Altos Research Real Estate Insights

Yesterday the Fed raised short term interest rates again. This move, while totally expected, brings us one step closer to an economic conundrum of a new sort. In this case, we're looking at one of two negative scenarios for the real estate market on a 12-month or so horizon. These scenarios hinge on the yield curve. Here's a snapshot of today's from Bloomberg.

The Federal Reserve adjusts the Fed Funds rate, which is the shortest-term (overnight) lending rate between banks - off the chart on the far left. The further right you go on the chart, the less direct influence the Fed has, but that's where (at the 30-year) mortgage rates are set.

Why do I bring this up?...

... it takes them longer to sell their homes

A friend is thinking about buying a place in tony Monte Sereno so we checked out the market conditions to see what we could see about that exclusive little market.

First the basics: Monte Sereno has typically about 20 or some homes on the market at any given time. The median price is about $2.5Mil. zowie. But here's how the quartiles break down. Note the new listings have come on at the low end of the market so this week's median price for the market as a whole notched down to $2.4mil from last week's $2.7. Note also that all the super high-end (Quartile 1 are basically brand new homes, some of which are spec.)

So are people buying at these prices? Well let's just say...

Northern Trust has published a mildly negative assessment on the state of consumer borrowing.

This sharp increase in home mortgages has occurred in a low interest environment. When adjustable rate mortgages are repriced, the debt servicing burden will shoot up sharply. For the record, close to a third of all mortgage applications in 2004 and 2005 were for adjustable rate mortgages.

Fine. Lots of new borrowing and it's coming from mortgages. The implication is that Joe Sixpack is going to get hit hard. But are we selling Joe a little short? One could interpret this accompanying chart with a more sanguine scenario.

this morning quoting the Federal Reserve's William Poole saying that several converging factors should keep the housing market at reasonably healthy levels this year. But that common wisdom aside, predicting a bubble is a fool's game.

"So if you have an academic interest in house prices, I recommend that
you wait a few years. If you have a direct financial interest, I can't
help much - you're on your own," he said.

The New York Times today published it's real estate mega-issue. The depth and breadth of content that paper consistently churns out always amaze me.

My favorite articles are by and about the economists (I need to get out more, I know.)

Some Highlights:

Freakonomics' Dubner and Leavitt forecasting the demise of real estate agents...

There will always be some home sellers who prefer full-service,
full-fee agents, and a handful of these high-end agents will
undoubtedly thrive (just as some full-service travel agents and
stockbrokers still thrive, except they are now called "travel
counselors" and "financial planning specialists," respectively). But
more and more home sellers, armed with data from real-estate Web sites
and facing a variety of pricing options, will surely choose another
route.

Edward Glaser economist currently of Harvard illustrating the urbanist factors contributing to current real estate pricing situations

Between 1980 and 2000, four of the five cities in the U.S. with the
fastest-growing housing prices were in Boston's metropolitan area:
Cambridge, Somerville, Newton and Boston itself. (Palo Alto had the
second-fastest-rising prices over that time.) Glaeser and several
colleagues considered two explanations. First, the possibility that
builders in the metro area were running out of land and that home
prices reflected that scarcity. The second hypothesis was that building
permits were scarce, not land. Had the 187 townships in the metro area
created a web of regulations that hindered building to such a degree
that demand far outstripped supply, driving prices up?

...

Most of Boston's metro area, he concluded, wasn't particularly
dense, and even in places where it was, like the centers of Boston and
Cambridge, there was ample opportunity to construct higher buildings
with more housing units.So, after sorting through a mountain of
data, Glaeser decided that the housing crisis was man-made. The
region's zoning regulations — which were enacted by locales in the
first half of the 20th century to separate residential land from
commercial and industrial land and which generally promoted the orderly
growth of suburbs — had become so various and complex in the second
half of the 20th century that they were limiting growth.

In both cases the themes are related to conditions we see here. Our professional real estate agent and broker friends are running like mad to provide more and deeper value to their clients. And Bay Area residents who have undertaken any construction project have persevered through the intense maze of regulation and fees unlike say, working in Vegas.