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Real estate experts shrug at bailout

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A federal bailout package will not buoy the housing industry immediately, most real estate experts agreed Wednesday, but it’s a start.

“We’re taking some of the water out of the quicksand, so it’s firming up, but we haven’t hit bottom yet,” said Mark Riedy, executive director of the Burnham-Moores Center for Real Estate at the University of San Diego.

He and others predicted a continued drop in home prices and tighter lending standards, with an estimate of brighter times at the middle of next year.

“You’re going to continue to see pretty moderate, if not aggressive, reductions in home value as banks start cleaning up their books,” said Jeff Cornthwaite, a senior loan consultant with JPMorgan Chase (NYSE: JPM) .

The Anderson School of Management at University of California, Los Angeles -- which released its economic forecast Wednesday -- predicted much of the same, with housing starts bottoming out as soon as later this year or as late as 2010.

“Consumers no longer believe that home ownership is a path to wealth and lenders are busy raising standards to avoid repeating the debacle of the decade,” wrote David Schulman, senior economist for the Anderson Forecast.

Cornthwaite predicted further inventory increases and more foreclosures in the coming months as loans become scarce.

He and Alan Nevin, director of economic research at MarketPointe Realty Advisors, see a continued trend toward less traditional lending venues, like government-backed FHA loans.

Nevin, however, offered a more optimistic view of the real estate market, saying that most home prices have bottomed out and resales are on the rise.

“We see the resale market is picking up very, very nicely,” he said. “It’s pretty much proof that there’s still financing out there.”

The general consensus was that a government rescue was needed to stabilize financial markets and ease consumer confidence.

The proposal, which was announced last week and went to Congress over the weekend, would buy bad mortgage debt from beleaguered banks.

If the plan works, the increased liquidity on bank balance sheets would thaw out the credit market and jumpstart lending.

Property would then be more easily sold, which would increase liquidity for households, uplift wealth and the appetite for risk, and ultimately restore real estate value, said Anirban Basu, chairman and chief executive officer of Sage Policy Group Inc., an economic and policy consulting firm based in Baltimore.

There is a chance the plan could not work, with bankers and other economic players remaining frozen and too scared to act, Basu acknowledged, but “it should be noted that without any (federal) action, the nation’s residential and commercial real estate market would undoubtedly worsen in the near term.”

He said the public should feel reassured that “smart money” is showing confidence in the market, referring to investor Warren Buffett’s decision Wednesday to invest $5 billion in Goldman Sachs Group Inc. (NYSE: GS).

Still, results will take time. Lawmakers remain hesitant to rubber-stamp a bill, decrying the cost to taxpayers and the proposal’s inaction on the touchy subject of corporate pay.

Even if the bill is signed sometime this week, buying and selling the assets will take time as well.

The delay has increased the sense of urgency, with Treasury Secretary Henry Paulson telling lawmakers Wednesday that he’s willing to accept changes to placate opposition.

Other groups have also voiced their opinions. The National Association of Home Builders board of directors unanimously called for an urgent congressional response at its Wednesday meeting in San Diego.

“They’re not asking for any favors,” said Borre Winckel, the chief executive officer of San Diego’s Building Industry Association, who attended the meeting. “They’re asking for action, swift action.”

Winckel painted a bleak picture of the building industry that has already hit bottom. Residential construction is at a standstill, and homes are being sold for less than their production cost.

“It doesn’t get more bottom-oriented than that,” Winckel said.

Democrats have called for additional provisions in a bailout measure that would directly help homeowners, from modifying loans to reducing interest rates to suspending foreclosures entirely.

Basu said preventing foreclosure isn’t always the best idea for the financial crisis overall. The bad assets will then stay on bank balance sheets, preventing institutions from generating income, which would make loans less available.

“They absolutely should not do anything,” Nevin agreed, citing loans owned by foreign entities. A disruption in interest rate, for example, could shatter any confidence foreign investors had left in the American mortgage market.

“That will be devastating,” Nevin said.

As for the next few months, some experts say consumers should brace themselves. Basu described a continued rise in unemployment and stubbornly high gas, food and medical costs.

“For Main Street, the next few months will be quite gruesome,” he said.

But while interest rates remain low, homeowners looking to refinance soon can breathe a little easier. And those with capital intact will find plenty of investment opportunities in the lower-priced property that will likely post a return as the situation improves, USD’s Riedy said.

Things will start looking up, experts insist, perhaps even within the next two years. Home prices should start flattening out in May, Chase’s Cornthwaite said, followed by moderate increases in different parts of San Diego.

As home value goes up, the demand for houses will rise, infusing the building businesses that survived. According to Riedy, the sight of apartments being converted into condos will be a sign of changing times.


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