The Bay Area probably won’t slide into a recession this year, but it will come close.That’s the prediction of the Association of Bay Area Governments, which released its annual economic forecast Thursday.

Job growth will slow, household income will barely keep pace with inflation and the housing market will continue its slump, according to the group. But the Bay Area won’t lose jobs, the way it did during the dot-com crash. And the region’s economy should start to recover in 2009.

“I’m saying we’re going to skirt the recession, but I’m not saying it’s happy days,” said economist Paul Fassinger, the association’s research director.

His prediction came with a caveat. If the United States as a whole sinks into a recession, the Bay Area will follow, Fassinger said. But it won’t be anywhere near as severe as the last economic downturn, which wiped out 400,000 jobs here.

“If it is a recession,” he said, “it will be a mild one, and it will be short.”

The association acts as a regional planning agency for 101 Bay Area cities, towns and counties, and the local economy’s health shapes everything those governments do. About 200 government officials and employees gathered at the association’s Oakland headquarters Thursday to hear what the year might have in store.

“If this is a prolonged situation, it’s going to have a real impact on our quality of life,” said Joe Eddy McDonald, vice mayor of Hercules, listening to the forecast. He feared that a recession could slow his city’s efforts to develop a ferry, bus and train hub on the waterfront.

Already the association’s researchers see ample signs of a slowdown.

Hammered by the mortgage crisis, the number of permits for new housing in California dropped to an estimated 113,000 in 2007 - the lowest level since 1997 - while home foreclosures soared. The Bay Area’s unemployment rate rose to 4.8 percent last month, compared with 3.8 percent a year earlier. And while last year’s retail sales in the Bay Area were higher than the year before, their rate of growth slowed, from 5 percent in 2006 to 3.7 percent in 2007.

“We ended the year without a lot of momentum in the California economy, and we’re expecting it to slow in 2008,” said Howard Roth, chief economist with the California Department of Finance. “The risk of a recession is a lot higher now than it was a year ago.”

But a recession is not inevitable.

Despite the recent slowdown, Bay Area household incomes have held steady, growing 1.2 percent faster than inflation in 2007. The region added 54,100 jobs. And while American consumers have grown increasingly skittish about spending, foreign tourists continue to pump money into Bay Area stores, particularly in San Francisco.

“International tourists will flock to the city by the bay, due to the weak dollar,” said Hing Wong, senior regional planner for the association.

The group expects taxable sales to grow in the next two years but not by much, rising about 2.7 percent in 2008 and 3.3 percent in 2009.

The region will add jobs. But again, the pace will be sluggish, with 15,000 new jobs in 2008 and 25,250 in 2009.

Inflation will fall - slightly - compared with 2007, when soaring oil prices pushed up the costs of gasoline and food. The association predicts that inflation in the Bay Area will be 3.4 percent in 2008 and 3 percent in 2009.

Household incomes will keep rising. But in 2008, that increase will just keep pace with inflation. In 2009, incomes should rise 0.5 percent faster than inflation.

“You’re not going to see any real growth in incomes,” Fassinger said. “We’re not going to see an outright recession in 2008. But it’s going to be much slower than 2007.”

Taxable sales growth

Forecast

2008       2.7%

2009       3.3%

Income growth

Forecast

(over inflation)

2008       0%

2009       0.5%

Job growth

Forecast

2008        15,000

2009        25,250

Source: ABAG

Buying or refinancing a house in the pricey Bay Area?

You could get a big break on your mortgage from the economic stimulus package announced Thursday.

Besides its core purpose of providing tax refunds, the tentative package - which still has several hurdles to clear - essentially rewrites the definition of “jumbo” loan, raising the cap from its current $417,000 to as high as $729,750 in high-cost areas for one year.

That would mean home buyers who need the high-ticket mortgages this area requires could qualify for the benefits now limited to non-jumbo, or conforming, loans: an interest rate that’s roughly a full percentage point lower.

On a $650,000, 30-year fixed-rate mortgage, the savings could be $417 a month, according to California Sen. Barbara Boxer’s office.

“This is exactly what we need for California,” said David Crane, Gov. Arnold Schwarzenegger’s adviser on jobs and economic growth, reacting to news that the White House and bipartisan Congressional leadership had agreed to raise the loan cap.

“There is no issue of greater importance to the California economy than the availability of (housing) credit,” Crane said. “When people can’t get credit, housing prices decline, you can’t get new buyers in, and people can’t refinance existing, expensive, subprime or other loans. This is critical.”

The proposal would allow Fannie Mae and Freddie Mac to buy loans up to 125 percent of an area’s median home value - up to $729,750 - well above their current $417,000 limit. While the new limit would vary based upon how expensive an area is, almost all of the Bay Area would automatically merit the $729,750 cap by virtue of having medians above $600,000.

Fannie and Freddie are government-sponsored entities that inject liquidity into the mortgage market by purchasing loans and then either keeping them or packaging them into securities sold to investors - with a guarantee in case they default.

Ever since the credit crunch hit last summer, banks have been skittish about writing mortgages that don’t qualify for Fannie/Freddie backing. That’s why jumbos got so expensive relative to conforming loans, and jumbo borrowers needed to have good income, a big down payment and a stellar credit score.

The jumbo tightening had a huge fallout in California, especially in expensive places such as the Bay Area. It’s a one of the main reasons home sales plummeted last fall. Almost two-thirds of Bay Area homes were bought with jumbos from last January through July, according to DataQuick Information Systems. But by November that had fallen to 43.4 percent, and in December it was 39.6 percent.

The state’s median housing price is $402,000, far above the nation’s $220,000 median. And the going rate in the Bay Area is even higher. In December, the region’s median sales price for an existing single-family home was $620,000, according to DataQuick. California finance and real estate professionals have long chafed under the Fannie/Freddie limits, saying it’s unfair to impose the same cap on, say, Marin County, where the median is $835,000, as on Akron, Ohio, where it’s $125,000.

“This will really open up the market,” said Richard Redmond, a broker associate at All California Mortgage in Larkspur. “It is fabulous news for the Bay Area and for first-time home buyers.”

John Lonski, chief economist at Moody’s Investors Service in New York, said lifting the cap could happen just in time.

“This remedy could prove quite valuable at supplying a badly needed boost to this spring’s peak selling season for housing,” he said. “If home sales can’t stabilize in the second quarter, then the U.S. economy is in more trouble than we currently realize.”

While the higher cap would benefit buyers and refinancing homeowners with decent financial profiles, it might not help a significant number of troubled homeowners, experts said. That’s because many people who live where home prices are sinking are underwater - they owe more than their homes are worth - which disqualifies them from Fannie/Freddie-backed mortgages. Moreover, some people with subprime loans might be too shaky financially to qualify.

“This won’t do anything for people who bought houses in 2005 and 2006 with subprime loans who have little or no equity,” said Jack Guttentag, emeritus professor of finance at the Wharton School at the University of Pennsylvania, who maintains the MTGprofessor.com Web site. “If they can’t afford the reset rate (for adjustable loans), their only hope is to get a modification from their lender.”

Struggling homeowners might get a boost from another element of the stimulus package, which would raise the loan cap for Federal Housing Administration mortgages to the same $729,750 in high-cost areas from its current $362,000. That might allow more people to refinance into FHA loans, which are available to buyers with down payments as low as 3 percent, and also would offer options for people with blemished credit.

The proposed new loan cap drew some criticism as allowing Fannie/Freddie to take on too much risk and to stray too far afield from their mission of expanding affordable housing.

“I’m concerned,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. “It raises the possibility that Fannie and Freddie will just be buying up a lot of bad mortgages.”

Or rather, mortgages that could turn bad. Criteria vary, but most loans that the duo purchase have at least a 5 percent down payment. In a depreciating market, it’s easy for that equity to get wiped out if prices fall - and for homeowners to then go into foreclosure, Baker said. “If you owe $600,000 on a home that’s worth $500,000 or even $550,000, there is going to be a very strong temptation to walk away,” he said.

Although Fannie and Freddie are independent, publicly traded companies, there is universal belief that the U.S. government would ride to their rescue if need be.

“If they end up buying up bad loans or getting themselves in trouble so that their own survival is in question, the federal government will bail them out, I don’t doubt it,” Baker said.

Supporters of the cap hike say that the housing market is in such crisis that a quick infusion of capital is the best way to prevent foreclosures from spreading even more.

Now that the Bush administration and House leaders from both parties have agreed on the stimulus package, it will go to the full House and then to the Senate. Underscoring how urgently Congress views the economic situation, legislators plan to fast-track the bill so it reaches Bush by mid-February.

Boxer has already written to congressional leaders urging that the higher cap be enacted.

“This opportunity to raise the loan limits comes at a crucial time for many families in California, which is currently experiencing one of the highest rates of home foreclosures in the country,” she wrote Thursday. “Taking this action now would help those who want to affordably refinance their mortgages and save their homes. The security and affordability provided by Fannie Mae and Freddie Mac should not be limited only to those areas of the U.S. with lower housing prices.”

How stimulus package will work

What: The tentative economic stimulus package would raise the limits on mortgage loans Fannie Mae and Freddie Mac can acquire. For one year, the limit would be 125 percent of an area’s median cost, up to $729,750, a big jump from the current $417,000.* Likewise, the package would raise the limits for Federal Housing Administration loans up to $729,750 in high-cost areas, up from the current $362,000.

Why it matters: Mortgages backed by Fannie and Freddie carry an interest rate a full percentage point or more lower than “jumbo” loans.

Local impact: The Bay Area median home price stood at $620,000 in December. If the loan cap is raised, many more homeowners and home purchasers here would qualify for “conforming” loans at lower interest rates.

Examples: For a 30-year fixed mortgage of $550,000, the monthly savings would be $353, Sen. Barbara Boxer’s office said. For a 30-year fixed mortgage of $650,000, the savings would be $417 a month.

What’s next: The package has to pass the House, which seems likely, and then go to the Senate. Congress aims to get a bill to President Bush by mid-February. Experts said if the loan cap is raised, the new limit would be reflected in mortgage offerings almost immediately.

That’s right! Purchase your new home in the beautiful community of Windemere in San Ramon through the Shastri Team at Remax and in addition to the great pricing offered by the builders, you will get an additional $7,500.00* towards the landscaping of your new house, courtesy of the Shastri Team! But don’t wait, as this promotion is for a limited time only! Call today – 925.699.9099.

*Credit given in escrow, from commissions earned by the builder.

About Windemere:

Windemere is a master planned community offering a broad selection of home sizes and styles. Along with the new neighborhoods, are state-of-the-art schools, 18 parks, miles of trails, a new community center and library and acres of dedicated open space. In fact 55% of the land is dedicated to permanent open space. Windemere BLC is a partnership of Brookfield Homes, Centex Homes and Lennar Homes.

Schools – Windemere schools rank in the Top 2% Statewide.

Schools in the district have won the National Blue Ribbon Award or State Distinguished School designations 28 times over the past decade.

Elementary Schools:

Hidden Hills Elementary

Hidden Hills Elementary received a score of 959 out of a possible 1000 on the 2007 Academic Performance Index. Also offers complete on-campus before and after school programs.

Live Oak Elementary School

This state-of-the-art campus is located next to the 15-acre San Ramon Sports Park and Tiffany Roberts Field. Before and after school programs are also provided.

Middle School:

Windemere Ranch Middle School
Windemere Ranch Middle School received a score of 928 out of a possible 1000 on the 2007 Academic Performance Index. The new campus includes a language lab, computer lab and more.

High School:

Dougherty Valley High School
The first new high school in the valley in 32 years, this 54-acre campus offers great academics and comprehensive athletic facilities—an aquatic center, gym, football field, track and more. Everything is state-of-the-art.

College:

Diablo Valley College, San Ramon Valley Campus
This 65,000 square foot state-of-the-art campus serves students of all ages and interests with classes ranging from culinary arts to computer science.

Call the Shastri Team today to find your next Windemere Home – 925.699.9099.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.

California Previews Retreat
Monterey, August 2007

Brief History of Real Estate

Historically, housing downturns average 27 months. We are in the 23rd month of the current downturn, so once we are past this financial over-reaction, things should improve. The national median price of a resale home is 3.4% higher than a year ago and the pending sales index is moving back up. There may just be some light beginning to shine at the end of this tunnel!

1970 to 1980

Prior to my entering real estate in 1971, a quote appeared in Business Week (late 1969) due to an increase in housing prices: “The goal of owning a home seems to be getting beyond the reach of more and more Americans. The typical new house today costs about $28,000. “In 1972, interest rates were 7% and it would take over 24 years before a home buyer could be able to obtain those low rates once again - today, we are in the low 6’s. In 1973, banks had a run on deposits and for a period of approximately 8 months there were no lenders who were in a position to make loans to home buyers. This should have caused a collapse in the real estate market, but home prices continued to rise. In 1977, the National Business magazine stated: “The median price of a home today is approaching $50,000. Housing experts predict price rises in the future won’t be that great.”

1980 to 1990

At the end of the 70’s and into the 80’s, inflation hit 21.5% and home loans were reaching 18%! This was followed by a crash (and later bail out) of the savings & loans industry in America. Although large job losses were creating foreclosures, home prices continued to rise. By 1985, Money Magazine made this prediction about home prices: “The golden-age of risk free run-ups in home prices is gone.”With a buildup in defense spending and huge growth in manufacturing sector in the late 1980’s, increased job creation led to a boom in home construction and home prices continued to rise. Then on November 11, 1989, a dramatic event took place: the Berlin Wall came down! With the Evil Empire (the Soviet Union) breaking up, things were going to change around the world and change quickly!

1990 to 2000

In early 1990, Congress began slashing funds for defense spending. Within a very short period of time, a lot of highly paid workers in both defense and manufacturing had lost their jobs. California home prices declined about 12% by 1996 when the San Francisco Examiner said: “A home is where the bad investment is. “In the following 3 years, California home prices rose 19.7% wiping out all the losses of the early ’90’s and ended the decade with net gain of 9.35%. The median price in California has not declined since 1996.

The Media

Today’s media plays up bad economic news now more than ever, which leads to misconceptions about economic realty. Our economy is extremely strong, profits are superb and the world economy is exploding.

. All you read and hear is that real estate is going down, yet last month, prices in the U.S. rose 3.4% from a year ago and California is up almost 1%. The Bay Area prices have gained 4.1% over the last year and southern California median price is up 3.7%.

· Foreclosures are supposed to be at a record high - but last year 98.83% or mortgages did not go to foreclosure. Today, the Bay Area’s foreclosure rate is up only 1.5% over last year while southern California’s foreclosure rate is up 2%.

· The media reported 53,942 notices of default for the 2nd Quarter - a near record high. They are comparing it to the 1st Q. of ‘96 when 61,541 notices were filed but fail to mention that 2 million more home have been built in California since then!

· What if the media’s headlines read: 99.2% of Mortgages are Not in Foreclosure?

· The media and the financial markets have greatly over-reacted, to the real problems that have been revealed in the lending marketplace, which is typical.

The Sub-Prime Market

It may surprise you to know that sub-prime loans make-up only 5% of the U.S. total loan market and Alt - A loans (those with credit better than sub-prime but less than prime) total only 8% of all loans in the U.S.!

1. These exotic loans became a major influence in the early 2000’s, but anyone obtaining them up through 2004 had very few problems due to rapid equity growth. Many with no-money-down purchases soon found they had 20% (+) equity within a year or two!
2. Most of the problems with sub-prime loans originated in the summer of2005 through 2006. In California, 43% of all loans funded during that time were sub-prime loans.
3. Sub-prime loan investors that needed to sell their loans were liquidating their paper for $.96 on the dollar. There has been no current data on sales since August 5th, but with the current turmoil in the financial markets, I am sure they are being “dumped” for less.
4. Here is a financial report on some of the banks that provided the sub-prime money:

· Bear Stearns 2nd quarter revenue was $2.512 billion - a new record!

· Merrill Lynch saw 2nd quarter profits rise 30.2% Morgan Stanley (holding $5.2 billion in sub- prime loans) had a 60% jump in earnings.

· Goldman Saks earned $2.33 billion in the past year.

· Bank of America (#2 U.S. bank), after putting aside $1.81 billion for potential credit losses, saw net income rise to $5.76 billion - up from $5.48 billion last year.

· The media will still report about massive delinquencies and huge foreclosures in the sub-prime market, but those reports will not be accurate because they don’t explain the difference between a delinquent payment, a notice of default or a foreclosure. They tell us “Foreclosures at Record High!” but that is not accurate.

Source: Mortgage Bankers Association, National Homebuilders Association, Inside Mortgage Finance

Delinquencies vs. Notices of Default vs. Foreclosures

Delinquencies

Delinquencies cover any missed payment - even if it is just for one month, it is reported as a delinquency.

1. The delinquency rate on sub-prime loans was running at 13.77%, which is up 13.44% from the previous year. In the last quarter, the delinquency rate dropped to 12.4%!
2. The delinquency rate on Alt-A loans is only 2.69%, while prime loans are at 2.57%.
3. Combining the three rates with the loan volume gives you a delinquency rate for all loans in the U.S. of only 4.84%. The record low is 4.0%.
4. On jumbo mortgages (anything larger than $417,000) the delinquency rate is 0.37%

5. California’s delinquency rate is only 3.25%.

Notices of Default

Notices of Default are filed when lenders’ loans have been delinquent for a specific period of time. These loans begin the foreclosure process. The four states of California, Florida, Nevada and Arizona currently have the largest amount of loans in the foreclosure process. Yet, in the 1st Quarter, 24 states saw a decline in foreclosure starts and 36 states saw a decline in the 2nd quarter!

1. Only 3.23% of all sub-prime loans have entered the foreclosure process, with most of the defaults occurring on loans from Jan. 2005 to June 2006.
2. Only 1.28% of all prime loans have entered the foreclosure process.
3. In California, the last quarter saw 53,943 notices filed, with most filings being on loans from the summer of 2005 to the summer of 2006.
4. The lowest number was 12,417 in the 3rd Quarter of 2004.

Foreclosures

Foreclosures occur when the buyer has been unsuccessful in curing the debt, and either a lender or an investor has acquired the property. As of last month, there was 1 foreclosure filing for every 693 homes in America.

1. For sub-prime loans, 68% of the buyers are able to prevent the foreclosure by either refinancing the property or successfully selling their home.
2. For prime loans, the foreclosure rate is 0.86%. Last year, the U.S. saw a combined foreclosure rate of only 1.09% while California’s rate was 1.17%!
3. California now ranks #4 in the nation in foreclosures - down from #1!

The media will try to scare you with numbers like $1 trillion in loans needs to be recast this year and that foreclosures could cost lenders as much as $2.3 billion dollars! They never mention that there is $10.4 trillion of mortgages with $56 trillion dollars of equity in American households.

Add to that the wealth of the U.S. at $70 trillion, with the value of stocks between $15 and $20 trillion, while the bond market is even larger. So these loses (should they occur) should not have any great effect on home prices.

A final note about foreclosures: The #1 reason they occurred was due to fraud. The #2 reason was unethical lending, followed by #3 - loss of job, and finally #4 was medical reasons. By the way, mortgage insurers are in a good position to cover losses at these (high) levels.

Source: Mortgage Bankers Association, Federal Reserve, Federal Bureau of Investigation

Why the World Changed in 1979 Baby Boomers’ Impact

Never before in the history of the world has a generation accumulated so much wealth as the baby boomers. The Internal Revenue Service will tell you that from 1945 to 1979, incomes increased at the same rate for all tax brackets. By 1979, the early baby boomers had been in the workplace for over 10 years. They were the most educated generation to enter the work force, and they had the skills for our changing world. Today, the IRS tells us that, from 1979 to 2004, the median income in the U.S. rose 18%. From 2004 to 2005, incomes grew 5.8%.

The number of taxpayers making more than $100,000 grew by 3.4 million and accounted for more than two-thirds of the growth vs. 2000! Half of Americans make less than $30,000 and two-thirds make less than $50,000.

Those making more than $1 million grew by 26% and numbered 303,817 in 2005! These individuals, who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total income gains in 2005.

The top 85% of the nation’s wealth resides with the richest 15% of Americans; the bottom 50% of Americans holds only 2.5% of the nation’s wealth.

Over the next decade, there will be a 25% increase in the population over 50 years of age. They have more money than any preceding generation, due to having dual incomes, equity growth, and record inheritances (60% goes to the top 40%)! This age group is spending $2 trillion dollars annually! Last
year, 2.1 million boomers turned 60, with 25% planning on not retiring.

They found a way to mix leisure with work and are not ready to fully retire - they have money and income and they are still investing in real estate.