Inverted Curve

The interest rate curve has inverted. What this means is that US Treasury bonds with longer terms are yielding less than those with shorter maturities. In market-based analysis, this shows that investor demand is higher for long term US Treasury bonds. What does this mean for real estate and the Bay Area market? An inverted interest rate curve is usually a signal that the economy is headed for a recession next year, as investors flock to US Treasuries for safety. If the economy heads into recession, the Feds may slow down the rate increases. This would be good for real estate. A recession though would be bad for real estate. A recession normally brings job losses, decreased government revenue, a flight of capital, etc. Given that many jobs created in California over the last five years centered on real estate, it could spell a double whammy for our state.

Happy Holidays!

Holiday Party Recap

Wed Dec 7th
SF Rex holiday party at Armani Exchange. SF Rex is a networking group for young professionals in commercial real estate. I was party hopping that night and this was the last stop. The usual mix of commercial brokers and lenders. Lots of mortgage brokers go to these events looking for networking and lending opportunities. I did meet one actual real estate investor. He'd been invited to the party by a lender he knows. Told me a bad flip story. Market had changed and he's taken a $300,000 price reduction since July. Later that evening, his friend arrived who was just moving here from Washington DC. I agreed with him that the weather was better here. They invited me to a Marcus Millichap party in Russian Hill. Unfortunately, my evening was ending and besides I has already drunken 3 glasses of wine. This was the last stop.

Wed Dec 14th
Office holiday party at Elephant and White Castle. Lots of food, lots of people, no open bar. Real estate isn't like other professions where you get to know the people in your office. Everyone pretty much runs their own business and agents spend most of their time out of the office. Except for sales meetings (which I rarely attend) I don't get to see the other agents that often. There were people at the party whom I've never seen nor met. I had to run so I missed the holiday skit, but I came back for dessert later to find a few people sitting around a table. I found out one of our administrators is recently engaged, how one of our top producers found her husband, an agent's take on "cheating" in relationships, etc, etc. Steve mentioned he liked my blog, so I dedicated a posting to him (12/19).

Mon Dec 19th
San Francisco Apartment Association holiday party. I promised to bring a holiday desert and settled on the SF Cityscape cake from Just Desserts. It was the talk of the party along with me being late. I thought the party started at 6:30pm but it really started at 6pm. Holiday brain hiccup. I did make a fashionably late entrance. Another real estate agent and a title company officer came by to help me set up. People in this industry tend to be both helpful and nice. Lots of food, lots of people, open bar. Got into some discussions with the apartment owners about city politics. In a city like San Francisco, it's a topic that is hard to avoid. Landlord tenant relationships leave a lot to complain about. One of the other real estate agents saw problem tenants as an opportunity. Only if the price is right. I brought the cake to remind us of why we choose to live and own here. This is a wonderful city...

Real estate agents believe their own bull

So says Steve, my fellow real estate agent at the office. Real estate agents in general are an optimistic breed with only one thing in mind: sell, sell, sell. Nary will you here a single negative comment utter from their mouths. I can only think of one reason for this. There are too many real estate agents, chasing too many dollars, chasing too few deals. So many have taken the real estate exam and so many have come to our great city to make a living, that I think SF now has one of the highest number of real estate agents per capita. If you don't know at least one real estate agent, then you must live in a bubble.

Competition is fierce. The pressure to sell coupled with the natural cheery disposition of our profession has resulted in an industry break from reality. I've heard agents tell their nervous buyers, "I can guarantee you that the value of your condo won't go down." This was just a month ago (reality check- prices are headed south). I've seen agents gladly sell their clients into risky interest only, adjustable loans so that they can buy a home that they really can't afford. I've also seen agents sell their clients an overpriced piece of investment property in a bad location or worst yet, sell them a cash flow negative property. Or that property bought in a sub par area with a promise of a quick flip into TICs. Most realtors will sell you any piece of real estate under the belief that real estate is safe and prices won't decline. Reality check, real estate, like almost everything, is cyclical.

Speaking of cycles, the market has definately changed. Right now we seem to be in that stand off stage. Seller's are not marking down and buyers are not writing offers. Something has got to give and I don't think it will be the buyers who back down. These corrections tend to take 18 months, so buyers have enough time to be patient. Still listening for the "pop"...

Fed raises rate Tuesday

The federal reserve raised the funds rate to 4.25% on Tuesday. The fed also signalled that they may be nearing the end of rate hikes. From the sound of it, there may be at least one other rate hike early next year.

I'm watching to see if the flat yield curve will become inverted. Either the market sees little inflation risk in the future, the market is fleeing to US treasuries seeking safety, or both.

Sky high rents

The NY Blog www.theslatinreport.com reported a study about housing affordability Tuesday. The National Low Income Housing organization put out their study of the minimum hourly wage required to afford rental housing. The study assumes rent is no more than 30% of income and calculates rents at fair market value. It's no big shocker that San Francisco has the highest hourly wage required to afford market rents. The minimum housing wage to afford a two bedroom in SF is $29.54/hour. Marin county, San Francisco county, and San Mateo county all tied for the least affordable jurisdictions. This isn't new info to those of us who live here. Rental shock is one of the first emotions felt by many newcomers to San Francisco.

To read the study, visit http://www.nlihc.org/oor2005/ .


Tickets to RE Wealth Expo

As reported in my previous post, the Learning Annex real estate wealth expo is next March at Moscone Center. You can also get tickets by pledging to KQED (PBS). For $175 you get two tickets to the event (they are normally $179 each) while supporting public television. To join contact KQEX member services 1 800 568 9999 or go to www.kqed.com .

Individual TIC Financing

My opinion of TIC's has not changed (see 11/11 posting), but it is worth mentioning that individual TIC financing is available. I received an email about this last week from Marc Herrenbruck at Metrocities Mortgage. For more information, his email is mherrenbruck@metrociti.com.

The Learning Annex Real Estate Forum

FYI the Learning Annex is having their Real Estate Forum next year at Moscone Convention Center March 25-26. Headlining are Donald Trump, Robert Kiyosaki ("Rich Dad, Poor Dad"), Suze Orman, and Anthony Robbins. VIP tickets are $499 ($299, for the first 350 people) and regular weekend tickets are $179. Learn about real estate investing from the "Donald" and Robert Kiyosaki. If you have not read "Rich Dad, Poor Dad", you should put this book on your wish list. Kiyosaki has made millions investing in real estate and it is a must read.

To register
http://www.learningannex.com/realestate/realestate.taf

Schizophrenic market data

Today, I went scouring various websites, newsletters, and journal looking for data. I'm trying to make of sense of where the market is now and where we are heading.

The headline of the day was that mortgage rates headed south. It was based on a report released by Freddie Mac. I decided to go to Freddie Mac's website ( www.freddiemac.com ) to read the news release. This week's 30-yr fixed rate mortgage averaged 6.26%, down slightly from the 6.28% average of last week. The 15-year FRM remained unchanged at 5.81% while the five-year treasury indexed hybrid ARM averaged 5.76%, up from last weeks average of 5.75%. The one-year ARM averaged 5.16%, up slightly from 5.14%. So what? The weekly average goes down slightly and the media is making a big deal about it. I think media must be doing a little of what I am, staring at the data, looking for any signs or anomalies, grasping for straws. What's more interesting is the one year data. A year ago, the 30-year FRM was 5.81%, the 15-year FRM was 5.23% and the 1-year ARM was 4.19%. There is no one-year data for the 5-year ARM. Why is this interesting? Because the Fed has raised interest rates 14 times since June 2004, yet interest rates have only gradually gone up with the biggest jump in ARM, up approximately 1%.

Also in the news, gold close at $506.50/ounce and the yield curve is still flat (it briefly inverted on Monday). With gold so high you would think inflation to be running out of control, the dollar to fall, and the economy to stagnate. With a flat curve, there is no risk assigned to time- no inflation risk, no interest rate risk, no default risk, etc. Is the market hedging? Or do bond and commodities traders operate in different spheres in and of themselves.

The WSJ reported Wednesday that, through September 2005, a greater percentage of this year's high risk ARM holders are 30 days or more delinquent in payments than the first nine months of the previous three years. The National Association of Realtors is reporting delinquencies surged nationwide in October. At my office downtown, we started getting cold calls, mailers, and faxes from small investment banks and dealers trying to unload collateralized mortgage obligations (CMO). For those of you who don't know what a CMO is, it is a pool of mortgages that are securitized and sold to investors. Banks generally won't lend unless they know they can sell the loans on the secondary market. It is the secondary market that helps keep the mortgage market liquid and, more importantly, the banks lending.

Speaking of Freddie and secondary markets, Freddie and Fannie raised the limit for loan guarantees 16% to $417,000 (according to the California Association of Realtors our median home price is $538,770). This should calm the secondary markets a bit.

Conclusions from the data? It's hard to draw any, except that something is out of whack.