Roger Ewing's Blog

“Home Values Jump In January”, appeared in the Business section of the Times on February 17.  In response to his article, I sent the following letter to the author Alejandor Lazo and the LA Times.  You can view Mr. Lazo’s article by clicking on the link at the end of this post.

Mr. Lazo,

Thank you for your well thought out article in the Times this morning, “Home Values Jump In January”.   As a 32 year veteran of the Southern California real estate market and I would like to offer a couple of observations regarding home values in today’s market.  Unfortunately, I believe the real estate market is extremely fragile and the recovery may be long and painful for home owners who have lost so much equity in this economic downturn.

First, as you probably are aware, we currently have a two tiered real estate market.

A conforming loan market where buyers obtain loans less than $729,751 and a jumbo loan market for loans above $729,750.

The jumbo home market price structure is still depreciating and will continue to do so until a secondary mortgage market becomes available to create a resource whereby lenders can sell the jumbo loans to third parties.

None of us see such a resource becoming available in the near future.  As a result the important “move up” real estate market is for all intents and purposes, moribund.

The conforming market continues to show strength and has probably bottomed out in terms of price depreciation for the time being.  However, an increase in interest rates, combined with harsher qualifying guidelines, and a rush of foreclosures could cause this situation to reverse itself as you correctly mention in your article.

Second, the real estate market is not immune to classic financial market behaviors.  The government has been successful in supporting the current situation through a number of incentives that you mentioned.  However, it is important to consider the entire home market as a singular unit.

Ecosystem

Each segment of the market is dependent upon the other in an ecosystem of sorts.  And just like any ecosystem, the failure of any market segment will have negative consequences for the other segments.

In other words, for the low end home market in Southern California to become permanently stable, the upper end market (where buyers depend upon jumbo mortgages) must also become healthy.

I would point out that the real estate market in our country is responsible for over 20%  of the national GDP.  Given the importance of the real estate market in the overall economy, I am surprised at the lack of understanding on the part of our leadership in Washington.

The focus for stimulating housing has and continues to be only on the low end conforming segment.

This continued myopia by leadership will result in extending the delay of a full recovery in housing and will hold back the overall economy as well.

Thanks for reading my email.  I hope to see articles in future that draw attention to the two tiered market and the importance of addressing issues related to each market segment.  After all, those who purchase conforming loan properties tend to be tradespeople and small business owners/workers.

When a real estate transaction is successfully completed, more than 25 individual vendors receive work.  This tends to be an even higher number of vendors when a high end property finally closes escrow.  At the end of the day, full employment is the key to overall financial stability.

LA Times: Home Sales Jump In January