John M. Lee: 2001 - Real Estate Year in Review

This year will definitely be remembered in history as the year the United States woke up to international terrorism and decided to do something about it.

The impact that the event has on the Bay Area real estate market is yet to be seen. With the daily positive news coming out of Afghanistan, the war might be over sooner than we expect, which will be good news for our economy and might ignite the real estate market.

The real estate market this year started on a positive note with the Federal Reserve Bank aggressively cutting interest rates. Even with the stock market declining at the end of 2000, the start of the year brought renewed enthusiasm and sale prices remained high. However, the activity in terms of numbers of sales was slowing. Instead of having 10 offers on any given property like it was in 2000, we might see three offers now. But it is enough to keep prices at a high level.

However, the slowing activity, lack of a good listing inventory, company lay-offs and the economic downturn, especially in the dot-com industries, finally started to have an effect on real estate prices.

First, high-end homes and trendy lofts in the South of Market area felt the impact because stock option money was gone and not in play any more in the housing market.

Next, it spread to areas such as Noe Valley, Potrero Hill and the Bernal Heights.

Finally, it hit us in the west end of town toward the second half of the year. We have been fortunate because most of the buyers in the Richmond and Sunset districts tend to be families and they have fairly stable jobs and income and so we have not been hit as hard as other neighborhoods. Next month, I will be summarizing the year's activities and prices in your area.

What is in store for 2002 is anyone's guest right now. Here are some signals of what is to come and we can draw our conclusions accordingly.

The 30-year mortgage rates are hovering in the six to six-and-a-half percent range, the lowest it has been in the past 30 years. The Federal Reserve has indicated that interest rate cuts are still on the horizon and experts are predicting another one-quarter to one-half point cuts in the near future. This might or might not decrease mortgage interest rates, but some buyers are purchasing properties because they can not pass up the low interest rates. Many others are refinancing their properties to take advantage of lower monthly payments or else they are taking cash out to finance other projects or investments.

The president and congress are studying several economic stimulus packages to reduce taxes and increase governmental capital spending, resulting in more money that can be spent in the economy in the hope that it will boost our economic system. This is good for real estate.

The stock market appears to have bottomed out shortly after the Sept. 11 World Trade Center incident and have been up sharply since then. This might have marked a bottom for the stock market and give consumers hope that we have seen the worst. Some companies reporting third quarter results have actually beat their estimates, indicating the worst is behind them and that they see more positive results in the future. Since the stock market is a leading economic indicator, this points to the prediction that the economy will do better soon.

Unfortunately, real estate is a lagging economic indicator, meaning we will be feeling the effects even after the economy has recovered. For example, the stock market bottomed out in March 2000 but real estate prices, for the most part, kept going up until this March, a lag time of 12 months.

If we follow the same pattern, we might have a down market in real estate until the third quarter of next year.

Several other factors are pointing to this trend. I am starting to see more short sales - where the amount owed on the property is higher than the sales price of the property. In cases like these, we have to work with the banks to see if they will accept a lower pay-off in lieu of foreclosures.

The work-out departments in banks, where they review these on a case-by-case basis, have been busier than ever. Our hope in the industry is that we do not see the wave of foreclosures that we saw between 1992 and 1994. During that recession, the banks foreclosed on properties and then sold them off at fire-sale prices, further depressing real estate values.

My prediction for 2002 then is that we will have a very balanced market between buyers and sellers. Our prices might slide somewhat in the first three quarters of the year, followed by a stabilization of the market the following year.

Thanks for reading this column throughout the years and I want to wish you all a very happy holiday season. We certainly have much to be thankful for this year.

John M. Lee is a top-selling broker at Pacific Union, specializing in Richmond and Sunset district properties. If you have questions concerning real estate, call him at (415) 447-6231 or e-mail him at isellsf@aol.com.