The Black Hole On The West Coast

California Association of Realtors (CAR) came out with the most recent sales numbers for the 3Q of 2007 and in case you didn't hear (or notice), sales are off 40% from a year ago. The media might portray a downturn of 5-7% as a big deal, but try 40% from last October. Most developers and public builders (in this market) are scrambling for anyone to qualify, and then they'll see which house they can afford to lose the least on, with the 'one buyer in tow'.

LOS ANGELES (Nov. 28) – Home sales decreased 40.2 percent in October in California compared with the same period a year ago, while the median price of an existing home fell 9.9 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.

“Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months,” said C.A.R. President William E. Brown. “The decline in sales at the upper end of the market contributed to a significant decline in the statewide median price as even well-qualified borrowers had difficulty securing financing.”

Closed escrow sales of existing, single-family detached homes in California totaled 265,030 in October at a seasonally adjusted annualized rate, according to information collected by C.A.R. from more than 90 local REALTOR® associations statewide. Statewide home resale activity decreased 40.2 percent from the 443,320 sales pace recorded in October 2006.

The statewide sales figure represents what the total number of homes sold during 2007 would be if sales maintained the October pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.

The median price of an existing, single-family detached home in California during October 2007 was $497,110, a 9.9 percent decrease from the revised $552,020 median for October 2006, C.A.R. reported. The October 2007 median price fell 6.4 percent compared with September’s $530,830 median price.

“We expect further weakness in sales over the next few months as the liquidity crisis plays out,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Both the state and national economies remain fundamentally sound at this time, despite recent developments in the housing market. While there have been mixed signals in recent months, economic growth is expected to continue into 2008.”

Highlights of C.A.R.’s resale housing figures for October 2007:

• C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in October 2007 was 16.3 months, compared with 6.4 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
• Thirty-year fixed-mortgage interest rates averaged 6.38 percent during October 2007, compared with 6.36 percent in October 2006, according to Freddie Mac. Adjustable-mortgage interest rates averaged 5.68 percent in October 2007 compared with 5.56 percent in October 2006.
• The median number of days it took to sell a single-family home was 59.3 days in October 2007, compared with 56.5 days for the same period a year ago.

Regional MLS sales and price information is contained in the tables that accompany this press release. Regional sales data are not adjusted to account for seasonal factors that can influence home sales. The MLS median price and sales data for detached homes are generated from a survey of more than 90 associations of REALTORS® throughout the state. MLS median price and sales data for condominiums are based on a survey of more than 60 associations. The median price for both detached homes and condominiums represents closed escrow sales.

In a separate report covering more localized statistics generated by C.A.R. and DataQuick Information Systems, 13.9 percent, or 41 out of 296 cities and communities, showed an increase in their respective median home prices from a year ago. DataQuick statistics are based on county records data rather than MLS information. DataQuick Information Systems is a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. (The top 10 lists are generated for incorporated cities with a minimum of 30 recorded sales in the month.)

Note: Large changes in local median home prices typically indicate both local home price appreciation, and often, large shifts in the composition of housing market activity. Some of the variations in median home prices for October may be exaggerated due to compositional changes in housing demand. The DataQuick tables listing median home prices in California cities and counties are accessible through C.A.R. Online .

• Statewide, the 10 cities and communities with the highest median home prices in California during October 2007 were: Newport Beach, $1,575,000; Santa Barbara, $1,275,000; Cupertino, $1,033,000; Danville, $1,017,500; Los Gatos, $1,005,000; San Carlos, $927,500; Redwood City, $912,000; San Ramon, $835,000; San Clemente, $832,500; and San Mateo, $829,500.
• Statewide, the 10 cities and communities with the greatest median home price increases in October 2007 compared with the same period a year ago were: Santa Barbara, 24.4 percent; Arcadia, 21.3 percent; Redwood City, 20.6 percent; Newport Beach, 18.4 percent; San Ramon, 14.4 percent; Cupertino, 11.7 percent; San Carlos, 9.5 percent; Redlands, 8.8 percent; Redondo Beach, 8.7 percent; and Sunnyvale, 7.6 percent.

Leading the way...® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States, with about 200,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.

October 2007 Regional Sales and Price Activity*
Regional and Condo Sales Data Not Seasonally Adjusted

October-07	Median Price	Percent Change in Price from Prior Month	Percent Change in Price from Prior Year	Percent Change in Sales from Prior Month	Percent Change in Sales from Prior Year
	Oct-07	Sep-07	Oct-06	Sep-07	Oct-06
Statewide
Calif. (sf)	$497,110	-6.4%	-9.9%	-2.4%	-40.2%
Calif. (condo)	$416,210	2.7%	-2.1%	-4.6%	-31.9%
Region
Central Valley	NA	NA	NA	NA	NA
High Desert	$265,880	-2.2%	-19.1%	1.9%	-56.9%
Los Angeles	$533,070	-6.4%	-8.6%	-20.0%	-42.0%
Monterey Region	$714,550	-1.1%	1.7%	15.6%	-35.1%
Monterey County	$620,000	-10.1%	-5.3%	7.7%	-43.7%
Santa Cruz County	$735,000	3.2%	-2.5%	23.9%	-24.8%
Northern California	$373,790	-2.5%	-3.6%	20.5%	-16.8%
Northern Wine Country	$532,900	-3.4%	-9.4%	8.0%	-37.8%
Orange County	$673,770	0.0%	-1.1%	-11.3%	-41.7%
Palm Springs/Lower Desert	$323,440	-6.5%	-5.1%	16.4%	-30.1%
Riverside/San Bernardino	$344,370	-3.4%	-15.6%	15.6%	-34.4%
Sacramento	$309,360	-5.0%	-15.7%	9.1%	-30.5%
San Diego	$539,060	-3.9%	-6.2%	0.8%	-37.1%
San Francisco Bay	$810,490	3.3%	8.9%	9.0%	-41.5%
San Luis Obispo	$548,610	5.6%	-2.2%	-6.1%	1.6%
Santa Barbara County	$742,190	9.4%	-12.4%	1.0%	-29.5%
Santa Barbara South Coast	$1,325,000	-15.3%	18.8%	22.0%	-33.0%
North Santa Barbara County	$360,870	-1.9%	-18.5%	-22.2%	-23.6%
Santa Clara	$860,500	1.4%	11.0%	7.6%	-35.1%
Ventura	$650,570	-4.6%	-3.1%	-3.5%	-52.6%

na – not available

*Based on closed escrow sales of single‑family, detached homes only (no condos). Reported month‑to‑month changes in sales activity in October overstate actual changes because of the small size of individual regional samples. Movements in sales prices should not be interpreted as measuring changes in the cost of a standard home. Prices are influenced by changes in cost and changes in the characteristics and size of homes actually sold.

sf = single‑family, detached home
Source: CALIFORNIA ASSOCIATION OF REALTORS®

Median Prices By Region – Current Month vs. Year Ago

	Oct-07	Sep-07		Oct-06
Statewide
Calif. (sf)	$497,110	$530,830		$552,020	r
Calif. (condo)	$416,210	$405,360		$425,180	r
Region
Central Valley	NA	NA		$345,070	r
High Desert	$265,880	$271,940		$328,650
Los Angeles	$533,070	$569,390		$583,160
Monterey Region	$714,550	$722,500		$702,680
Monterey County	$620,000	$690,000		$655,000
Santa Cruz County	$735,000	$712,500		$754,000
Northern California	$373,790	$383,330		$387,560
Northern Wine Country	$532,900	$551,680		$588,330
Orange County	$673,770	$673,770		$681,340
Palm Springs/Lower Desert	$323,440	$346,080		$340,830
Riverside/San Bernardino	$344,370	$356,510		$408,170
Sacramento	$309,360	$325,550		$366,940	r
San Diego	$539,060	$560,840		$574,530
San Francisco Bay	$810,490	$784,220	r	$744,300	r
San Luis Obispo	$548,610	$519,740		$560,980
Santa Barbara County	$742,190	$678,570		$847,220	r
Santa Barbara South Coast	$1,325,000	$1,564,000	r	$1,115,000
North Santa Barbara County	$360,870	$367,860		$442,590
Santa Clara	$860,500	$848,950		$775,000
Ventura	$650,570	$681,820		$671,330

na - not available
r - revised
Source: CALIFORNIA ASSOCIATION OF REALTORS®

8 Interesting News Stories

It's Thanksgiving 2007 and before the rush of the day, I sat down to catch up on some articles that I've archived over the past week. Here is the list of several interesting news articles I've been saving to review and comment on, given the busy last two weeks with clients:

1. Millionarie Household chart - per country (US is 5.5x over #2);
2. SIV Superfund has picked a top flight manager to handle the $75B fund;
3. Gov. Schwarzenegger works with Lenders to Help California Homeowner;
4. NAR releases 3Q housing results - As defaults increase, lenders pull back;
5. Liberty Dollars seized by FBI;
6. Preview for the Top 5 gadgets from CES 2008 - via Popular Mechanics;
7. Fannie Mae and Freddie Mac Crash - charts;
8. Six brilliant marketing campaigns - with videos;
   

Commercial Real Estate Values Fall 2.5%

For the 3Q of 2007, there was a decrease in the TBI of 2.5%. Since the 3Q of 2003, the TBI (The MIT/CRE CREDL Initiative has developed a Transactions-Based Index (TBI) of Institutional Commercial Property Investment Performance) has been steadily increasing for the past 4 years.

The MIT Real Estate Center analysis shows that
the drop may not only indicate the end of commercial real estate price increases which effectively doubled in the past 4 years, but it also may signal that weakness in the housing market is spilling over into commercial real estate. The last time we saw this large of a price decrease occurred when prices fell 3.9 percent following the terrorist attacks of 9/11, says the MIT center.

Commenting on the index for the third quarter of 2007, MIT center director David Geltner said in a statement, "The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets."

They Own Nothing

Apparently, Judge Christopher A. Boyko of the Eastern Ohio United States District Court, on October 31, 2007 dismissed 14 Deutsche Bank-filed foreclosures. The original article can be viewed here. In the post, it states that the ruling was based on lack of standing for not owning/holding the mortgage loan at the time the lawsuits were filed.

[..]The Court's amended General Order No. 2006-16 requires Plaintiff (Deutsche Bank) to submit an affidavit along with the complaint, which identifies Plaintiff as the original mortgage holder, or as an assignee, trustee or successor-interest.

Apparently Deutsche bank submitted several affidavits that claim that Deutsche was in fact the owner of the mortgage note, but none of these affidavits mention assignment or trust or successor interest.

Thus, the Judge ruled that in every instance, these submissions create a "conflict" and they "do not satisfy" the burden of demonstrating at the time of filing the complaint, that Deutsche Bank was in fact the "legal" note holder. [..]

The other items in the post, that will take some further investigation and dissemination of the facts, include the revelation that Deutsche Bank was not the originator of the notes, only the assignee under its securitization agreement, and is attempting to foreclose on these assigned notes without taking possession or proving factual assignment. Thus, these MBS or CDO pool holders own nothing. It's worth further investigation to confirm.

[..]Jacksonville Area Legal Aid Attorney, April Charney, broke this news to us via email and made these comments in regards to the Ohio Federal Court ruling (emphasis ours):

This court order is what I have been saying in my cases. This is rampant fraud on every court in America or nonjudicial foreclosure fraud where the securitized trusts are filing foreclosures when they never own/hold the mortgage loan at the commencement of the foreclosure.

That means that the loans are clearly in default at the time of any eventual transfer of the ownership of the mortgage loans to the trusts. This means that the loans are being held by the originating lenders after the alleged "sale" to the trust despite what it says per the pooling and servicing agreements and despite what the securities laws require.

This also means that many securitized trusts don't really, legally own these bad loans.

In my cases, many of the trusts try to argue equitable assignment that predates the filing of the foreclosure, but a securitized trust cannot take an equitable assignment of a mortgage loan. It also means that the securitized trusts own nothing.[..]

Level 3 Assets Are Surging

The FASB 157 rule is set to take effect on the brokerage houses, banks and financial institutions, in case you haven't noticed the latest 5 day drop in the Dow, S&P and Nasdaq. In today's Bloomberg article:

...Under the rule, Level 1 assets are those for which market prices are readily available. Level 2 holdings are valued based on ``observable inputs,'' or prices of similar assets traded in the market. Assets fall into the Level 3 category when there aren't even any observable inputs, and the firm has to rely on in-house models to calculate potential gains or losses... While those typically fall into the Level 3 category, assets such as leveraged loan commitments shift from one level to another depending on market conditions...

The Rule is specific about unobservable inputs (Level 3 category) and their intended use (FAS 157):

...The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. In those situations, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort.

This Statement clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. A fair value measurement should include an adjustment for risk if market participants would include one in pricing the related asset or liability, even if the adjustment is difficult to determine. Therefore, a measurement (for example, a “mark-to-model” measurement) that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one in pricing the related asset or liability...

As these real estate assets are lumped into the Level 3 category on the financial institutions' books, the value of the write-downs are going to become larger as we've been seeing in the past week (Bloomberg):

...Goldman's Level 3 assets, for which market prices are so scarce that companies use internal models to gauge their value, accounted for 6.9 percent of the New York-based firm's $1.05 trillion total at the end of August, according to a filing with the U.S. Securities and Exchange Commission. Citigroup classified 5.7 percent of its assets as Level 3 on Sept. 30 and Merrill reported 2.5 percent.

Investors have grown wary of banks and brokerages with difficult-to-sell securities on their books, after profits at Citigroup and Merrill were crippled by at least $19 billion of writedowns, mostly from bonds backed by home loans to borrowers with poor credit histories. While Goldman officials say the firm won't report an ``extraordinary'' drop in its subprime holdings, investors remained skeptical, pushing its shares down 15 percent this month through yesterday in New York Stock Exchange composite trading.

``It's hard to believe Goldman is perfect,'' said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management and sold his Goldman, Merrill and Morgan Stanley shares in the past 12 months. ``Their losses might be smaller than others, but that doesn't mean they don't have a problem.''...

It's the Fed's next move to determine if they're going to drop interest rates to curb these expanding portfolio losses on the Street, or keep interest rates in check with commodities to curb inflation on Main Street. In last week's post, Level 3 Assets Broken Down:

If we look at the major institutions and divide their Level III assets by their equity capital base, we arrive at the following calculations:

• Citigroup: Equity base: $128 billion, Level III: $135 billion. Ratio: 105%
• Goldman: $39 billion, Level III: $72 billion. Ratio: 185%.
• Morgan Stanley: $35 billion. Level III: $88 billion. Ratio: 251%.
• Bear Stearns: $13 billion. Level III: $20 billion. Ratio: 154%.
• Merrill Lynch: $42 billion. Level III: $16 billion. Ratio: 38%.

Again, whether this "matters" remains to be seen. What I will offer, with some degree of certainty, is that Hank, Ben and the rest of the den are fully aware of this dynamic. That's likely why we saw such aggressive actions from global central banks and, to that end, why the Treasury is pushing the super-conduit emergency bailout plan.

OFHEO Response Letter to NY AG - Cuomo

Yesterday's 300+ pt loss in the Dow was partially a response to New York Attorney General's demand from the OFHEO to investigate Fannie Mae and Freddie Mac and the loans with Washington Mutual..

Second, as part of a wider probe of the mortgage industry, the New York Attorney General Andrew Cuomo demanded that Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500) examine whether mortgages sold to them by Washington Mutual were for homes that had been appraised at an artificially high price.

The fear is that Fannie and Freddie might cut back on purchases and guarantees of loans from WaMu (Charts, Fortune 500). That would be a crippling blow for the bank, because the market for loans that Fannie and Freddie buy is the only part of the mortgage market that has substantial volume.

Today, I received the email link for the response letter from James Lockhart with the OFHEO:

...OFHEO shares your concerns about fraudelent appraisals and their impact on the mortgage markets and homeownership. Additionally, we have a core interest in the safety and soundness of the Enterprises (GSEs). These allegations of appraisal fraud are a serious matter to the Enterprises and OFHEO and require vigilant attention by all relevant government agencies. Active and early consultation is appropriate in such circumstances.

After reviewing these materials, I feel that you and your staff may not fully understand the differences between the mortgage-backed securities (MBS) issued by the GSEs and those issued by other entites. In particular, unlike the issuers of private label MBS, when Fannie Mae or Freddie Mac issues an MBS, they retain the credit risk on the underlying mortgages by guaranteeing repayment to MBS holders...

Video: Iraqi IED explosion from 9/2/07

I'm watching the market recap today (listening to GM's woes, the credit crunch and the Chinese deciding not to purchase anymore greenbacks) and was sent this email from my attorney - if anyone is offended, I'll be glad to provide his name and number - :-)

If we ever need a reminder of how lucky we are that we don't have to worry about this type of reality, here it is.. and don't forget that there are those Americans (albeit teenagers) that are serving this country dealing with this on a daily basis.. they're doing this so we don't have to watch another 747 slam into Lower Manhattan.. enough said..

Notice the slow moving truck (on the left) that pulls over while the Humvees come up from the rear, and the truck on the other side of the street that is pulled over with civilians outside of the vehicle..

What The Fed Didn't Tell You?

As expected the Fed cut rates by 1/4 of 1%, or 25 basis points, but behind the headlines, the WSJ reported that the Fed pumped in more money into the financial system since the "credit crisis" took hold in August. This injection suggests that lending institutions are still wary to lend as the short-term debt markets are still sluggish (mortgage apps may be up in the past few weeks, but funding sources have dried up, even in commercial where Greenstreet Commercial (8th largest commercial lender) closed operations this past week).

NEW YORK -- The Federal Reserve pumped a total $41 billion to the U.S. financial system in three separate operations Thursday, amounting to the largest injection of funds since the liquidity crisis took hold this summer.

The size of the injection may come as a surprise, coming just a day after the central bank delivered its second consecutive rate cut. Wednesday's 25 basis point cut -- which brings the target rate to 4.5% -- follows a half percentage-point drop in September, which was intended in part to help ease stubbornly high lending rates in the interbank market.

The New York Federal Reserve's Web site announced a one-day repurchase of $12 billion, alongside a $21 billion seven-day, and a $8 billion 14-day operation. The total exceeds the $38 billion injection back in August that marked the largest contribution to the market in a single day since the World Trade Center attacks in 2001.

"This morning's combined RP package of $41 billion is significantly larger than we had expected based on our tentative reserve projections," said Lou Crandall, chief economist with Wrightson ICAP.

CCIM Call to Action

I posted the newest Call to Action from the Legislative Liaison for the CCIM on the BHB site. It looks like Dem's are trying to raise taxes on Real Estate Partnerships from 15% to 35%, which would have an immediate impact on commercial real estate.