Southern California home sales shot up by an unprecedented 65 percent last month from the dismal, record lows of a year ago, when a credit crunch slammed the brakes on home financing. September sales also posted a rare gain over August as price cuts lured more buyers. Foreclosure resales rose to half of all transactions…"You have to view last month's sales in the proper context," he cautioned. "They represent escrow closings, which reflect purchase decisions made in mid-to-late summer. That was before the dramatic worsening of the nation's economic crisis in recent weeks. Over the next few weeks our sales data will begin to show how the meltdown in financial markets this fall has impacted housing demand."

So while this is undeniably good news, the question becomes is it sustainable and how long before this trend hits Maui? Economists estimate the lag is usually six months.

For a private showing contact us.

Another eventful weekend. The Morgan Stanley Mitsubishi transaction is being renegotiated but is likely to be completed. Were that to not happen, it would really rattle the markets. Germany has announced a $400 billion bailout of its banks. European leaders are considering guaranteeing all interbank lending.  Clearly there is now worldwide political will to infuse capital into banks in return for a taxpayer ownership stake.    This is  MUCH better idea in our view than buying troubled mortgage assets directly.     

 National governments around the world have agreed to do what is necessary to prevent another major financial institution from failing, the International Monetary Fund's managing director said, although he didn't specify any measures.During weekend meetings, the IMF's 185 member nations endorsed an earlier commitment by the leading industrial nations to "use all available tools" to prevent the failure of "systemically important" financial institutions. Essentially that meant "no one is going to let an important financial institution fail," said the IMF chief, Dominique Strauss-Kahn.                           

Since the original 110 page Bailout bill couldn't get approved, Congress added 340 pages of tax cuts, tax breaks, regulatory changes and other assorted unrelated items to create the actual bailout bill. But the portion devoted to the bailout remains the same and is summarized here. Implementation has begun though it will take about a month for Treasury to devise auction rules, hire portfolio managers etc. In other important news, Wells Fargo has offered to purchase Wachovia for 15.4 billion. Wachovia had previously agreed to, with FDIC prompting, be sold to Citigroup for substantially less. It begs the question, if things are so bad, why would Wells Fargo pay so much more? The news on the economy was troubling this week as non-farm payrolls declined 159,000 in September. That's a number that indicates a recession. In fact Goldman Sachs is now predicting that the third quarter will show no economic growth at all and that a recession  is likely. Finally, the rates for jumbo mortgages remain elevated and Libor, the rate at which banks lend money overnight to one another remains very high. So what does this all mean for Maui real estate?

While it is possible the bailout settles down the credit markets and we see renewed mortgage lending, and indeed, renewed lending in general, it will take time for that to filter down to real estate values everywhere, including Maui. It now seems likely we are in for a protracted period of economic stagnation and job losses nationally.  

The National Association of Realtors has released the existing home sales results for August.

Existing-home sales were down in August following a healthy gain in July as tight mortgage credit curtailed activity, according to the National Association of Realtors^®. Sales rose in the Midwest and South but fell in the Northeast and West…The national median existing-home price2 for all housing types was $203,100 in August, down 9.5 percent from a year ago when the median was $224,400.

The red chart shows that existing home sales have been about flat on a seasonally adjusted basis for most of 2008. The more important chart in our view is the green months of supply which appears to have peaked at least temporarily. A good sign. Thanks to Calculated Risk for the charts.

So in the last several days there have been the following major developments:

• The Treasury crafted a plan in which it would buy $700 billion worth of mortgage backed securities from financial institutions;
• The SEC has placed a temporary ban on short-selling 800 financial institutions;
• The Fed has approved Morgan Stanley and Goldman Sachs becoming bank holding companies; and

• Morgan Stanley is selling a 20% stake to Mitsubishi for $8.4 billion;

So what does this all mean in general? Here are our thoughts:

• The Treasury will pay more than market value for the securities they buy and the taxpayers will take a bath. But there is no going back at this point without a collapse of the system;
• The short-selling ban is necessarily distorting prices and will not last long;
• Goldman and Morgan will buy other banks, become much less leveraged and begin to mimic BofA and JP Morgan Chase;
• The Mitsubishi purchase does NOT mean we will see a huge resurgence from Japan.

What does this all mean for Maui real estate?

• The mortgage business will steady out and look the way it did ten years ago;
• The stock market will stop seeing the jarring volatility that has been spooking buyers; and
• Thankfully, this has all happened during the slowest part of our season in any case.

So what do the events of the past week mean for Maui real estate? First, let’s recap the major events:

-Fannie Mae and Freddie Mac placed under Federal Receivership
-Lehman declares bankruptcy then sells a major portion of its operations to Barclay’s
-AIG trades an 80% interest for an $85 billion loan and Federal Control
-Merrill Lynch sells out to Bank of America
-Wall Street Firms organize a $70 billion credit facility for one another
-Federal Reserve injects over $70 billion in liquidity into the bond market
-Dow Jones Industrials were off 450 points on Wednesday
-Reserve Money Market Fund, viewed as incredibly safe, “breaks the buck” and halts withdrawals
-Morgan Stanley is clearly in serious trouble and is likely to be sold as is WaMu
-Goldman Sachs may not survive as an independent entity either

The key problem causing this meltdown on Wall Street include the following:
-NOBODY is willing to lend money to financial institutions at the moment
-These firms have no ability to sell their troubled positions to raise capital either without effectively bankrupting themselves
-The companies being targeted by short-sellers have no extra capital to buy their own shares and combat what is going on

The liquidity problems in the bond market are likely to remain for a while here. It is also likely that further writedowns related to the mortgage business are coming all across the financial sector.

SO WHAT DOES THIS MEAN FOR MAUI REAL ESTATE?

In the immediate term, very little as this is the slowest part of the season in any case. But if this Wall Street situation persists for a few weeks it is going to mean mortgages will be increasingly hard to come by, that buyers are likely to “pull in their horns” on all discretionary purchases and that corporate America is also likely to become much more conservative on their expansion plans. This all increases the risk of a national recession, and certainly stokes the fear of one. All of this news is going to slow buyers down and make them feel less urgency regarding a purchase creating an even more advantageous environment for those buyers willing to act.

We will of course continue to keep you apprised.

Another dramatic day on Wall Street.

Stocks resumed their downward spiral Wednesday as even the Federal Reserve's $85 billion rescue of American International Group left investors unconvinced that the broader U.S. financial system is no longer in peril.The Dow Jones Industrial Average ended near a three-year low, down 449.36 points, or 4.1%, at 10609.36, off 7.1% so far this week. All 30 of the Dow's components fell, including a 45.3% drop in AIG shares. Among the blue-chip measure's other financial names, big losers included J.P. Morgan Chase, off 12.2%, and Citigroup, down 10.9%.

Goldman Sachs and Morgan Stanley are now being focused on by the bears in the market. The thinking seem to be that the traditional investment banking business model no longer works and that deposit base is necessary for financiall institutions. We would expect Morgan Stanley to be sold or to merge with a bank and it appears Goldman has to do something as well.

The big problem remains the freeze in the credit markets. Financial institutions simply cannot survive without liquidity and no one is comfortable providing it.  These events are shocking and isn't over yet.

What is the impact on Maui real estate? At the moment who knows…but it isn't good.

In two astonishing pieces of news, giant insurer AIG will receive an $85 billion loan from the fed in return for an 80% interest…

The precise details of the government's plans were still being formulated late Tuesday. The primary option being hammered out involved the Fed providing AIG with a short-term "bridge" loan of $85 billion, according to people familiar with the situation. In exchange, the government would receive warrants in AIG representing the right to buy its stock, under certain conditions. That could put the government in a position to potentially control a private insurer, a historic move, particularly considering that AIG isn't directly regulated by the federal government.

…and Barclay's will buy Lehman Brothers core North American businesses for $1.75 billion. This will preserve 9000 jobs.

The new plan enables Barclays to buy much of Lehman's securities business without taking the risk of further losses on the firm's commercial real estate and mortgage assets; but it is unclear how many of Lehman's 26,200 employees will keep their jobs. Early estimates pin the number at about 9,000 to 10,000.

So what does this all mean? Well it is a short-term bandaid for the markets. It prevents the nearest-term possible crisis. Longer term it doesn't solve much and the idea of the Federal government controlling the country's largest insurance company cannot be a good thing over time. In terms of Maui real estate, this will quell some concerns buyers have over the general state of the financial markets, but only for a short time.