Thursday, February 14, 2008

California and the Economic Stimulus Act of 2008

California's real estate trade group revised its forecast on declining home prices and now says home values will drop as much as 10 percent this year. A $152 billion national economic stimulus program could cushion the larger-than-expected price fall -- or not.

by Broderick Perkins
© 2008 DeadlineNews.Com

Deadline Newsroom - The California Association of Realtors (CAR) may not have to eat too much crow after all.

Leslie Appleton-Young, chief economist for the Golden State's realtor association has had to revise her forecast to include a larger than expected decline in California's home prices this year.

But a new $152 billion economic stimulus package from Capital Hill could provide mortgage relief to home buyers in California and other high-cost housing markets.

If that happens, California's home prices may not fall as much as predicted in the new forecast.

Last year, Appleton-Young forecast the median price of homes would tumble by 4 percent this year in California.

Recently, she confessed the need to eat her own words when she revised the forecast to a projected 8 percent to 10 percent drop in prices.

Stephen Levy of the Center for Continuing Study of the California Economy, based in Palo Alto, CA said Appleton-Young's revised estimate is more accurate, but still off the mark.

He says a 10 or 15 percent decline in the state's median home price would be more likely this year. With a high rate of foreclosures, high-cost housing and tight money conditions, California is in the thick of the housing downturn says Levy and an about face isn't on the horizon.

Appleton-Young said falling prices can be a good thing. The faster home prices fall, the faster the market will hit bottom.

California home prices could get some buoyancy from legislation just signed by President Bush.

H.R. 5140, called the "Economic Stimulus Act of 2008," is designed to stimulate the economy and it has a provision that could cause Appleton-Young to revise her forecast again -- back to a smaller median home price decline in California.

The same legislation that will send tax rebate checks to millions of Americans this spring and offer other provisions to boost the anemic economy, will also raise the conforming loan level in some high cost areas from $417,000 to $729,750.

That will allow Fannie Mae, Freddie Mac, and the Federal Housing Administration to back more mortgages.

That means more home buyers in California will be eligible for conforming loans, which carry lower interest rates than non-conforming or "jumbo" loans.

The "more," however, may be limited.

Some critics aren't so sure the new loan levels will do much to save California's housing market.

Buyers still have to meet tight lending standards that often require no more than 35 percent of a household's gross income spent on the mortgage payment.

In some cases, lenders are rejecting appraised values by reducing by 5 percent how much of the appraised value they will actually finance, according to Realty World - California Property Network's broker Quincy Virgilio, who is also president elect of the Santa Clara County Association of Realtors.

And then there's the cost.

The median price in many areas ($743,500 for Silicon Valley in January) is so high, median income earners still won't qualify for loans despite higher limits.

In "Locked Out 2008," the California Budget Project recently reported, a buyer in Silicon Valley, for example, would have to have a household income of $170,352, with certain loan term and financial presumptions, in order to buy the median priced home.

Only 24 percent households in California can afford entry level housing, according to CAR

Some buyers in the Golden State and elsewhere, including the metro areas of New York, Boston, Los Angeles-Orange County, San Jose-Santa Clara in California, and Washington, D. C., will benefit from higher conforming loan limits, according to a Deutsche Bank report by Nishu Sood, a homebuilding analyst.

Marginal impact may occur in Miami, Sacramento, and California's Inland Empire region. Sood's report said prices aren't high enough in Phoenix, Las Vegas, Chicago and most major Southern markets, including Houston and Dallas for the new conforming loan level to make a difference.

There's also a question of declining home values and existing "upside down" mortgages that are now larger than the home is worth. Already skittish lenders aren't going to look favorably on refinance loan applications for those properties.

And, right now, the increase in the conforming loan level expires on Dec. 31, 2008.

It's a small window of opportunity that will close quickly if the provision for higher conforming loan levels isn't extended.

• Looking for more California housing market news? It's right here in the Deadline Newsroom and DeadlineNews.Com, two places to get ALL the news that really hits home.

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© 2008 DeadlineNews.Com

Broderick Perkins, an award-winning consumer journalist of 30 years, is publisher and executive editor of San Jose, CA-based DeadlineNews.Com, a real estate news and consulting service, and the new Deadline Newsroom, DeadlineNews.Com's new backshop. In both cases, it's where all the news really hits home.

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