Long-time Mortgage Mania readers, (aka Mortgage Maniacs) know that I’m an avid reader of the New York Times, so it should come as no surprise that I would have some comments on this article in the Friday June 6 edition regarding the continuing foreclosure crisis affecting consumers across the country.

Authors Bajaj and Grynbaum review some recent statistics on foreclosures, and then go on to predict another wave of foreclosures as the economy continues to slow and more consumers fall victim to layoffs and job cuts.

It’s easy to ignore these rumblings here in wealthy Silicon Valley where the local economy is still vibrant, even with nearly $5 a gallon gas, as it is still a minor impact on a budget with a $5,000 a month mortgage. It’s easy for us living in The Bubble of Unstoppable Real Estate (which I define as: Palo Alto, Menlo Park, and Los Altos, your mileage may vary) to say “it can’t happen here”.

Not so fast there pardner. A Short Sale in Atherton you say? It’s almost enough to make you drop your Grey Poupon.

This little number at 199 Selby Lane in Atherton recently listed by Lanny Dannenberg of Keller Williams is a short sale at $1,795,000. It has been on the market with a couple of different brokers for over two years, starting at $2,495,000 in March of 2006.

The good news is that the local market continues to be pretty strong, especially at the upper levels, above $3 million. Don’t take my word for it, check out this market data for the latest facts and figures on Palo Alto and surrounding communities.

Thanks for reading . . .

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In not a big surprise to anyone, Ben Bernanke today stated that The Fed would cut interest rates further if the economy needs help. The markets rose a bit in response, with the Dow ending up 117 on the day. Of bigger news are rumors of a buyout of struggling Countrywide Financial by Bank of America.

Countrywide has been one of the lenders hardest hit by the recent spate of mortgage defaults and foreclosures nationwide this year, and the stock market has been dragged down with concerns over a potential bankruptcy at Countrywide.

“For the last month, rumors are that Countrywide was going into bankruptcy,” said Ryan Larson, senior trader at Voyageur Asset Management. “Any deal with Bank of America is good news, and the market is looking for even a hint of good news these days.” (read the entire article here).

Both of these tidbits are good news for homebuyers.

1) Lower interest rates at the Fed level will put additional downward pressure on mortgage rates which have sunk back to near historic lows.

2) More importantly, lower rates also reduce the amount that variable rate equity lines go up when they reset from promotional rates, reducing the risk of default for all those loans taken out in the last couple of years that haven’t reset yet. (These would be the other shoe we have been waiting to hear drop). Hopefully, this avoids the proverbial “last straw” that tips the national economy into recession.

3) If Countrywide survives this, either through acquisition or recovery, lenders and Wall Street, whom they resell packaged loans to, will breathe a bit easier about this “unfortunate occurance” passing and money will become cheaper and more freely available, making homes relatively more affordable for buyers, especially those with good credit and down payments of 20% or more.

So, with the Discount Rate currently at 4.25%, and some economists complaining that the Fed should be cutting more aggressively and the rate should be at 3%, I am gaining more respect for Alan Greenspan’s ability to keep the markets under his spell, and give guidance and speeches that left us understanding less what to expect after hearing him than before. Ben has a tough act to follow.

And now back to decoding Greenspan’s book: The Age of Turbulence: Adventures in a New World

Thanks for reading.

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Tomorrow (1/10/08) Ben Bernanke is scheduled to speak on his outlook on the economy, and the pundits are all expecting that by examining his comments repeatedly, reading tea leaves, and consulting their favorite oracle, they will be able to predict whether the US economy will slide into recession in 2008, and whether the Fed will cut interest rates again at their next meeting.

The stock market seems optimistic, with trading up today as investors shifted into sectors that are seen as resistant to recession and economic contraction. These are things that we spend on whether things are good or bad; food, medical care, gasoline and heating oil.

Some economists say we are already in recession because of a jump in unemployment in December coupled with little growth.

Nationally, I tend to agree with the doomsayers. Here in Palo Alto, Los Altos, Mountain View and Menlo Park however, we are still beneficiaries of the strong local economy. Local executives are still complaining that they can’t hire enough engineers, the housing market continues to be strong as we are seeing a net inflow of people, and minimal relative increase in housing (no more land), and we have a unique concentration of educational instituions, venture capital and innovation that enables Silicon Valley to continue to reinvent itself.

In summary - We will likely see a national recession in 2008 and 2009, with housing prices potentially falling by up to 30% in some areas where prices have been driven up by speculators/investors. The local real estate market will remain constrained by supply, so we will see fewer homes being sold, but prices will remain at current levels, or even continue to increase. Great news if you are planning to sell your home in Palo Alto, bad news if you want to buy in Palo Alto.

In the Central Valley this will sadly not be the case . . .

Stay tuned for a recap of tomorrow’s commentary by Fed Chairman Bernanke.

Thanks for reading.

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