NPR: The Giant Pool of Money

I'm a sucker for episodes of This American Life. No matter what the subject, the program always seems to lure me in with its combination of sentimental narration and poignant documentary. Episode 355 isn't merely entertaining, it manages to educate and encapsulate this whole economic/mortgage crisis. I recommend it to anyone interested in how we got here.

Here are the program notes:

355: The Giant Pool of Money (click here to be directed to the site, then click on the full episode link on the left.)

A special program about the housing crisis produced in a special collaboration with NPR news. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.

A shorter companion version of this story appeared on NPR's "All Things Considered."

Prologue.

Ira talks with NPR business and economics correspondent about two gatherings he attended. One at the Ritz Carlton and one at a community college in Brooklyn. The first was an awards dinner for finance professionals who created the mortgage based financial instruments that nearly brought down the global economic system. The other was a non-profit conference for people facing foreclosure. Ira explains that today's show lays out how the finance guys and the people facing foreclosure are connected by a chain of middlemen, and that together, they all brought about the current housing and credit crisis. (4 minutes)

Act One.

This American Life producer Alex Blumberg teams up with NPR's Adam Davidson for the entire hour to tell the story - the surprisingly entertaining story - of how the US got itself into a housing crisis. They talk to people who were actually working in the housing, banking, finance and mortgage industries, about what they thought during the boom times, and why the bust happened. And they explain that a lot of it has to do with the giant global pool of money. (31 minutes)

Song: "Hard Times," The Sex-o-Rama Soundtrack


Act Two.

Alex and Adam's story continues. (23 minutes)

Song: "Time Machine," Grand Funk Railroad

Rainy Days, Thursdays and a Trip Back in Time

Thursday is Brokers' Tour in El Cerrito, Kensington, Berkeley and North Oakland (Rockridge, Temescal and Montclair.) Realtors tour newly listed homes on Thursdays for a number of different reasons. For some, it is a way to keep in touch with the market. For others, it's an opportunity to socialize with colleagues. Most importantly, it is also a way for agents to preview homes that match the search criteria of their current buyers.

This Thursday it rained-- a lot. Rain is often good enough reason for self-employed Realtors who fit the socialite\market watchers category to stay home. No use getting wet for a casual outing. Therefore, rainy tour days often mean reduced agent traffic. This Thursday was an exception. Thursday's tour was popular. Some streets were so crowded with Realtors they became difficult to negotiate (Keith at Euclid in Berkeley for example.) I casually remarked to a an agent with whom I rubbed shoulders, "Boy there must be a lot of buyers in the market." "Thousands," she said, "and they all have at least 20% down." For those that thought the loss of the sub prime market would deplete the buyer pool (eliminating those with less than 20% down), apparently the void has been filled. Then, I started paying more attention to the social quality of the conversations. The grapevine was flooded with new multiple offer stories. The home on 60th street in Temescal that had eight offers was just one example.

Then I saw a house which I knew would appeal to one of my buyers. No one had access to the house before Brokers' Tour, so this was my first chance to see it. I enthusiastically told my buyers about the home when I returned to the office after tour. We made an appointment to see it first thing Friday morning. By Friday afternoon, one preemptive offer had already been submitted and the sellers were inclined to take it. Upon hearing from five other interested parties, the sellers decided to delay their acceptance of the offer in hand and give the other buyers until 7:30 p.m. to submit their offers. All I could think was welcome to 2005.

UPDATE: This home received four offers before 7:30 and is in contract. The chosen buyer was not the same buyer that instigated the preemptive hustle.

For anyone who wasn't in the market in 2005, or for those with selective amnesia:
Click here for an SFGate article on Bidding Wars from Friday, April 15, 2005.

Recession or Rally? The Feds Lower Discount Rate

Aug 10 (NYT) -- Saying it now feels that the recent disorder in financial markets has raised the risk of an economic downturn, the Federal Reserve today approved a half-percentage point cut in its discount rate on loans to banks....

The upheaval in the credit markets have confronted Ben S. Bernanke, the Fed chairman, with the first crisis of his 18-month tenure. In recent weeks, the Fed has intervened to support the markets by lending in the money markets against mortgage securities and Treasuries. It did so again this morning, by lending $6 billion against mortgage securities. Over all, since Aug. 9, the Fed has injected $94 billion into the financial system by lending in the open market.

The Federal Reserve is scrambling to address the mortgage crisis in an effort to stabilize the US economy. A reduction of the discount rate will specifically target banks that are having short-term financial difficulty (like, Countrywide.) This rate does not have a direct impact on consumers, so we will not see an immediate drop in interest rates. It does however free up financing making loans easier to obtain.

The discount rate is the one the Federal Reserve charges qualified lenders, mainly banks, for temporary loans. Lowering interest rates encourages banks to lend more money to mortgage borrowers.

That in turn could make it easier for home buyers, especially those using big-ticket loans called Jumbos, to get financing.

Lending restrictions will remain tight and sub-prime loans difficult to obtain. The ultimate question remains: Will the Feds efforts be enough to bolster consumer confidence? Information may arrive instantly, but insight takes longer. Fortunately, our traditional/seasonal August slowdown will give us an opportunity to sit back and watch the chips fall. Hopefully, the market will announce itself come September.

Help is on the Way: Central Banks Rally to Stabalize the Credit Market

Aug. 10 (Bloomberg) -- Central banks in the U.S., Europe, Japan and Australia added at least $131.3 billion to the banking system in an attempt to avert a crisis of confidence in global credit markets

More than just a housing crisis, the sub-prime fallout threatened worldwide economies as confidence faltered and stock market funds plummeted. Monday mortgage lenders seemed to be over-reacting as many companies stopped taking new applications and others failed to honor existing commitments. Major lending sources recoiled in fear of uncertain futures. Now the central banks are uniting to inject money back into the banking system. This major act is designed to help stabilize the market and soften the risk for mortgage-backed debt.

In the U.S., the federal funds rate opened at 6 percent, the highest in six years. The rate fell to 5.25 percent after the New York Fed bought $19 billion of mortgage-backed securities and then followed up with $16 billion of funds in a second operation.

'Unlimited' Ability

"The Fed has almost unlimited ability to supply liquidity if they feel that is appropriate,'' Rivlin said. She noted that it was "symbolic'' that the New York Fed's first operation today involved mortgage-backed debt -- the type of securities that investors are unloading.

"Suddenly It's Not So Easy to Borrow"

As is often the case the New York Times says it best. Click on the link below for an easy to follow explanation of how we got into trouble:

Housing Busts and Hedge Fund Meltdowns: A Spectator's Guide

As new money loans dry up, sellers may have to consider creative financing to help buyers get in the front door, including; seller financing, land contracts and lease options. These concepts are not new, but feel more difficult to approach as sellers grapple with "the house that sold down the street two months ago for over asking price and closed in two weeks." As part of our service to sellers, we hope to expose your home to the largest pool of buyers, sell your home for the most money possible, and do our best to ensure that you never have to look back. Creative financing might help accomplish the first two tasks, but may keep your purse strings tied to the picket fence.

Lending Freezes, Rates on Hold, Clinton seeks Remedies

Here is an article listing some of the companies that have put a hold on writing new loans, or in some cases have declared an inability to fund existing obligations:

Mortgage mess spreads, creates bargains (Reuters)

The Federal Reserve met on Tuesday and left interest rates unchanged at 5.25%

Fed keeps US rates on hold; acknowledges market turmoil (AFP)

Hillary recommends action:

Clinton seeks aid for at-risk homeowners (AP)

Bay Area Home Sales Still Down, Median Prices Up

Even though home sales were down nearly 30% for June, Alameda county experienced slight price increases to the median home price compared to June 2006. Contra Costa county was the least changed with a slight .3% decrease in home values. Marin and San Francisco counties experienced the highest increase, while Napa and Solano counties' values appear to have been the hardest hit.

"Obviously there's still a bit of a standoff between buyers and sellers. It looks like unsuccessful sellers would rather take the home off the market than bring the price down, which is remarkable after almost two-and-a-half years of sales declines. Mainly, the price adjustments we're seeing are in more affordable outlying parts of the Bay Area, and those adjustments aren't all that significant except for Solano County," said Marshall Prentice, DataQuick president.

This data supports what we have been experiencing in the East Bay real estate market. We are seeing more homes coming back on the market, or being withdrawn from the market as Sellers resist selling their home for what the current Buyers are willing to pay.

In past markets, we advised Sellers looking to move on from their current residence to buy first, without a sale of house contingency. The theory was; they would be in a better position to buy without a contingency, their home would show better if stored items and clutter were taken to the new place, and banks could accommodate help them finance the interim with bridge loans. The past market was so heated and quick that we could nearly guarantee a fast sale and a good price. The current market is less predictable. Now our best advice is sell first so that you know what you can afford on the other end. Too often Sellers equate what they need with what their home is worth. This equation does not work for Buyers, who have seen competing inventory and the most recent sales. As emotional as residential real estate can be, buyers use concrete data to support their contract price; including syndicated press reports, area inventory and past sales. If a Sellers expectations are not met through initial marketing attempts, more time on the market only works to decrease perceived value for the Buyers.

Who you chose to represent you is important. Sellers need to make sure they have the best marketing advice to help them achieve the highest possible price.

• Establish a realistic starting price.
• Prepare the house to show in the best possible light for the lowest pre-market investment.
  
• Create the most polished marketing presentation.
• Expose the home to the largest possible audience.
• Negotiate solid contractual terms.
• Navigate a smooth transaction.
• Protect your liability, ensuring that you can move on without looking back.

All Homes	No Sold Jun-06	No Sold Jun-07	Pct. Chg	Median Jun-06	Median Jun-07	Pct. Chg
Alameda	2,198	1,536	-30.1%	$600,000	$605,000	0.8%
Contra Costa	2,102	1,413	-32.8%	$599,000	$597,000	-0.3%
Marin	453	350	-22.7%	$830,000	$961,250	15.8%
Napa	195	128	-34.4%	$680,500	$577,000	-15.2%
Santa Clara	2,763	2,163	-21.7%	$681,000	$699,000	2.6%
San Francisco	705	633	-10.2%	$790,000	$825,000	4.4%
San Mateo	906	755	-16.7%	$770,000	$795,000	3.2%
Solano	773	453	-41.4%	$475,000	$419,500	-11.7%
Sonoma	735	533	-27.5%	$580,000	$532,500	-8.2%
Bay Area	10,830	7,964	-26.5%	$648,000	$665,000	2.6%

Source: DataQuick Information Systems, www.DQNews.com

The Subprime Crisis

Subprime lending, also called "B-Paper", "near-prime" or "second chance" lending, is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history. Subprime loans or mortgages are risky for both creditors and debtors because of the combination of high-interest rates, bad credit history, and murky financial situations often associated with subprime applicants. A subprime loan is one that is offered at a rate higher than A-paper loans due to the increased risk.

Some of you may be wondering, why we haven't talked much about the "subprime lending crisis." We have noted that buyers have been seeking alternative financing to compensate for decreased afford ability. Some of these buyers have turned to suprime loans in order to qualify for their home purchase. Subprime loans do help some buyers who would otherwise not be able to enter the market. The downside is that the flexibility has encouraged misuse by some predatory lenders. As a result, we have seen an increased number of foreclosures and short sales. This fact has prompted us to caution buyers about their lending options (See the post titled, Would You Risk an Extreme Mortgage.) However, the impact on housing prices has not been great enough to affect our forecast for the general East Bay real estate market.

An independent real estate market forecaster, Housing Predictor, reported the following:

Hundreds and perhaps thousands of local real estate markets scattered throughout the U.S. are insulated from the sub-prime loan crisis and as a result are not suffering from fall out of the sub-prime fiasco, according to the latest Housing Predictor study.

Beginning in late 2006, subprime mortgage lenders began filing bankruptcy. This meltdown prompted some economists to fear a fallout similar to the U.S. Savings and Loan Fraud Crisis of the late 1980's. Although our market has experienced a healthy leveling, this gloomy prediction is not being realized. The subprime crisis seems to have been limited to less affluent areas with less healthy local economies.

Is It a Buyer's Market Yet?

I keep reading that Bay Area home sales are at the lowest level in 12 years. This headline has left buyers scratching their heads wondering, "where are all the resulting deals?" Unfortunately for buyers, it's the number of sales that have declined not the prices. Fewer homes on the market have resulted in the recording of fewer sales. This translate to low inventory for buyers. This in turn creates competition and results in multiple offers. The Median Price for a single family home in the Bay Area has increased to $660,000, the highest recorded level yet.

There is good news for buyers despite the confusion. The current median price reflects a modest 3.4 percent gain over last year, as reported by DQnews.com. This is a small gain compared to the 20 percent increase from 2004 to 2005. (In 2005, the median price for a single family home in the Bay Area was at $556,000.) This isn't a windfall for Buyers, but it does indicate a healthy leveling of the Bay Area market.

In our office, we are seeing buyers react cautiously to a sometimes spotty market. The market is "spotty," because some, but not all houses, are drawing the competition from buyers that results in sales prices which exceed market expectations. For our sellers, we do our best to increase the odds in their favor (which makes our track record better than most) but the current market is more susceptible to buyer whim. As sellers work to rally scattered enthusiasm, buyers gain an improved bargaining position.

This brings more good news to Buyers. In addition to the tempering of competition on some houses, buyer contingencies have regained some strength. In particular, buyer inspections have returned along with the negotiations associated with their findings.

We have also seen a continued increase in the number of homes "back on the market" as buyers struggle to develop a well rooted sense of value in what has been a changing market. Sellers too struggle to rationalize the reports from the neighborhood grapevine (with tantalizing instances of sellers who seemingly still hit the jackpot) with the realities of a leveling playing field.

We will be watching to see how this market plays out in July as we head toward August. August traditionally slows down as Bay Area residents take their summer vacations and prepare for the coming school year. As a result, what happens in July often informs the September market.

For Buyers and Sellers: Berkeley Hills Realty works hard to improve the odds in your favor. We remain ever vigilant and strive to think outside the box as it relates to all new information. For our Sellers, we have put new strategies in place designed to expand market exposure and to increase a property's perceived value. We also consult with our Buyer clients on factors that create and protect value as it relates to the purchase of their new home. As we embrace this new marketplace, we invite you, your friends, and family to call with any and all real estate related inquires. As always, we are happy to share our thoughts.

Mortgage Rates Rose to Nearly 7%

NEW YORK (CNNMoney.com) -- Mortgage rates made their largest upward movement in nearly 4 years, and the 30-year fixed-rate reached its highest level since July 2006, Freddie Mac said Thursday.

Will this be the final straw that breaks the camel's back or in this case pops "the bubble?" Rising rates have stunned us this week with the sharpest increase in four years. Per CNNMoney.com:

Rising rates, among other factors, have caused the MBA and the National Association of Realtors to push back their forecasts for a home price recovery. Both groups are now looking to early 2008, compared with a previous outlook for mid-2007.

Still, the Bay Area is unique and we find reason to remain optimistic. We have not seen marked value depreciation of the homes in our marketplace. Because our geography (specifically the S.F. Bay to the west and East Bay Regional Park lands to the east) creates a natural boundary around our buildable land, housing stock is limited. Residential sales in this area are simply not affected by large scale developers or urban sprawl. Meanwhile, the University, our moderate climate and rich cultural offerings continue to bring new buyers to the area. Currently buyer demand continues to exceed the supply of housing. Multiple offers are less common, but still occurring.

We aren't seeing anything as dramatic as a pop of the bubble; however the market is treating buyers more justly. A bit more balance is a good thing. The influence of the National press has dampened the frenzy of the recent past. Buyer's mindsets have noticeably changed. During the height of the bidding wars, the Bay Area real estate market was much like a game of musical chairs: Buyers scrambled for a spot to plop their derrière when the music stopped, and they were often compelled to offer Sellers a premium to just to get a seat. There was legitimate fear in the marketplace as housing prices outpaced salary increases. If you didn't buy your way in, you may have quickly gotten priced out. That fear dissipated as the market mellowed. Now Buyers sense that they have more time to make more prudent decisions. Even in the cases of multiple offers, competition is not inciting the previous returns of 20-30% beyond the list price. Overbids seem to be a bit more modest, in the 7-12% range (with a few tantalizing exceptions still tickling the grape vine.)

This brings good news to Buyers. In addition to the tempering of the competition, buyer contingencies have regained some strength. In particular, buyer inspections have returned along with the negotiations associated with their findings. Unfortunately for all involved (this is an emotional process), we have also seen an increased number of homes "back on the market" as buyers struggle to develop a well rooted sense of value in what has been a changing market.

If you are a hesitant buyer, here are some more reasons to throw caution to the wind: First, historically speaking rates are still low (rates have reached double digits in the past.) Act now to take advantage of current rates. If interest rates continue to rise, any increases will continue to decrease affordability. Second, your life plans can also help dictate if the time is right for you. If your plan is to stay put for more than five years, your investment risks lessens. Despite dips in the value of real estate throughout the last century, California's housing values consistently reflected an overall gain. If you can wait out any turn in the market, time can help protect your investment. Third, owning your own home posses significant merits beyond the bottom line. With residential real estate, you also get the intrinsic benefit of the "use and enjoyment" of your own home. Lastly, increased rates and gloomy press reports are only part of the story. CNN says it best:

Mortgage rates, of course, are only one third of the affordability equation that plays out in the housing market. There's also home prices themselves and household incomes, both of which have been positive lately for buyers, according to DeKaser.

For Buyers and Sellers: Berkeley Hills Realty works hard to improve the odds in your favor. We remain ever vigilant and strive to think outside the box as it relates to all new information. For our Sellers, we have put new strategies in place designed to expand market exposure and to increase a property's perceived value. We also consult with our Buyer clients on factors that create and protect value as it relates to the purchase of their new home. As we embrace this new marketplace, we invite you, your friends, and family to call with any and all real estate related inquires. As always, we are happy to share our thoughts.