Huge headlines, scary story lines, and big government moving at breakneck speed to shore up our economic backbone. You are undoubtedly hearing about an eminent and massive move by the Federal government to finally get its arms around the national, indeed global, financial crisis. The latest courtesy of my friend and Branch Manager Paul Gonzalez at our sister company CW Mortgage.
We are writing to you today to briefly shed some light on what this may mean to you and I. It will be historic, with nothing in our Nation’s history to compare to it. And this is going to happen literally in a matter of days. 
The Federal government appears to be preparing a new entity that will purchase most, if not all, bad mortgages that are currently on the books of lenders and banks, and possibly Fannie Mae and Freddie Mac. The Federal Reserve, US Treasury, Securities and Exchange Commission, Congress and the Administration are feverishly working on this as I am writing this, and will continue through the weekend and into this coming week.
When a bank has a lot of bad loans on its books, it must set aside equal amounts of cash to offset the bad debt and protect its stockholders. This is currently tying up tens of billions of dollars that could otherwise be pumped into the financing system. This has also caused, or been a primary factor, in the collapse of institutions including IndyMac Bank and Lehman Brothers, among many others.
The intended effect of the Federal plan will be to free up huge amounts of capital that lenders and banks will again be able to lend as mortgages and other types of consumer financing.
The plan will likely resemble the Resolution Trust Corp, or RTC, which was set up in 1989 to clean up the portfolios of bad debts that resulted from the Savings and Loan crisis of the times. . All this is vitally important to you and I, and all real estate professionals, and will warrant our close attention over the next few days and weeks.
If such a plan is enacted we will expect to see investors and banks more willing to invest money into the mortgage financing system. Increasing the amount of funds in the system should, over time, bring down the interest rate spreads and lower interest rates.
In the short term, be prepared for wild swings in the stock, bond and mortgage markets. Volatility will be likely rule the day until the global markets begin to sense greater stability and lower risks in putting money into the financing system.
One of the most important functions of our Government is to help individuals and corporations when they are in trouble. 
Last Sunday, our Government made a strategic decision to officially bail out Fannie Mae and Freddie Mac. The decision is obviously great news for the two mortgage giants, and homebuyer-hopefuls should be just as excited – you’re going to benefit, too!
Although the bailout is a complicated issue, it is better than the alternative – the failure of two companies that own or guarantee about $5 trillion in home loans!
A complete failure of Fannie Mae and Freddie Mac could have lead to a catastrophic freeze in the mortgage market because of the lack of money to fund new loans.
The bailout is positive news and is exactly what the housing industry needs right now. The CEO’s of Fannie Mae and Freddie Mac are being replaced and the new heads will report to the recently formed Federal Housing Finance Agency – which was created under our friend the Housing and Economic Recovery Act.
There will be an injection of up to $100 billion into each of the two companies which should help lower mortgage rates and add stability to the economy. Lower rates and added stability will entice banks to become more willing to write new purchase-money loans and refinance existing loans.
Since the announcement, we have already seen a dramatic decrease in rates. From September 5 to September 8, Conforming 30-year fixed rates dropped about a half percent!
In my twenty-five years of financial and real estate experience, I cannot remember a time when rates decreased that much in such a short period of time.
Buyers are coming out of the woodwork asking how much more they can afford at these lower rates. With their buying power significantly increased, everyone is excited by the homes that are now in their price range.
San Diego is a particularly fortunate place to be if you want to buy a new home. A recent report by Global Insight, the global leader in economic and financial analysis, showed that San Diego homes are undervalued by more than 17 percent. This is a dramatic drop from 2005; at that time our city was overvalued by more than 39 percent.
The combination of lower rates, increased buying power and a newly affordable inventory of housing makes this a fantastic time to buy a home.
The key will be for the rates to hold at these low levels. Remember, lower mortgage rates alone will not solve the housing predicament.
The highly unregulated, Wild West of loan guidelines we experienced a year or so ago helped get us into a mess and the market is still in a corrective period. Reasonable rates, fair guidelines and a properly valued market are our way out.
It is still hard to tell how all of this will be absorbed in the long run and there is no quick fix to the housing situation, but combined with other recently passed legislation, we are making fantastic progress.
Recently, I received a request by Glenn Roberts of Inman News to do an interview with him in regard to the San Diego Real Estate market and its recovery. The following are his questions and my answers as to how we’re doing and what we can expect in the weeks and months ahead.
The article will be featured in a series that is taking a look at the 
housing market’s recovery.
Some questions:
1) How do you define real estate bubbles?
A bubble is a periodic rapid increase in real estate values that sustains itself until such time as the market will not support further prices increases. Bubbles are invariably followed by severe price decreases over a relatively short period of time.
2) Does San Diego’s market rise and fall reflect this definition of a real
estate bubble? Explain.
Yes and no. Over a five year period from 2003 through 2007, San Diego real estate values soared to record levels, followed by significant price adjustments in certain areas of the county. Inland San Diego County and the South Bay reflect this definition of a bubble; however Coastal areas from Downtown North have not exhibited a decline as severe.
3) What led to the rise in San Diego’s market, and what triggered the
beginning of the downturn?
Many factors led to the rise. Location, demand, low interest rates coupled with a lack of sound underwriting practices by lenders and the expectation of future profits by investor oriented individuals. What triggered the beginning of the downturn was demand was satisfied and supply began to rise, subprime mortgage money became much harder to obtain, and negative financial news began to dominate the headlines causing loss of consumer confidence in the housing market.
4) What stage of the market cycle is San Diego now in? 
We believe San Diego is at or approaching the bottom of the cycle. A recent Wall Street Journal article states that the boom made housing unaffordable for many families, especially first time homebuyers. Recent statistics reveal that the affordability index has now risen from a low of 14% to over 33%. In April of 2008, single family home sales are a mere 3.55% below the April 2007 levels and indications are that this turnaround will soon result in sales exceeding comparable 2007 levels. (See attached chart 2004-2008 SFD Closed Through MLS.)
5) What makes San Diego’s real estate market unique when compared to other
markets that saw rapid rises and then declines in home prices: such as Las
Vegas and Miami?
San Diego is unique. We live in a paradise with perfect weather and geographical boundaries that naturally limit our growth, thus making San Diego even more coveted. Our economy here is sound, not dependent on any one industry or huge employer. Every year we have a net gain of people moving here from all over the world, and buying real estate. Although we have standing inventory of condo’s and new homes, this nventory doesn’t compare with the numbers in Miami or Las Vegas.
6) Are such market cycles in San Diego inevitable? And bound to happen
again? Any lessons learned from the latest run-up and downturn?
Absolutely! They are bound to happen again as real estate markets historically show us. I guess the lesson taken from our recent experience is how rapidly things can change.
7) What segments of the San Diego real estate market were most impacted by the
run-up and the downturn? Entry-level homes? Luxury homes? Single-family
homes? Condos? And why?
The most impacted segment has been the low end, entry level single family detached homes and condos. During the run-up, first time buyers were being priced out of the market. The market adjustment has caused those same first time buyers to be locked out of the market due to the lending changes that have taken place over the past couple of years.
What are important signs to watch for in signaling a recovery of the San
Diego real estate market? Any of these signs present already?
The factors that signal the recovery of the market is that we are not seeing an overabundance of new inventory and we are starting to see the investor buyer coming back into the market. Furthermore, we are seeing a mild stabilization in home sales prices. Lastly, buyer activity levels have significantly increased over the past few weeks.
9) What is the current state of the market in terms of year-over-year sales,
prices, inventory, days on market, foreclosures and short sales?
The current state of the market is that today, homes are selling for significantly less in 2008 versus 2006. Fewer units are being sold, and more of the transactions fall into the category of “short sales” and foreclosures. We are currently experiencing a “flattening” of inventory; no significant increase or decrease of units on the market. We anticipate that the number of foreclosure listings will increase throughout 2008. Based on most of the “bubble transactions” pre 2006 which had loans that are now being recast in 2008. It is that bubble that we are dealing with today. According to most experts, this bubble should wash through our San Diego market by late 2008 or early 2009.
10) What percentage did prices rise during the run-up and how long was this
period, and what percentage have prices fallen during the downturn and how
long has this period been?
Most of us feel that the five year run up from 2001 through 2006 was the greatest single appreciating market in history. Statistics vary by area, but in San Diego County we saw homes double or even triple in value over this period. Declining home price trends have now been common in many areas of the county for a year or more, with the hardest hit areas in inland North County and the South Bay declining by 25 to 30 per cent.
11) What is the outlook for demand? What is the state of consumer
confidence, buyer and seller behavior, and buyer psychology in the San Diego
market?
We feel the demand in San Diego County has always been, and will remain high. The buyer mentality to date has been cautious and looking for the “bargain”. The seller mentality to date has been, “I’m going to sell if I have to sell”. Most seller’s who don’t have a specific reason to sell, i.e. recasting their loan, relocation or simply outgrowing their home have by and large made the decision to wait. Consumer confidence in San Diego County, like most places is driven by our economy at large; and therefore still remains somewhat weak. The factors that will start to turn consumer confidence will be the stabilization of home prices, job stability, and overall “good news”.
12) Are there any myths, misperceptions about the current state of the San
Diego market?
Perhaps. Consumer perception becomes reality. Due to extensive inventory, the decline in prices and historically low interest rates, today’s home buyer is in the best position they have been in many years. The misconception is that the buyer can wait and prices will continue to decline. Reality tells us that you can never time the lowest point of a market.
13) When will it be clear that the San Diego market has fully recovered from
the downturn? How far away is that, in your opinion?
The clearest signal that the downturn is over is when inventory has decreased and prices start to rise again. When will this happen? This is virtually impossible to predict. We believe we at or near the bottom now. Throughout 2008 we will go through a period of adjustment and believe that in 2009 the market will start to swing back in the other direction.
We thank Inman News for contacting us and for using HotOnSanDiego as a source for San Diego Real Estate news and information.
Please read our other blog at www.HotOnSanDiego.com
Here in North County, especially in the inland corridors of communities like Escondido, buyers are resurfacing in large numbers. The reasons are simple…prices have declined significantly and interest rates are really low, and it adds up to more buying power for those in the market for a new home or investment property. You would think the opposite if all you did was read the newspapers. 
Today I got up and read the headline in the business section of the local Sunday paper, headline reading “Real Estate Crisis About To Get Worse”. The story went on and on about how the number of foreclosures are expected to rise and continue to rise throughout 2008. The story continued on two additional pages and the secondary headline on the next page read “Crisis” continued from page one. The author talks about real estate agents being at odds with “analysts”.
Further, I was confused by the quote attributed to their “analyst” that went as follows; “I am more wondering when is this thing going to blow up, and you’re already talking about light at the end of the tunnel”. Huh? (No, I did not misquote or mistype, this is actually what was printed). The quote was attributed to “an investor and former real estate broker” (actually still a real estate broker…I looked him up). But just as I was trying to find the meaning of this utterance, I realized what this was; just another opinion from someone who is probably not active in today’s market standing on the sideline barking negative information. Oh yeah, and the newspaper’s attempt to sell more papers.
I’m feeling less and less sorry for my local paper, as they are quickly being put out of their misery by the internet. What was once three sections and maybe 15-20 pages of real estate advertisements has shrunk to practically nothing. Why? It’s an old school medium that is frantically trying to turn all of their former print advertisers into advertisers on their internet portal. For years and years, many great local real estate brokers paid lots of money for what is essentially “presence” advertising in local papers, and are now being assaulted on an almost daily basis with three month old news and random predictions.
Next month, the National Association of Realtors “2008 Internet vs. Traditional Buyer Survey” will come out and it is expected to show that over 80% of us use the internet to help us with the search for real estate and related information. Listing aggregation websites like Trulia are seeing huge growth in their number of monthly users.
We’ve all determined that putting our listings online where we can display dozens of photos, virtual tours, satellite images, school information, walkscores along with just about anything else you can think of that runs 24/7 all over the world at a fraction of the cost…is more valuable than one picture (sometimes blurry) and very small for a one day run with a declining readership in a limited area.
Today I helped my wife (who is a local Escondido Realtor) hold an open house in Brookside. We had over twenty five people show up for it, and by the way she did not advertise it in the local fishwrap. We met several nice people, including three different couples looking to buy in Brookside since prices have come down and made it an incredible value. One couple owns another home in Vista that they intend to keep as an investment property, and move into the Escondido home.
The market is the market. And today’s buyer has an incredible opportunity. Prices have dropped significantly and interest rates are still at historic lows. Bank owned homes that need to disappear from their books are selling like wildfire, some with multiple offers over asking price, and many to investor buyers who know San Diego County real estate will rebound.
If you you’re a doom and gloomer, read the newspaper. If you want relevant information, talk to a local Realtor and mortgage loan representative. Talk to your CPA and invest for the long run. Like that guy on the radio says, “and now you know, the rest of the story”.
Read our other blog at http://www.HotOnSanDiego.com/
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