The lowdown on the mortgage meltdown—from two presidents of the California Association of Realtors
The subprime mortgage meltdown of 2007 has figured into a cascade of economic woes in recent months, including the first decline in median home prices in the U.S. since the Great Depression. It’s a bit of an understatement to say now is not an easy time to be a homeowner—or a Realtor. And there is shaking up still to come in real estate. The good news? Some of the shaking may even be for the better. Which is why, with a combined total of more than six decades in the business, current president of the California Association of Realtors (CAR) Bill Brown ’74 and past president Colleen (Stinnett) Badagliacco ’66 remain cautiously optimistic about what’s ahead—especially when they take the longer view.
In the meantime, though, there’s a whole lot of shaking still going on, with a precipitous drop in the number of houses being built, bought, and sold. From peak to trough, Badagliacco says, they’re expecting a 40 percent decline in transactions. Though she acknowledges that’s just a ballpark guess by economists.
The hardest hit markets are in the Central Valley down to Riverside and up into the Sacramento area, where overbuilding has created a new home glut, with builders drastically discounting inventory just to get rid of it. “If you’re in the house next door,” Badagliacco says, “you’re in a world of hurt.” Houses are sitting on the market, and the situation is getting worse.
The limited supply of land close to jobs in high-cost areas such as the Bay Area, Los Angeles, and San Diego insulates those locales to some extent; properties are not flying off the market, but they will sell if priced competitively. There, Badagliacco says, “if homeowners want to sell now versus two or three years ago, maybe they’re going to have to do the termite work, wash the windows. They’re going to have to present that property better than they would have when there was a frenzy going on.”
Having seen real estate cycle through many ups and downs, both Brown and Badagliacco note that even in the 1980s, when interest rates were astronomical, people still made money in real estate by being patient. “If you’re going to try to flip something now, you’re not going to be successful,” Brown concedes. “But if you buy a house to live in, and look on a three- to five-year horizon, you’re going to make money.”
The virtues of conforming
A primary purpose of CAR, which claims some 200,000 members throughout California, is to enhance members’ abilities to do business (through marketing materials, training, and legislation). Another equally important aspect is to preserve private property rights. “But anything that affects homeowners falls within our purview,” Badagliacco says.
One of the recent legislative changes CAR backed, and which will certainly affect homebuyers in California, is the law passed by Congress this winter raising the limits on conforming loans—which can be purchased by mortgage companies Fannie Mae and Freddie Mac; and raising the limits on loans guaranteed by the Federal Housing Authority (FHA)—which help borrowers with poorer credit ratings. As of press time, only President Bush’s signature is needed for the bill to become law.
The new limit for both types of loans in “high cost” areas is $729,750—with the cap retroactive to houses purchased in July 2007. Previously, in California the caps were $417,000 on conforming loans and $362,790 on FHA loans. California wasn’t considered a high cost state; only Alaska, Hawaii, Guam, and the U.S. Virgin Islands were. But median home prices in California hover near half a million dollars—which created quite a disconnect between the high costs Californians experienced and the ones the law acknowledged. One result of that disconnect was that many Californians were forced to obtain more expensive “jumbo” loans instead of conforming loans. Other homebuyers in California who might have benefited from an FHA guaranteed loan instead turned to the subprime market.
“If there’s a silver lining on the mortgage meltdown, so to speak, it’s going to be that there’s an understanding that in high-cost states, the conventional loan products which are offered at the better interest rates don’t work here anymore,” Badagliacco says.
Is this a permanent change? The legislation enacted by Congress makes the increase temporary, only through the end of 2008. But the camel’s nose is now under the tent.
In Badagliacco’s travels throughout California, the social science major has observed that most Realtors remain in good spirits despite financial stress in brokerages. But with the turbulence in the marketplace, there has been attrition in the field of realty. “I think it’s going to be a winnowing out time,” Badagliacco admits. A predicted 15 percent drop in membership (which peaked at 210,000 in 2006) may not be a bad thing, she says. “Maybe we’re going to get some of the people out of the business who weren’t really serious about it, didn’t have a long-term view—had a short-term, ‘let’s just see if I can make some quick money’ view.”
What hasn’t been turbulent is the transition from Badagliacco’s presidency to Brown’s last November. It’s not surprising; although Badagliacco focuses on residential property as a partner in RE/MAX Valley Properties headquartered in San Jose and Brown specializes in apartment transactions for both institutional and private capital investors as co-owner of William H. Brown, Realtor in Oakland, the two have more in common than an alma mater and an affable demeanor. Both grew up in Oakland. Their parents were friends. Brown went to grammar school with Badagliacco’s brother. They got married in the same church.
And both speak fondly of their years at SCU and credit their college experiences with instilling a desire to serve and with fostering the responsibility that comes with leadership. “The Jesuit education really provided an impetus to give back to a business, not just take everything you can out of it,” says Brown, a former Bronco football player. He speaks positively of the new buildings on campus, but he laments the loss of the football team.
Badagliacco reminisces about eating in Nobili Hall as a member of one of the first classes of undergraduate women to enroll as freshmen at Santa Clara. She laughs good-naturedly about how the male upperclassmen had to adjust to dressing in more than their bathrobes for meals now that women were in their midst.
As they lead the state’s largest trade association forward in uncertain times, the two Realtors lean on their ethical training from SCU. They’ve reached out to members to remind them of their code of ethics and standards of practice—not that they necessarily need the reminder, Brown says. “But I think that in this market, it needs to be reinforced. Don’t do just anything to make a deal. Stay within the framework of our ethical boundaries and be truthful.” After all, he says, the bulk of a Realtor’s business is from repeat and referral customers. So skimping on ethics gains nothing in the long term.††
—Anne Federwisch is a freelance writer living in the Bay Area.