Morgan Stanley and Goldman Sachs are becoming commercial
banks (they have been investment firms under
the SEC), a shift in status that brings them under tighter
federal banking regulation. Investment banking is officially
dead with this development, the end of an era. It also likely
marks the end of an era of lax regulation. This is a good
thing for the average citizen.

The S&P 500 is down 27+ points as I write this. The DOW is
down over 200 points also, as investors sell in response to
breaking news about more US banking troubles, this time
focused on regional banks also. Yes folks. What’s happening
right now is unprecedented and extremely serious, not
only for the US economy, but for the global economy. The
good news is that this may not last.

To gain some perspective, consider the following from
analyst Barry Habib… “There have been 10 bear markets
for the S&P 500 stock index since 1957 (i.e., market drops of
at least 20%), including the current decline which is down
19.8% as of last Friday’s close from its 10/09/07 all-time
high. Of the 9 previous bear markets, all of which eventually
recovered and reached a new closing high, 6 of them hit
their bear market low during the month of October, including
the last 3.”

The big news for mortgages is that the Fed is trying to
create an entity that can buy troubled mortgage debt to
get it out of the general marketplace. I applaud this move.
Although tax payers may initially take a hit, it still seems
better to give the government control of this debt for 2
reasons; a) this gets the debt that has made investors nervous
out of the market so trust can be rebuilt and, b) this
may give the government the ability to change the terms
of these mortgages (like fixing them at a low rate) to keep
people in their homes.

How can you move forward? With stocks losing value, this
makes real estate in Marin an even better investment. Your
neighbors agree. Of the properties sold in Marin in August,
only 13.5% were foreclosures. Contrast this to Solano
County’s 61.3% , Alameda’s 32.5%; Contra Costa’s, 54.4%;
Napa’s, 39%; Santa Clara’s, 24.7%, San Mateo’s,16.6%; and
Sonoma’s, 41.6%. Marin values right now mean that there
are prime investment opportunities are out there.

How many prospective home buyers feel that way? Why is there no motivation or urgency to purchase real estate in today’s market?There are a number of factors involved, but the biggest is confidence . Confidence has eroded to the point where we are now enmeshed in the proverbial vicious cycle. Once people lose confidence it takes a lot to restore it. Think about the person you trusted with your money, emotions - you name it. Once they’ve abused your trust, how likely are you to believe in them again. Not very likely at all. These days, that’s where it is with all things financial. Prospective home buyers in today’s market are worried that what they buy today won’t be worth as much next month. In some cases that’s true. However, all markets are cyclical. Just as we are suffering a severe credit crunch and declining home prices today, you can be assured we will once again experience a booming real estate market and readily-available funds. When will that be? That’s the tricky part, and by waiting for what you decide is the bottom of the market  you may very well miss the best opportunity to buy intelligently now.

Yes it is true that qualifying for a mortgage loan is more difficult than it’s been for several years. It better be. The ease with which loans were made in the absence of any documentation or qualification is one of the biggest causes of this mess - from the ballooning real estate prices to the Fed’s bailout of the troubled American International Group (AIG) . All do to reckless lending practices and an over-zealous Wall Street. Keep in mind that home prices, especially in Marin County, are lower and softer than they’ve been in decades and interest rates are still historically low. Does this qualify as the bottom?

Soon you may look back and realize the bottom of Marin’s real estate market has come and gone. These next few months may or may not be the bottom, but buying conditions - soft prices, low interest rates and a large housing inventory - are certainly optimal! Buying conditions haven’t been this favorable in Marin County for almost two decades. What are you waiting for?

Today the VIX is up by 8 million. The VIX shows trading
volume, how many shares are changing hands, and is
called by some “the fear index”. The rise from yesterday’s
already high numbers shows that Wall Street investors
are very concerned about economic issues in the spotlight
right now. Yesterday’s losses of over 500 points on the
DOW alone meant that yesterday was the worst day in
trading since 9/11/01.

The Feds did not cut Federal Funds rates today. This is in
opposition to market expectations and may trigger another
sizable sell off today. As always, the Fed’s primary concern
is mitigating the effects of inflation, so for me this is not a
surprise.

As I write this the DOW’s initial reaction to the Fed’s decision
is a sell off and the Dow dropped by 70 points within
minutes of the news of the Fed’s decision. The market
wanted the cut, which helps businesses, but in my opinion
the Fed made the right call in holding for now. Other major
indexes are also falling. The falling S&P index, where most
financial stocks tracked, is being hit by the Fed’s decision
and concern about AIG, the largest insurer in the US. AIG
insures many bank owned assets, so its failure would
leave financial firms exposed to increased risks.

Bank of America is now the proud owner of Merrill Lynch
and $154 billion in toxic mortgage debt originated through
sub-prime loans. Merrill had purchased First Franklin, a
major sub prime lender, when it failed last year. This debt
amount equals 15% of the nation’s total sub prime debt.
Way to go B of A! Time will reveal whether this was a
very stupid move, or a brilliant one. And I’ll be watching
closely.

How does this affect you? Well now that Fannie and Freddie
are owned by the US Treasury rates for loans they can
handle (up to $729,750) are essentially unchanged from
yesterday. Fixed rate loans with no interest only feature
are by far the best deals in loan rates today and I suspect
this trend will continue as lenders shy from anything they
perceive as risk. The DOW has lost 25% of its value in the
past year making Marin real estate a better investment
comparatively. With most real estate locally (in Marin) still
holding strong value, it’s a good time to buy a home!

Another wild ride is in store this week after weekend news
of the failure of yet another large Wall Street investment
firm, this time Lehman Brothers, sends more waves of
concern across the markets. Lehman, one of Wall Street’s
oldest and most respected firms, has tried to find a buyer
but has been unsuccessful and faces bankruptcy this week.

The Fed is not stepping in this time to guarantee Lehmans’s
investments, nor to advance cheap treasury money
to a buyer. Merrill Lynch is also in the process of being
bought by Bank of America, in essence another bank failure.
The shrinking of sizeable banking firms left after this
market meltdown are certain to be felt by consumers eventually
as their options for credit shrink. The “free market”
relies upon competition to hold down rates and pricing on
services so a decline in competitors signals the potential of
less favorable pricing for consumers.

Washington Mutual is another bank in the spotlight this
week. WAMU is the largest savings and loan bank in the
US, so their failure would be another huge loss for the
consumer. The DOW is down 300+ points as I write this
and the S&P, which contains most financial sector stocks,
is down almost 36 points, about 2.8%. The end result of all
this is likely to be increased regulation of banks and investment
firms.

Some good news for folks who need loans larger than the
conforming jumbos that cap at $729,750…! I’ve located a
portfolio lender offering 5.875% on a 7/1 ARM to $1.5M.

Locally this means that clients who have stock portfolios
are likely to be nervous about their shrinking stock assets.
This spells an opportunity for you if you can communicate
the upside potential of real estate as an investment. Being
an expert at assessing sale property values has never
been more important. Equally important is your ability to
communicate the ways that real estate still remains one of
the most valuable and stable investments available. Sure
properties have lost value during this crisis, but they still
are far more stable when compared with Fannie Mae stock
and many other types of stock that have lost 75% of their
value or more. This is definitely the time to grab property
bargains in Marin and the greater Bay Area.

I believe the confidence, both domestically and internationally, generated by the government’s takeover of Fanny Mae and Freddie Mac, along with the long-term profit that will be generated makes the take-over a very positive move.Check out our in-house mortgage broker, Ana Trueman’s, take on it.

Market Update September 8, 2008
SPECIAL UPDATE! Sunday’s decision by the Treasury
Department to take over Fannie Mae and Freddie Mac is
shaking up markets and stock indexes are rallying today.
Here’s the scoop!
Fannie and Freddie back about half the total US mortgage
debt, around 5 trillion dollars worth. In 2008 they lost 14
billion in loan defaults and delinquencies. To make matters
worse, an investigation of their accounting practices
has led to accusations of improper accounting practices
within the companies. The concern among many has been
whether the two have enough capital to sustain such losses.
To this end, the Treasury discount window was opened
to them recently so that they can borrow at low 2.5% rates
to offset their losses. Many felt this was not enough.
So even this could not shore up the mortgage giants to the
satisfaction of investors. Remember that many of the largest
investors in this type of debt are foreign. So big losses
are being felt around the world as a result… contributing
to global recession. We are truly members of a “global village”
these days!
This weekend’s decision reflects a solution I had put forth
last year around this time… that the way to help the mortgage
market is for the US government to actually BUY
the MBS’s (pools of mortgages), and thus absorb both the
losses (from defaults) and also the income from all those
folks who continue to pay their mortgages on time. The
end result to taxpayers is that the US treasury may take a
loss to begin with, but then a profit once the crisis clears…
in effect being paid back over time. Initially, credit default
swaps will likely be triggered. This means that current investors
will demand that they be paid in full immediately,
so initial Treasury losses will be felt.
The Treasury will buy 100 billion in Fannie and Freddie
loans. In return the Treasury receives 1 billion in senior
preferred stock, thus becoming a 79.9% stockholder in
the companies, plus 10% in ongoing interest for it’s stake.
The companies are also placed in conservatorship, which
allows accounting and other practices to be revised and
corrected. In the end rates may drop, good news for you.
Will this stabilize the housing market? Stay tuned…

Happy Labor Day! While some may breathe a sigh of relief
as the summer of ‘08 real estate cycle comes to a close,
there is some cause for optimism. Yes, we know that home
prices and sales volume have taken a hard hit this year.
But it’s always wise to consider ALL the data that’s out
there, not just what you hear in the news. So this week’s
update is again dedicated to giving you the data that
relates to your life on a local level… here in the San Francisco
Bay Area and greater California.
• July 2008 home sales volume in the Bay Area moved
higher in the first “year over year” gain since early 2005.
July 2008 sales volume in the Bay Area was up 5.7% over
the previous month… but still shy of the average volume
for this time of year, down by 22% from the past year average.
• Foreclosure sales made up 33% of the properties sold in
July ‘08 in the Bay Area, up 29.9% from June 2007.
• Eight Marin zip codes showed an increase in sales volume
while 6 showed a decrease in volume. Seven zip
codes showed an increase in price per square foot, six
showed a decrease. A few more offered no data.
• Median home prices across the whole Bay Area, including
inland areas such as Solano County (which has been
harder hit than Marin), did push home prices down to the
lowest median price since June and July of 2007, a drop of
29.3%. But in Marin the drop was 13.2%. Only San Francisco,
with a drop of 6.3%, was lower.

Compare the above to 2007 annual numbers that showed
seven Marin zip codes dropping in value (and the highest
drop at 8.8% in Inverness), while nine zip codes went up
in value for the year. I suspect that the end result of the
housing crisis for the majority of Marin will be that home
values were fairly flat from 2005-2008, and in some areas
farther north and west (like Inverness) there will be a net
drop in price for the same period. When one considers that
in previous years there was double digit appreciation, the
slow down means that on average growth was in the 4-7%
a year on average… which isn’t that bad at all! Perspective
is key these days and I hope this helps inform yours.