Wednesday, October 08, 2008

Manhattan Beach-Beach Cities: Changes in the real estate market....

What changes can the South Bay-Beach Cities expect to see in the local real estate markets ...

It seems as if there is no magic bullet to help resolve the current financial crisis. Paulson and the FED may have thought the bailout/rescue bill would pop the rabbit out of the top hat but so far no such luck. A lot has happened since I posted Part I and Part II on the FED bailout/rescue.... the good...the bad and the ugly. Over the last two weeks we've seen a lot of ugly, more bad and not much good as the markets continue to crumble. The financial sector just doesn't seem to care what governments around the world are proposing in their efforts to bring back stability to the credit markets. Even a worldwide lowering of rates this morning didn't calm the markets... although by the afternoon the market had improved slightly.

Credit remains very tight while companies and states try to stay afloat. The State of California will have to rethink their recently passed budget ... which might be the best thing to happen in years. I think we are going to see some financial common sense finally return to the market even if we have to bring it back kicking and screaming.

Most of us are concerned about how the financial market will affect our local South Bay-Beach Cities real estate markets. Both buyers and sellers have legitimate concerns. We know the market is going to face more changes...we just don't know how severe the changes will be. If we see a lot of people in our market lose their jobs then we can expect to see a bigger impact on the real estate market then if we are faced with a stagnant job market... few actual job losses but no new jobs being created.

I've had a number of people ask about buying in this market. My response is pretty much the same to everyone. While some markets appear to be better then others within the normal real estate market cycle; there really is no good or bad market if you need a home... as long as you are thinking long term. If you are a short term flipper don't buy... you will definitely lose money. If you don't have some solid financial reserves then this may not be the best market for you. At best this market is going to be flat which means if you have to sell in less then two years you will probably lose money on the transaction.

Historically in our area if you held onto your home, even in a bad market, you made money... no matter when you bought in the cycle. For those who have solid financial resources and want to buy a home this might be a very good market. Sellers are negotiating.. even bank REO's have seen the light. If you plan to own the property over the long term then getting a low long term fixed rate loan could be a very good move. In fact you just might see some investors returning to the real estate market in places that have held their value. If you had stock in Bear Sterns, Lehman or WAMU you are out of luck. You can't wait out the market for your stock to go back up because it doesn't exist. However if you buy a property in Manhattan Beach or any of the Beach Cities...even if the value declines in the short term it will go up over the long term. I think we may well see investors reconsider tangible assets as a place to park funds for the long term.

If you are a seller you have other concerns. We are looking at about 4-6 months as an average market time. Many homes have been on the market close to a year or more. If you have to sell in a given time frame then you will probably not get as much for your home as you might if you could take more time. If you need a quick sale then you will have to adjust the price accordingly. A lot of buyers may have 20% down, good FICO scores and make great money but may find that lenders only want to make loans with a 70% LTV (loan to value) so sellers may need to consider owner financing to help move the process along. Owner financing used to be fairly common but with lower rates and less stringent qualifying it went by the wayside. I think sellers may need to explore this concept once again.

Even in the worst of markets people buy and sell homes. The current financial market is shaping up to be one of the worst we have seen in a number of years. It will take at least a month before the FEDS get the bailout/rescue plan working. Once it is up and running it will take a longer period to see if it is actually going to work and by then we will have a new administration with a new set of issues. We may squeek our way out of this mess but it will take some time before we know how it will all play out. In the meantime for all those hoping for a total market careful what you wish for as you may not like it so much if you get your wish.

UPDATE: 10/09/2008... Weird stuff is happening in the loan markets... The LIBOR index which should have declined yesterday after cuts in the European funds rate went up... meanwhile rates on 30 year fixed loans dropped today. Most ARM loans are tied to a major index so these rates can be very important when ARM loans adjust. If the LIBOR, the Prime rate or Treasury Bill note rates fall then resets on loans will be lower then expected which means borrowers may see decreases rather then increases on their loan rates...that's good news for homeowners. On the other hand if these rates rise then resets will be on the high side and that will push up rates on loans that are resetting which could lead to more foreclosures.


Anonymous said...

Stuff looks real, real bad. This is a full blown loss-of-confidence financial crisis where nobody knows where it will end.

I think scores of small businesses will go down. Consumers will pull back.

I hate to say it, but I would be very, very surprised if house medians did not decline AT LEAST 50% if this crisis does not end very soon.

I have to say, I have been bearish for a couple of years, but this is much scarier than anything I ever predicted.

Kaye Thomas said...

anonymous 9:00,
This is as scary as anything I have seen that's for sure... A lot will depend on whether or not the "fixes" work. If they do then we will still see some nasty stuff but things will stabilize.

I heard from a few who know the market well that you might see the market start to turn next week after the excess has been taken out.

I think 50% declines in housing values from the current numbers may be a bit high as there are so many places that have had prices already fall near that level. But if the markets don't stabilize soon you are going to see some major price declines... even in MB and the South Bay... as people find themselves without jobs and a lot of their savings lost in the market.

The only bright side of the whole mess is that I believe we will see major changes in the financial sector which in turn will be beneficial for the private sector. This is a wake up call for everyone.

Anonymous said...

In the financial markets, I keep expected a brief counter-trend rally. But instead we keep getting 5% down per day.

I would say that the "fixes" will do little in the short term to fix anything. The world financial conditions are now degrading much rapider than the US. Now, Europe, S. America, and Asia are all in the throes of this......the US is not done, this will manifest here in terms of dramatically slowing world economy.

I would expect the bottom of the stock market is a good 6-8 months out.

And it will be a lot lower than it is now.

Kaye Thomas said...

anonymous 7:53,
Looks like we are now in panic mode as the market was worse this morning.

I sure hope we aren't 6-8 months from the bottom as there won't be much left if the markets continue to move downward at the current rates. As Monday is a holiday that might slow some of the panic selling if people have a chance to stop and think.

Very scary indeed...

Anonymous said...

Don't worry, Kaye. MB will be flat for a few months, then prices will rise again. It's unfair to imply otherwise. These fixes just need a few days to work.

Kaye Thomas said...

Anonymous 11:00,
Nice take but not what I said ...

We all know the "fixes" (that's why the quotation marks) will at best bring a bit of stability to credit markets but it's not going to cure them. The bloodbath we have seen in the last 10 days will take years to repair.

A flat market would be the best scenario you could hope for but we won't see that anytime soon. I don't think we will see 50% from today's numbers as a decline but it will be nasty.

I'm hoping it won't be as bad as the 90's as the job base is more diversified so fallout from one industry won't decimate the entire South Bay economy. No one is going to escape the consequences of the market not the bears or MB property values.

That said if we hang on a bit better be grateful as the job that gets saved could be yours.

Anonymous said...


You're lucky to be working in this market. Those in the know understand that the current financial issues will have very little effect on an area as wealthy and successful as this one.

Kaye Thomas said...

Anonymous 4:00,

Look.. let's just cut to the chase and stop being silly. We are in for some bad times. No one walks away from what's been happening in the last 10 days unscathed.

Will we fare a little better then other areas.. I sure hope so but that doesn't mean we are not in serious trouble.

The hope is that we don't see 2/3 of the population unemployed as we did in the 90's. With a little luck that won't happen because we aren't a one employer economy. That is not a bad thing.

Real estate sales are going to decline and so are values. Buyers are going to expect discounted prices and they are going to get them. Sellers who don't have to sell will take their homes off the market. Depending on what happens with rates and the economy it's 50/50 on an increase in foreclosures when another batch of ARMS reset. This is going to be bad.

We may do better then other parts of the state and the country because so far we have managed to hold up better.

You are right I am lucky to be in this area because we might just muddle through. You want to know what bad is... take a look at Detroit... you don't want to see that happen anywhere let alone in the South Bay.