This week, President Bush signed into law the Housing and Economic Recovery Act of 2008. This sweeping legislation primarily seeks to protect homeowners from foreclosure, stop declining home prices, and stabilize the mortgage industry. Major provisions of the new law affecting the real estate practice are as follows:

- SELLER NEED NOT REVEAL SSN TO BUYER UNDER FIRPTA: Effective immediately, sellers are no longer required to provide to their buyers the Seller’s Affidavit of Nonforeign Status (C.A.R. Form AS), which includes the sellers’ social security numbers, under the Foreign Investment in Real Property Tax Act (FIRPTA). Instead, as another option, no federal withholding is required if the seller furnishes the Seller’s Affidavit with his or her social security number to escrow or other qualified substitute as defined, who in turn, furnishes a statement to the buyer stating, under penalty of perjury, that it has the Seller’s Affidavit in its possession. A “qualified substitute” is a person responsible for closing the transaction, such as an escrow company, title company or the buyer’s agent, but not the seller’s agent. The federal withholding law is now similar to California’s Franchise Tax Board (FTB) policy which allows the escrow officer to remove the seller’s tax ID number from the buyer’s copy of the California withholding tax statement, but not other copies.

- $300 BILLION IN FHA REFINANCING: Under the HOPE for Homeowners Program, 400,000 distressed homeowners can pay off their troubled mortgages and replace them with more affordable, FHA-insured loans. To qualify, a borrower’s monthly payment on existing mortgage loans must be over 31% of his or her income as of March 1, 2008 (hence demonstrating the borrower’s inability to afford the original loans). The original loans must have been originated before 2008, and secured by the borrower’s principal residence (as well as only residence). Also to qualify, the borrower must satisfy FHA underwriting requirements for the new FHA-insured refinance loan.
The FHA refinance will be a fixed rate loan up to $550,400 for at least 30 years, and will include charges for FHA insurance premiums. The maximum loan-to-value ratio of the FHA refinance is 90% of the appraised value. If the refinance proceeds are insufficient to pay off the existing liens, the refinance will not go through unless the original lenders voluntarily agree to accept a short payoff as payment in full. Rules will be established to allow, among other things, equity sharing for the original junior lienholders.
Upon obtaining the FHA refinance, the borrower must share with the FHA at least 50% of any equity realized through a subsequent sale or refinance. The FHA’s share in equity will be based on a sliding scale of 100% of any equity realized within the first year of the FHA loan, 90% the second year, and so on, but not less than 50%. The HOPE for Homeowners Program shall be in effect from October 1, 2008 to September 30, 2011.

- $7,500 TAX CREDIT FOR FIRST-TIME HOMEBUYERS: With certain exceptions, a first-time homebuyer will receive a tax credit of 10% of the purchase price up to $7,500 maximum, for the tax year in which the buyer purchases a principal residence. The tax credit, however, must be repaid like an interest-free loan in equal installments over the next 15 years or in full if the homebuyer sells the property for a gain. A buyer qualifies as a “first-time” homebuyer as long as the buyer (and spouse if any) has not owned a principal residence in the U.S. for the last three years. The tax credit phases out for a taxpayer with a modified adjusted gross income over $75,000 (or $150,000 for joint returns). This tax credit is available for qualifying homes purchased from April 9, 2008 through June 30, 2009.

- FANNIE MAE, FREDDIE MAC, AND FHA REFORM: The new law permanently sets the conforming loan limit for FHA and government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac at 115% of an area’s median home price, not to exceed $625,500. The new loan limits take effect after the current $729,750 loan limit expires on December 31, 2008.
The new law also authorizes the Treasury Department to bail out Fannie Mae and Freddie Mac if necessary by increasing their lines or credit or purchasing their stock. A new governmental agency, the Federal Housing Finance Agency, will be created to oversee GSE operations. Other FHA reform includes an increase in the minimum down payment requirement from 3% to 3.5%, and effective October 1, 2008, the elimination of seller-funded down payment assistance programs.

Some of the other provisions of the new Housing Act are, without limitation, $4 billion in assistance to stabilize neighborhoods hurt by the foreclosure crisis, $180 million for pre-foreclosure counseling, Home Equity Conversion Mortgage (HECM) reverse mortgage reform, assistance for veterans, and the creation of a nationwide loan originator licensing and registration system. The appropriate governmental agencies will establish new regulations as needed to carry out and enforce the new Housing Act.

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The sales volume for June ‘08 improved over May ‘08, but for our month over month comparison of June ‘08 to June ‘07 and comparing YTD  ‘07 to ‘08 it was quite a different story. Sales volume in June ‘08 was up over May by 14% however, YTD, June ‘08 to June ‘07, sales volume was down 44%. June ‘08 to June ‘07 month over month sales volume was down 38%. During this same time only three markets performed better; Malibu Beach, Pacific Palisades, and Santa Monica. In reality, only Santa Monica really fared better as Malibu and Pacific Palisades had one and three sales respectively. 

Median sales prices performed differently. Seven markets actually performed better comparing the median price of properties sold from June 2007 to June 2008. They were: Beverly Hills $950,000 to $1,170,000; Brentwood  $702,000 to $739,000; Hollywood Hills East  $478,750 to    $650,000; Pacific Palisades  $706,000 to $707,000;  Silver Lake $476,000 to $595,000; Venice $1,025,000 to $1,295,000; West Hollywood $585,000 to $585,000; Westwood-Century City $689,500 to $700,000.  In eight markets’ median sales price increased in June 2008 to May 2008.

It has taken longer on average to sell a condo in 2008. The Average Days on Market to sell a condo YTD for June ‘07 was 77 days and for June ‘08 it was 102 days . Comparing month over month, June ‘07 took 64 days to sell a condo while June ‘08 has been averaging 108 days. Individual markets have different statistics. Los Feliz  averaged 198 days in ‘07 to sell a condo compared to 145 days in ‘08. Malibu Beach took 268 days in ‘08 and there was not a single sale in ‘07. In Pacific Palisades it took just 10 days in ‘07 but jumped  to 166 days in ‘08. And in Venice it took 63 days in ‘07 to 25 days in ‘08.

Active listing inventory for condominiums currently on the market year to date ‘08 is down to 710 listing from 1501 in ‘07. The number of sold listings year to date for 2008 is also down, 809 condominiums sold compared to 1511 in 2007. New listings that have come to market year to date are also down to 2240 in ‘08 from 2511 in ‘07. Expired listing increased from 153 in ‘07 to 205 in ‘08. These were listings that did not sell and the listing agreements were not renewed. More listings were withdrawn from market in 2008. These were listings that had not run the course of their listing agreement and were removed from market. 

In conclusion, the average days on market is up, median prices are stable, inventory is down 52% and sales volume is down  44%.

JUNE 2008 Micro Market Report- Condominiums

The following micro markets were up in sales activity June 08 vs. June 07: Beverly Hills, Westwood - Century City, Brentwood, Los Feliz, and Malibu Beach. In 10 of the 19 micro markets we track, sales activity was up in June 08 vs. May 08.

The median sales price across the 19 micro markets we tracked in June 08 vs. June 07 was down 10.8%, while the YTD numbers are up 4.9%. What is also very interesting is the sales price to list price ratios. On average, listings are selling at 6% off the original asking price and 4.4% off the list price at the time of sale. The following micro markets were up in terms of median sales price for the month of June 08 vs. June 07: Bel Air, Los Feliz, and Venice.

The following micro markets have experienced a YTD increase in median sales price: Beverly Hills P.O., Bel Air - Holmby Hills, Sunset Strip - Hollywood Hills West, Cheviot Hills - Rancho Park,  Venice, Santa Monica, and Hancock Park- Wilshire.

Our Conclusions:

There is actually a healthy competition for well-priced properties. The media headlines suggest inventory is swelling and buyers should be able to purchase a property from a  distressed seller or through foreclosure. These situations in our local markets are practically non-existent. In our local markets, many sellers have the financial ability to decide whether or not to sell their home in the current market environment. The big anticipated price drop many buyers had expected has simply not occurred. For a buyer, sitting on the sidelines is not without risk. While interest rates are slowly trending upward, they continue to be the silver lining in the market. With loan programs changing every day, it is very difficult to say which programs will be available, and at what cost, going forward.

Sellers are faced with the reality that the media continues to create a perception of a buyer’s market. Sellers can take heart in the  fact that buyers want to buy and multiple offers still take place for well-priced properties. Homes priced at “market value”, not feelings or false expectations, are still selling.

In summary…. Buyers and Sellers need to pay close attention to the real numbers, not just the headlines. The media’s coverage is largely based on macro trends, not on our local micro market data. Yes, we are in a different real estate environment when compared  with the market of two or three years ago. At the same time, the  market is much more balanced than the headlines indicate.

* Our report has been amended to reflect revised statistics from the MLS listing service.

JUNE 2008 Micro Market Report

Here are some highlights from our Micro Market Report:

1. The number of sales are down year over year. For the month of May that decrease was 37%. Sales volume in 11 markets we track fared better for May 2008 than April of the same year.
2. The median sales price was down year over year for the month of May by 3%. However in 10 of the 19 Micro Markets we study, the median price was actually up looking at May 08 versus May 07. The markets that were up included: Beverly Hills, Sunset Strip-Hollywood, Bel Air Holmby Hills, Brentwood, Cheviot Hills-Rancho Park, West Hollywood Vicinity, Venice, Santa Monica, Pacific Palisades, and Hancock Park - Wilshire.
3. The list price to sales price ratio declined 2.6% year over year looking at the May numbers. The ratio of sales price to list price was 97.9% in May 07 versus 95.3% in May 08.
4. 43.7% of all the listings that sold in the markets we are watching sold in less than 30 days in May of this year. This is a very important number. It clearly shows the importance of pricing when it comes to selling a home. It also shows that good homes at the right price are still selling quickly and in some cases in multiple offers. There is still demand in the market for good homes at the right price.

As a buyer in today’s market you are probably not going to get the “deal” you are hoping for based on the headlines you are reading. Prices are firmer than the media reports would lead you to believe. Buyers who anticipate further declines in the market run the risk of higher interest rates and more restrictive lending practices. No one has the ability to predict the market. Many buyers who were hoping for lower prices are now locked out of the market because they can not get the loans that were available to them a year ago or prices have not dropped as much as they had hoped. There is always a risk in waiting.

For sellers, the lesson of this market is price. Homes are still selling and selling quickly, however the market is extremely price sensitive. The only people who should be putting their homes on the market right now are those individuals who absolutely want to sell. If you need to get a certain price for your home, now is not the best time to be on the market. Please know there is no news on the horizon that points to higher prices in the short term and therefore sellers should not have any false expectations around receiving higher prices than the market will bear.

MAY 2008 Micro Market Report

April’s closed sales volume is the aftermath of the slow flow of new transactions from February and March. Escrows are averaging 30 to 60 days to close.

Open House Activity is very strong as the mood and confidence of buyers improve. Positive media outlooks, including upbeat forecasts from Warren Buffet and The Wall Street Journal, about the improving sub prime markets and the housing markets are a refreshing respite from all of the negative news articles that have been published over the past many months.

Sellers are beginning to enter the market at market value and/or are reducing listing prices until market value is found.

Financing is still tough and is still the major obstacle for buyers and sellers to close a transaction. Many lenders are acting gun shy by pricing themselves out of the market or seeking appraisals below the contracted price between a buyer and seller. Local lenders, however, are taking advantage of the opportunity by providing portfolio loans to qualified borrowers, but demand is outstripping supply and the queue for approval is long.

First time buyers are back in the market. This is good news for the middle of the market as this will give those sellers the opportunity to move up to a new home. The top of the market is still very strong and oblivious to the economy or financial markets. If these buyers want a property, they buy it. We think they know something about real estate as an investment.

Improved values are driving multiple offers on existing inventories and we have participated or managed transactions with as many as 13 offers.

Inventory is still low in many markets. Sellers are waiting for the market to stabilize before placing their property on the market.

Now for some specific observations:
The sales volume in 10 out 20 markets we track had a better April than March in 2008. Santa Monica’s April sales volume doubled its March volume.

However, only 4 out of 20 markets had improved sales volume for April ‘08 compared to April ‘07.

Beverly Hills, Beverly Hills Post Office and Brentwood, which were our best performing markets for the year, took the brunt of the lower sales volume in April.
Bel Air bucked the trend and had a stronger April compared to the previous year.

Cheviot Hills / Rancho Park continues in its steady sales volume and Venice made a strong comeback by tripling sales volume compared to March ‘08 and nearly matching April ‘07.

Hancock Park continues to perform well, matching previous sales history. As traffic congestion tightens on the Westside, the Hancock Park market improves.

Median Prices improved for 13 out of 20 markets in April over March for ‘08. Only 6 markets improved for April ‘08 compared to April ‘07.

Sunset Strip improved to a median price of $1,740,000 for the month of April compared to $1,539,00 for April ‘07 and $1,475,000 for March ‘08.

Cheviot Hills / Rancho Park enjoyed a median price of $1,645,000 compared to $1,600,000 for the same month the previous year and $1,417,000 for the month of March this year.

Venice surged to $1,200,000 from $969,000.

Hollywood Hills East fared very well at $1,169,000 compared to $1,080,000 for the same month the previous year and $765,000 for March of this year.

Please use the link below to obtain the information you need for your particular market.

APRIL 2008 Micro Market Report

The Wall Street Journal

May 20, 2008

POCKETS OF STRENGTH

Where Home Prices Are Holding Up
By JEFF D. OPDYKE
May 20, 2008; Page D1

Downtown: It’s been among the safest places to hide from the housing downturn.

Much has been made of the way the nation’s real-estate bust is affecting some American cities far more than others. But even within a single metro area, changes in housing prices can show wild variations.

And in big cities, prices in the central cores often fare the best. Far-flung suburbs — where home building exploded in recent years — have more typically gotten hammered. In between is a patchwork of established suburbs and city neighborhoods peripheral to downtown that can be all over the map in terms of price declines — or even increases.

Consider the San Francisco Bay area. Overall, prices there slid 17% in the 12 months through February, the most-recent data available, and were down 8% over the first two months of 2008 alone, making it one of the worst-performing metro areas in the country, according to the S&P/Case Shiller Home Price Indices. Yet prices within the city of San Francisco are up 0.3% over the first quarter of 2008, according to DataQuick Information Systems, a San Diego-based real-estate-data firm.

For today’s buyers, all this means that shopping for housing bargains is increasingly complicated. The best deals may be where prices have slid the most, but such areas could easily fall a good bit more before hitting bottom. Meanwhile, you’ll get few bargains if you buy a home in San Francisco or Manhattan or downtown Boston. Of course, if the housing crisis broadens, the central core areas also could see price drops.
HOME BUYING STRATEGIES

Housing blog: Discuss strategies for buying a home in the shaky market.2

Here’s a cheat sheet to understanding home-price patterns in some of the country’s biggest metro areas.

Chicago

It’s a mixed picture in Chicago’s downtown area. A flurry of condominium building has kept prices down on much new construction. At the same time, some established apartment buildings are still seeing buoyant prices, even as properties spend more time on the market. The Carlyle, a 1960s-era glass-and-concrete tower along the city’s prized Gold Coast neighborhood, recorded the highest price ever — $2.4 million — for one of its “C”-tier units earlier this year, for example.

Jim Kinney, president of Rubloff Residential Properties in Chicago, says “80% to 90% of the buildings along the Gold Coast achieved a record sales price in the last year.” The older buildings are often in blue-chip locations and are generally cheaper, per square foot, than new units.

Bargains abound in Chicago’s periphery. Seven miles south of the Carlyle is Bronzeville, a gentrifying community that during the housing boom was a favorite of buyers who couldn’t afford Chicago’s glitzier core. Just last month, a bank that owns a foreclosed duplex in Bronzeville dropped the asking price to just $85,000, from the January listing price of $129,900. The owners who lost the property originally paid $330,000 in November 2005, about a year before the Chicago market peaked.

But beware: Prices may be stagnant or worse for a long time to come. “Because of the huge inventory, it will take years to recover,” says Christina Miller, a Rubloff agent, citing periphery neighborhoods such as Wicker Park, Ukrainian Village and Bucktown.

Chicago’s desirable North Shore suburbs are, for the most part, doing well. Median prices in Evanston, Wilmette and Winnetka, all hugging Lake Michigan’s shoreline, are up over the past year to varying degrees, though sales volume is down sharply, according to a Zip Code analysis by DataQuick. Sellers are receiving about 89% of the list price, according to March data from the North Shore-Barrington Association of Realtors. That’s down from about 95% at the peak of the market.

In upscale Highland Park, about 25 miles north of downtown, prices are down more than 6%. But that average is being skewed by a high number of sales of low-end homes, some forced by foreclosure.

New York

While New York’s commuter market — which includes suburban New York, New Jersey and Connecticut — is down about 8% from its peak in mid-2006, much of Manhattan continues humming along. Neighborhoods such as SoHo, the Lower East Side, Greenwich Village, Chelsea, Murray Hill, the Upper West Side and Harlem are all up in the past year, according to DataQuick’s Zip Code analysis.

Bidding wars still happen. Toni Haber, an executive vice president at Prudential Douglas Elliman, a New York City real-estate firm, says 60 people waited in line recently at an open house to view a three-bedroom apartment in Greenwich Village. The owner had four competing offers within the week, and agreed to sell for about $2.5 million — $300,000 over the asking price.

Part of the city’s strength comes from the fact that few buyers were investing in properties to flip them. Moreover, many apartment buildings in New York aren’t condominiums but co-ops, which impose financial demands on potential buyers far more rigorous than banks do — which helps keep the number of foreclosures down. In addition, foreign investors have been exploiting the weak dollar by grabbing Manhattan real estate.

One area of weakness: the Financial District in Lower Manhattan, where median prices are down, in part because of an abundance of new construction in the area.

Those areas of Brooklyn that are close to Manhattan are also holding up well. On the periphery, places like Jamaica, Queens; parts of the Bronx; and nearby New Jersey towns such as Jersey City and Hoboken are off between 3% and 14%.

Farther out, popular commuter towns like Summit and New Providence, N.J., are down at much as 16%. Pockets of suburban strength do exist, though. High-end suburbs in New York’s Westchester County such as Chappaqua are up over the past year.

Boston

Michael DiMella, managing partner at Charlesgate Realty Group, recently sold a one-bedroom condo in Boston’s South End district for $365,000, roughly $100,000 more than the owners originally paid in 2000 and about what they could have expected at the peak of the Boston real-estate market in late 2005. But the condo sat on the market for nearly four months before a buyer came along.

That sale typifies many parts of core Boston these days: flat to modestly higher prices but a longer time to sell. Prices in the city’s core are off less than 1% over the past year, according to first-quarter data from Listing Information Network, Boston’s MLS system. The real difference today is that homes are staying on the market for 111 days on average, up from 85 days in 2005.

Prices in key neighborhoods, such as Back Bay, the South End, Fenway and the Waterfront, are all up between 3% and 10%. Beacon Hill and the North End, however, are down sharply, as much as 33%. That’s partly the result of a slew of high-end properties that hit the market in 2006 and 2007 that were priced as high as $1.5 million, skewing the price data upward. Even without those sales, however, the median price would be down by double-digit amounts.

“No one is taking prices higher these days just to see if they can get it, like they used to,” Mr. DiMella says of Boston’s downtown core. “But you have to come with realistic expectations. This is a highly desirable area, and you’re not going to find a steal.”

Nearby communities are a mixed bag. Condos in suburban Brookline, one of the most desirable Zip Codes — 02445 — are down about 8%, while neighboring 02446 is up nearly 7%, for example. Among city neighborhoods, Dorchester is down across the board by as much as 25%, yet Jamaica Plain and West Roxbury are each up between 7% and 9%.

San Francisco

“I get buyers who come in thinking they’re going to get a real bargain these days because prices are down all over the country, and we just laugh,” says Caroline Werboff, an agent with San Francisco real-estate firm Hill & Co.

People want to live in San Francisco’s urban core. Median prices around the Financial District, North Beach, Telegraph Hill and Russian Hill are up — in some case strongly.

Ms. Werboff says a Russian Hill home that sold for $7.7 million in April 2004 sold again in February for $10.3 million. A newly listed house in Pacific Heights, another core neighborhood with strong price appreciation, sold three years ago for $6 million. Ms. Werboff says that the owners “will get $10 million now.”

Still, some San Francisco neighborhoods are down, particularly along the edges of the city, such as Portola, Bayview, Hunters Point and Sunset. Edward Leamer, director of the UCLA Anderson Forecast, an economic research center at the University of California Los Angeles, warns that “the housing problems won’t bypass San Francisco proper. The decline will just take more time.”

Meanwhile, both closer-in and distant suburbs are weak, too, often markedly so. On the periphery, San Mateo County and high-end Marin County are doing the best, both down more than 4% between March 2007 and 2008, according to DataQuick. Alameda and Contra Costa, across San Francisco Bay from the city and chockablock with anonymous tract housing, are down 18% and 27%, respectively. Bargains exist, but with so much inventory, prices aren’t expected to rebound quickly.

Santa Clara County, home to Silicon Valley, is down more than 9%, though pockets of strength exist in communities such Sunnyvale, Mountain View and Los Altos. Napa County, meanwhile, is one of the weakest in the region, with median prices off more than 20%.

Los Angeles

L.A. is an anomaly. No real urban core exists. The area is just a sprawling string of suburbs that run together.

And most of that sprawl is bathed in red ink. Median prices in communities throughout Riverside and San Bernardino counties — the distant, inland suburbs that are at the epicenter of the region’s subprime and foreclosure crises — are down, often sharply.

Lower-priced homes in tony Palm Springs have lost about 24%, though more-expensive homes are up slightly. Less-affluent cities such as Ontario, Chino and Rancho Cucamonga are all down between 15% and 31%. Los Angeles County, Orange County to the south and Ventura County to the north are suffering equally.

The only notable area of strength: high-end real estate. L.A.’s Westside, home to affluent neighborhoods such as Brentwood and Westwood, “tends to be more insulated because this is where people with money want to be,” says Madison Offenhauser, regional director in Los Angeles for Keller Williams Realty.

Median prices in Brentwood are up 16%. The Hollywood Hills, up 26% to a median price of more than $2.1 million. Rancho Palos Verdes and the Palos Verdes peninsula, up 17%. Parts of Newport Beach, one of Orange County’s poshest addresses, are up as much as 67% to $2.75 million. The coastal village of Laguna Beach is up 6%.

Lee Ann Canaday, owner of the Canaday Group, a Laguna Beach real-estate firm, says “almost every deal I’ve done this year” in Laguna and Newport Beach has had multiple offers.

Write to Jeff D. Opdyke at jeff.opdyke@wsj.com3
URL for this article:
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Hyperlinks in this Article:
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*****************************************************************************************************************

The Housing Crisis Is Over

The Wall Street Journal

By CYRIL MOULLE-BERTEAUX
May 6, 2008; Page A23

The dire headlines coming fast and furious in the financial and popular
press suggest that the housing crisis is intensifying. Yet it is very
likely that April 2008 will mark the bottom of the U.S. housing market.
Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are
about to return to the heady days of 2005. That probably won’t happen
for another 15 years. It just means that the trend is no longer getting
worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years
old. Home sales peaked in July 2005. New home sales are down a
staggering 63% from peak levels of 1.4 million. Housing starts have
fallen more than 50% and, adjusted for population growth, are back to
the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8%
of GDP; by the fourth quarter of this year, it will probably hit the
lowest level ever. So what’s going to stop the housing decline? Very
simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families,
especially first-time home buyers. During the 1990s and early 2000s, it
took 19% of average monthly income to service a conforming mortgage on
the average home purchased. By 2005 and 2006, it was absorbing 25% of
monthly income. For first time buyers, it went from 29% of income to
37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the
houses they purchased (as opposed to speculators) stopped buying. This
caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept
growing (albeit more slowly recently) and mortgage rates have come down
70 basis points from their highs. As a result, it now takes 19% of
monthly income for the average home buyer, and 31% of monthly income for
the first-time home buyer, to purchase a house. In other words, homes on
average are back to being as affordable as during the best of times in
the 1990s. Numerous households that had been priced out of the market
can now afford to get in.

The next question is: Even if home sales pick up, how can home prices
stop falling with so many houses vacant and unsold? The flip but true
answer: because they always do.

In the past five major housing market corrections (and there were some
big ones, such as in the early 1980s when home sales also fell by
50%-60% and prices fell 12%-15% in real terms), every time home sales
bottomed, the pace of house-price declines halved within one or two
months.

The explanation is that by the time home sales stop declining,
inventories of unsold homes have usually already started falling in
absolute terms and begin to peak out in “months of supply” terms. That’s
the case right now: New home inventories peaked at 598,000 homes in July
2006, and stand at 482,000 homes as of the end of March. This inventory
is equivalent to 11 months of supply, a 25-year high - but it is similar
to 1974, 1982 and 1991 levels, which saw a subsequent slowing in
home-price declines within the next six months.

Inventories are declining because construction activity has been falling
for such a long time that home completions are now just about
undershooting new home sales. In a few months, completions of new homes
for sale could be undershooting new home sales by 50,000-100,000
annually.

Inventories will drop even faster to 400,000 - or seven months of supply
- by the end of 2008. This shift in inventories will have a significant
impact on prices, although house prices won’t stop falling entirely
until inventories reach five months of supply sometime in 2009. A
five-month supply has historically signaled tightness in the housing
market.

Many pundits claim that house prices need to fall another 30% to bring
them back in line with where they’ve been historically. This is usually
based on an analysis of house prices adjusted for inflation: Real house
prices are 30% above their 40-year, inflation-adjusted average, so they
must fall 30%. This simplistic analysis is appealing on the surface, but
is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of
Americans buy their houses with mortgages. And if one buys a house with
a mortgage, the most important factor in deciding what to pay for the
house is how much of one’s income is required to be able to make the
mortgage payments on the house. Today the rate on a 30-year, fixed-rate
mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today’s
house prices to the 1970s or 1980s, when mortgage rates were
stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been
subtracting a full percentage point from GDP for almost two years now,
which is very large for a sector that represents less than 5% of
economic activity.

When the rate of house-price declines halves, there will be a wholesale
shift in markets’ perceptions. All of a sudden, the expected value of
the collateral (i.e. houses) for much of the lending that went on for
the past decade will change. Right now, when valuing the collateral,
market participants including banks are extrapolating the current pace
of house price declines for another two to three years; this has a
significant impact on the amount of delinquencies, foreclosures and
credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will
be underwater on their mortgages. They will thus have less incentive to
walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the
market value of a lot of the securitized mortgages that have been
responsible for $300 billion of write-downs in the past year. Even if
write-backs do not occur, stabilizing collateral values will have a huge
impact on the markets’ perception of risk related to housing, the
financial system, and the economy.

We are of course experiencing a serious housing bust, with serious
economic consequences that are still unfolding. The odds are that the
reverberations will lead to subtrend growth for a couple of years.
Nonetheless, housing led us into this credit crisis and this recession.
It is likely to lead us out. And that process is underway, right now.

A copy of the Wall Street article is below.

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The Wall Street Journal

May 5, 2008

MARKETBEAT
By KAREN RICHARDSON
Investors, take heart: Warren Buffett sees investment opportunities in the U.S. stock and bond markets, and believes widespread financial turmoil from the credit crunch is behind us.
All eyes were on Warren Buffett at Berkshire Hathaway’s annual meeting at the Qwest Center in Omaha, Neb.
Speaking to reporters Sunday, a day after Berkshire Hathaway Inc.’s annual fan-fest for shareholders at the Qwest Center in Omaha, Neb., both Mr. Buffett, 77 years old, and Vice Chairman Charlie Munger, 84, criticized regulators, politicians and accountants for lax oversight of financial institutions that are at the center of the subprime-mortgage crisis, and, according to Mr. Munger, were guilty of “deep conflicts of interest.”
“The regulators and the accountants have failed us terribly,” Mr. Munger said, adding that mark-to-market accounting rules are necessary but can obscure other problems within a company.
This year at Mr. Buffett’s annual gathering for shareholders — often called “Woodstock for Capitalists” — 31,000 Buffett enthusiasts were serenaded by Fruit of the Loom minstrels, enjoyed samples of Berkshire portfolio companies such as Dilly Bars and watched artist Michael Israel speed-paint a Buffett portrait with Benjamin Moore paints.
Mr. Buffett credited the Federal Reserve for helping to avert a more-widespread crisis on Wall Street by orchestrating a bailout of Bear Stearns Cos. that “prevented, in my opinion, the contagion where you’re going to have runs on investment banks.”
Bank losses “aren’t over by a long shot, but a lot of it has already been recognized,” he said, adding that the depth of the housing crisis, unemployment and other economic factors would help determine how long the write-downs continue.

“The idea of financial panic — that has been pretty much taken care of,” he said.
As to buying opportunities, Mr. Buffett told shareholders, “We are happy to invest in businesses that earn their money in the euro, or in companies that derive their earnings in Germany, or from the sterling in the [United Kingdom], because I don’t have a feeling that those currencies are going to depreciate in a big way against the dollar.” Sunday he said a Berkshire unit is close to buying a midsize company in the U.K., but he didn’t elaborate. This month, Mr. Buffett is scheduled to tour five European cities looking for more buying opportunities.
What may not be an attractive buying opportunity? Berkshire itself, Mr. Buffett said on Saturday. “Anyone who expects us to come close to replicating the past should sell their stock. It’s not gonna happen,” he said. “You may have something better to do with your money than buy Berkshire.”
No, his face isn’t on the dollar bill. Yet.
Mr. Buffett also said Berkshire Hathaway’s four-month-old municipal-bond insurance business garnered more than $400 million of premiums in the first quarter, boasting that this made its new business bigger than that of its rival. “This whole company has been built in just a couple of months,” Mr. Buffett said.
Sunday he took a few jabs at rivals, saying he was confounded by the ability of his municipal-bond insurer’s biggest rivals, MBIA Inc. and Ambac Financial Corp., to retain their triple-A ratings.
“If you can find another illustration of a company whose stock that’s gone down by 95% in one year and is still rated triple-A, I have yet to see it,” Mr. Buffett said.