A lot of people around me, especially those focused on buying real estate as an investment in this historically challenging real estate market, are obsessed with when US home prices will “bottom out”. I believe people sometimes focus on finding the lowest home price at the expense of other equally important economic factors such as the cost of construction/”fixing the place” and financing costs…both of which are at historic lows right now, and thought I’d share some of the latest news/information relevant to this topic:

1. The general consensus of economists (this is available from several media sources) is that home prices, which have already tumbled 20% from their peak three years ago, will probably sink another 10% before stabilizing.

2. Per a Wall Street Journal article on October 29, 2008 (see below for an excerpt, and a link to the article), the consensus at a National Association of Home Builders conference recently was that “home prices will bottom out as early as the middle of next year (2009)”.

3. Finally, there were several articles this past week discussing the troubled mortgage modification plan the FDIC has implemented at Indymac since they took management control in July. The FDIC is proposing implementing this type of plan at a much broader level nationally to reduce the total number of foreclosures in the future. I agree that foreclosures are generally bad for everyone involved (including the homeowner and the lender)….and the more that’s done to avoid them systematically, the better. I also believe addressing this issue will help home prices “find their bottom”. While the White House has not made a decision on the FDIC backed proposal yet (and likely won’t till we have a new President), JP Morgan announced over the weekend that it is launching a similar program which should help prevent foreclosure for about 400,000 homeowners. All this is good news from a housing finding its bottom standpoint.

I won’t take an official position on when the market will bottom as I believe it’s already a great time for folks with a long term investment horizon to invest in real estate. And as a wise person once said: “you only know the market bottomed once it’s too late (i.e., once it’s started rising again). But here’s some thoughts on what the above could mean for you:

Selling: If you’re a current homeowner….this is generally not a good time to sell….so unless you believe you must sell for financial or other life reasons (e.g., job change), hold off on selling the real estate you own currently. The key caveat here is if you think you’re going to need to sell in the next 24 months or so. If this is the case, I would consider selling now as you’ll likely maximize your home value by selling today vs. in the near future.

Buying: If you’re thinking about buying for living or investment purposes, then the key is to have a long time horizon (e.g., 5 years or longer). For folks who fall into this category, I believe it’s a good time to start looking at possible opportunities including foreclosures.

Key Recent Articles:

Economists Predict Home Prices Will Bottom Next Year (WSJ, 10/29/08)
When will housing's sickening slide stop?
According to economists at the semi-annual National Association of Home Builders forecast conference, not soon—though the end is in sight. The consensus: Home prices will bottom out as early as the middle of next year.
I've been attending these conferences for years, and last spring's was the gloomiest I'd ever attended. The latest conference, held last week, was also downbeat, but with a glimmer of hope—many of the economists seemed optimistic that the government's bailout plan, which includes buying toxic mortgage debt, will lead to housing's recovery. More affordable prices, pent-up demand, incentives on new homes, fewer housing starts and expected declines in interest rates for fixed-rate mortgages also should help ease the crisis, said David Seiders, chief economist of the trade group.
For the rest of the article, click here (you may need a WSJ subscription to read the full article): http://online.wsj.com/article/SB122522301876377101.html

Massive Effort to Save Mortgages (WSJ, 11/01/08)
J.P. Morgan Chase & Co. launched an ambitious plan Friday to modify the terms of $70 billion in mortgages for borrowers who are behind on their payments or soon could be.
The move by the New York bank will cover as many as 400,000 borrowers. They'll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.
For the rest of the article, click here (you may need a WSJ subscription to read the full article): http://online.wsj.com/article/SB122549543952589677.html

FDIC Plan Tests Limits of Leniency (WSJ, 11/01/08)
When the Federal Deposit Insurance Corp. seized control of IndyMac Bancorp -- the nation's 10th-largest mortgage lender by loan volume -- the agency vowed to ease terms for many of its troubled borrowers. In doing so, the FDIC wanted to show the mortgage industry how it could slash home foreclosures by making decisions both sensible and humane.
For the rest of the article, click here (you may need a WSJ subscription to read the full article): http://online.wsj.com/article/SB122548504641688959.html

In late June this summer, about 2 weeks before the “failure” (i.e., inability to continue to be in business without third party support) of my ethical and well run employer Indymac Bank, I – then a Senior Executive at the Company - read in horror a letter that New York Senator Charles Schumer had sent to two key regulatory bodies - the Office of Thrift Supervision (Indymac’s primary regulator) and the FDIC - and that his office had “leaked” to the Wall Street Journal. We had been fighting hard to adapt/save our business and as many jobs as possible for 12 hard months since the capital markets froze up in the summer of 2007....and this Schumer letter looked like a possible death warrant for our business. "When it rains, it really pours", I thought.

Within hours the letter was all over other media outlets. It (the letter) essentially made public this New York Senator’s concerns about the financial condition of Indymac (a California Thrift), and triggered a “run on the Bank” which ultimately (2 tough and painful weeks later) led to the company’s takeover by the government.

The truth is that financial services companies survive and operate based on “confidence”, and no Bank in the country (or really the world) can survive a run on the Bank. In fact, Runs on Banks were virtually unheard of in modern times until….recently they have become quite widespread (more on why in a future post), and have been the “triggering mechanism” for most if not all of the financial institution failures you have read about in the media (in the US and abroad).

At the time it happened, me and those around me wondered what a US Senator who was also a longtime member of the Senate Banking Committee was doing taking such a public action which he knew (or should have known) could (and probably would) result in the failure of a (regulated) US Bank. Not to mention the question of why a New York Senator was so focused on a (relatively small) California Thrift….when there was plenty to worry about right in his own backyard i.e., on Wall Street.

But too many lives and jobs were at stake…and we got totally consumed first trying to fight this huge “fire” (to try to save the company)….and when the "fire" consumed the company, trying to deal with the aftermath of this disaster on our jobs and lives, and the jobs and lives of those around us.

Then, today, I saw the below article in the news…and it brought the events of the summer right back.

Wasn’t it irresponsible of Senator Schumer to basically trigger Indymac's failure? Why raise a public concern about any financial institution, knowing the possible consequences of such an action? And why Indymac instead of Washington Mutual or Wachovia or some Wall Street firm....all of whom really ultimately faced very similar problems?

Here are some articles on this issue:

Article 1:
Schumer Ripped IndyMac as Democratic Donors Probed Books
New York Sen. Charles Schumer's public criticism of IndyMac Bancorp last summer, which critics say helped spark a run on deposits that took under the troubled thrift, came while IndyMac's assets were being eyed by investors who are major donors to the Democratic Senate campaign committee the senator chairs.

http://online.wsj.com/article/SB122428567636046459.html?mod=rss_Politics_And_Policy

Article 2:
The OTS press release on Indymac...the day it was taken over by the government:

http://www.ots.treas.gov/index.cfm?p=PressReleases&ContentRecord_id=37f10b00-1e0b-8562-ebdd-d5d38f67934c&ContentType_id=4c12f337-b5b6-4c87-b45c-838958422bf3&MonthDisplay=7&YearDisplay=2008

And here is an excerpt from the release: “The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors’ demands in the normal course of business and is therefore in an unsafe and unsound condition. The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.