Lenders gear up to adapt to a climate
much different than a year ago

Republished with permission from
Real Estate Times Finance Today

Lenders in the Golden State said they will look to refinance activity to keep business lively while the economy slows. But most said they were not too worried about an incremental slowdown, and added that the worst of it will not compare to conditions during the state’s last recession, which covered the late 1980s and early 1990s.

The state cashed in early on the “new economy” Internet Age, which eventually swept the nation. But in recent months, it has seen significant dot-com layoffs, an energy crisis that some economists said could spark a national recession and now a slowing of state housing markets known for high house appreciation.

Sales of existing homes in California have dropped by 5.4 percent in December compared with the previous year, according to the California Association of Realtors (CAR). And the San Francisco Bay Area, which caught the attention of the real estate world with high appreciation and first-in-the-nation office costs, witnessed a dramatic decline, according to DataQuick Information Systems, La Jolla, Calif.

In the Bay Area, existing home sales from the nine-county region were down 13.1 percent from the same month a year ago. The December numbers also showed a drop of 12.2 percent from the previous month, according to Data Quick.

The UCLA Anderson Forecast, a quarterly release, said California would gain approximately 10 million people in the next 10 years. One local lender said as much as half of that gain could be in Southern California, further straining already tight housing markets.

A leading real estate economist said there is a 50 percent chance of recession nationwide, which will increase to 70 percent if “drastic measures” are not taken. Kenneth Rosen, professor of real estate at the University of California Berkeley Haas School of Business, also predicted the dot-com hiring market would not likely stabilize until 2002.

Rosen said lower interest rates will bring additional liquidity to the market as debt burdens soften and capitalization rates will come under downward pressure. But most commercial markets continue to exhibit excess demand, so the industry is not at risk of a crash similar to a decade ago.

Lenders said the refinance market can supplement business, but nothing takes the place of purchase home origination. Some said they feel uncomfortable with hiring and firing around refinance windows.

“Refinances are like a mistress,” said one lender. “It’s only temporary.”

Some lenders said California still interests homebuyers, because rents are high and there is an entire class of young professionals looking to make the move at some point. Lower interest rates for those who are not affected by the sagging economy could compel them to buy a home, one lender said.

“There is a shortage of housing, and rents are going up,” said Paul Yalnezian, president of Right Home, Glendale, Calif. “Because rents are increasing, more people who did not see themselves buying may feel forced to buy.”

CAR also reported that the median price of an existing single-family home in California in December was $249,370, a 10.7 percent increase in their respective median home prices from a year ago, CAR officials said.

Rosen predicted that Internet firm layoffs will increase and continue through 2002, along with more moderate overall employment growth.

Despite recent layoffs and business closures, online firms continue to be attracted to the Bay Area, Rosen said, and many traditional off-line firms are planning to slow their growth in the region in response to the record rents.

 “While demand may be softening, the Bay Area’s real estate markets are in better shape to withstand a potential reduction in employment growth than they were in the late 1980s,” Rosen said. “New supply is more constrained and vacancy rates are starting at very low levels.”

Yalnezian said his company, which was formed a year ago to combine the real estate agent, broker and mortgage banker roles, probably will not benefit from the refinance window too much.

 “We’re planning on focusing on the main driving force of the business, which is, of course, the purchase market,” Yalnezian said. “We want to grow as a result of new purchase.”

The effect of the electricity crisis is also a concern for the mortgage business, a lender said.

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