John M. Lee: What's In Store for 2008?

What a tumultuous early start we have had in the financial markets these first three weeks in January! We have seen all the major stock indexes drop between 8 and 12 percent in 2008 already, and 14 to 18 percent from the peak in October of 2007. That drop has wiped out all the gains from 2007 and more!

Because the stock market is a leading indicator of the economy, most economists are predicting that the chance for a recession is very high. And some are even thinking that we are already in one.

The Federal Reserve banks have moved aggressively in cutting the Fed Funds rate a full three-quarters of a percent even before its regular meeting to signal they are serious about making sure our economy does not tank. With the upcoming presidential election, politicians are doing their best to insure that our economy will be doing well going into November. Otherwise, the cries of "It's the economy, stupid!" will be heard all over again.

Mortgage interest rates also have been dropping to a point where a borrower can obtain a 15-year fixed conforming loan (amounts under $417,000) at 5 percent or a 30-year-fixed rate at 5.25 percent, the lowest we have seen in the last four to five years.

What caused the decrease? The interest rate is determined by the supply and demand of money. When the supply is high and demand is low, the interest rate drops. Part of the reason is that banks, because of the subprime mortgage fiasco, tightened up on their underwriting guidelines and are not making as many loans. Then, when the real estate market slowed down, resulting in fewer loans and less demand for money.

Both factors point to a lowering of interest rates. So how do all these factors affect the real estate market in the future? There are varying opinions on what this means in the world of real estate. Judging from the San Francisco real estate market and talking to people the first three weeks of January, I believe that our market will be fine. We do not have much real estate inventory, and so listings are selling quite briskly.

With the correction in the stock market, people who have lost money are rethinking their investment strategy. There will be individuals who will make the decision that the stock market is too risky, and that money will rotate out of the financial markets and into real estate.

In the Bay Area, statistics indicate that in any given 10-year period, real estate prices have always gone up. With lower interest rates, payments will be lower, housing will be more affordable and more buyers can afford to purchase again, resulting in a better real estate market.

Also, it looks like the conforming loan limit will be raised this year to the $600,000 to $700,000 range. This will have a large effect on the refinance and purchase markets Mortgage brokers and title companies who were hurting at the end of the year are all of a sudden receiving more incoming business.

When people refinance, many usually take cash out at the same time. They think that since they are getting a better interest rate, they can continue to make the same mortgage payments as before and have some more money to spend. They put that money back into the economy, stimulating growth and helping pull us out of a possible recession.

So what do you do if you are in the market? If you are a buyer, continue to look for opportunities as inventory is about to increase. Get qualified for a loan and be ready to act quickly and decisively because good properties are still selling extremely well.

If you are a seller, study the market by reviewing comparable sales, go around the neighborhood and preview competitive homes for sale, and price your property aggressively.

If you are a homeowner and staying put, check your current interest rate and watch the rates to see if it makes economic sense for you to refinance your home at a lower rate. If you have an adjustable mortgage, now might be the time to switch over to a fixed rate mortgage.

John M. Lee was recently elected president of the Chinese Real Estate Association of America. For questions about real estate, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.