John M. Lee: Markets Affect Real Estate

With the turmoil in the financial markets, all the questions I have been answering this past month and a half have been along the lines of: How this will affect the San Francisco real estate market.
With the recovery in the economy stalled, our government running at record deficits, unable and unwilling to provide monetary stimulus into the economy, our stock markets have been extremely volatile since mid June. The Dow Jones Industrial Average has reverted to its level at the beginning of the year and has fallen as much as 16 percent from the peak this year. All the other major indexes have been doing the same.
Meanwhile, there are also uncertainties in the European and Asian financial markets, each with their own problems. The only positive movement is in commodities, such as gold, silver and platinum, which are defensive plays on the market.
How does all this bad financial news affect real estate? The answer depends on what you are trying to do with real estate.
Obviously, with the financial markets going down people who are invested long in stocks lost money and will have less to purchase property with. The size of their initial investment has decreased and thus they cannot put as much money down. With lending underwriting still very strict, this will hurt home sales.
On the positive side though, the feds are holding the interest rate steady for the foreseeable future, and as a result, mortgage rates have decreased and are currently at 50-year lows. Loans in the 4.375 percent interest range, for 30-year loans, and 3.375 percent range for 15-year fixed rate mortgages, are available, effectively lowering the cost of housing.
This has fueled another cycle of refinancing, so lenders at banks and mortgage companies are extremely busy helping clients refinance their homes. Once this is completed, consumers will have more discretionary income at their disposal to spend on other goods and services.
The lowering of rates has actually helped our first-time home buyers, most of whom have been out of the stock market and saving money for a down payment. With the interest rates so low, it makes homes that much more affordable, and thus the starter home market is doing well.
The luxury home market also is doing well because of a shortage of good inventory. Most of those transactions are being purchased with all cash anyway, so mortgage interest rates do not affect the market as much. It seems like the wealthy still have plenty of money.
The middle market is where buyers are hurting the most. Many of them are dabbling in the stock market, so they lost some of their assets. The conforming loan limit is scheduled to decrease in September and many banks have already changed their underwriting criteria to conform to the new lower limits.
Homes in the Richmond and Sunset range from starter homes to the middle market with a few luxury homes in the more exclusive neighborhoods. So, we will be seeing a mixed bag of activity moving forward.
Also, keep in mind that the stock market is a leading economic indicator and the real estate market is a lagging indicator, so our activity will follow what occurs in the financial markets. Nobody can predict what is going to happen, but I urge you to take advantage of these uncertain times, especially to refinance your properties at these unprecedented interest rates!
Our fall selling season typically starts after Labor Day and we will be anxiously watching for early signals of how it will go. My belief is that with the interest rates low, our market will finish the year just fine.
John M. Lee graduated from UCLA with an MBA in real estate and finance. If you have any questions about real estate, call him at Pacific Union at (415) 447-6231 or send an e-mail to johnlee@isellsf.com.