The Goldman Report- Weekly Bay Area Real Estate Market Report

The newspapers called it “Gray Friday” as the stock market dropped 360 points this past Friday on the 20th anniversary of “Black Friday” when the stock market dropped 23% in one day. I think I would have called Friday’s drop “Silver Friday” (like silver lining). Those 360 points represented only a 2.6% decrease. I would have expected a larger drop given the downgraded earnings reports for the 3rd quarter combined with the on-going sub-prime dilemma.

There was a time when the housing market and the stock market tracked in opposite directions. Actually economists had a word for it----“disintermediation”. When the stock market went up the housing market went down as investment dollars poured into stocks. And conversely when the stock market went down the housing market increased. All that changed about 25 years ago. In fact in the last great run up of the NASDAQ we tracked the rise of housing prices to the rise of the NADAQ and unbelievably the curve tracked perfectly with the two variables. It also tracked perfectly after the dot.com bomb in the opposite direction when prices declined. Obviously the wealth made with rising company values in the NASDAQ, particularly in the Bay Area, fueled the escalating prices during the run up in the late 90’s to 2000. The reason I mentioned this is that housing prices in the past moved quite slowly. Since this change of the markets running in similar patterns, the housing market has acted much like the stock market in being more vulnerable to wider swings and being influenced more by emotion and conjecture on the future of the economy.

As the stock market goes so does the housing market---instability in the stock market follows with instability in the housing market. And I should also
comment that housing from 2002-2005 played a significant role in driving the economy with the dramatic increase in new home building and in resale transactions. Certainly supply and demand plays its card and more recently easy qualifying sub-prime mortgages, but today more than ever the housing market is tied to the vagaries of the investment markets and visa versa.

Given the fragility of the stock market and the ever incessant drone of the media highlighting the demise of the housing market I am amazed our local market is doing as well as it is. During the reporting week our SF Presidio office had 31 sales and we saw a bit of resurgence in the wine country with sales doubling from previous weeks. However all parts of the Bay Area markets do not run together. The point is that in spite of all the negative news homes are still selling.

Part of the reason is that you can’t sleep in your stocks. First and foremost buying a home is part of the American Dream and a place to raise our families. Secondly it is one of the very few tax deductions left to most Americans. Thirdly, over the long term, it has proved to be an exceptional investment. The positive news in this course-correcting market is that interest rates are still historically low.

The demand is out there. Although open house traffic has slowed, the best of the properties are still attracting good numbers of buyers. Buyers today feel there is no sense of urgency. The caution is created by uncertainty in economic conditions and the prospect of housing prices continuing to drop. This condition has impacted the lower and middle price ranges of markets. The upper end seems to be doing just fine as indicated by two $12 million sales in SF and seven sales over $ 3 million. Let me add we had another sale in Ross over $ 6 million with multiple offers. What do the wealthy know that others do not? Obviously they feel confident in holding real estate.

Until the uncertainty in our economic future and the sub-prime fiasco unwinds itself the housing market continues to be sluggish in areas of first time buyer homes and those overloaded with inventory. There is some bright news. Unemployment is still at 4.7 nationally. In the Bay Area we are a bit under the national average at 4.4%. We still have job growth. Also on the bright side regarding the sub-prime situation Citigroup, JPMorgan and B of A are setting up a $75 billion fund to purchase mortgage securities and other distressed debt. This fund is designed to stave off any threat to financial world markets. The G7 nations met to strategize on limiting any further damage the credit crisis. All these efforts should have a positive effect over the long term to stabilize the credit markets.

The most important factor is the one I had talked about in several other reports and that is that recessions are created by consumers changing habits. The more the media focuses on negative events without balancing there stories will create a downward spiral among consumers that will impact their buying patterns. This is not just my theory, Robert Shiller of The New York Times wrote an article last week succinctly pointing out that the last recession was shaped by such a pattern. Right now he sees the economy as having the sniffles whether it turns into the flu will be based on whether or not the “salient, emotion-arousing narratives lead people to change in their spending habits.” He goes on to say, “the housing crisis and the credit crunch have people talking about ‘foreclosures and failures of financial institutions’. If that downbeat conversation continues the economy’s aches and pains may well turn into full-blown flu.” Words and thoughts are powerful. I don’t mind the media reporting on the facts, just make sure you balance it with all the facts.

So for my part I am going to focus on the positive elements of our economy and spread the word that there are great buys out there in the market (which there are). It is kind of like taking a flu shot to protect against the ill effects of the flu. If more of us do this, it will be a good antidote against the economy getting the flu.