October 1, 2007
Dane Faber, Broker

The San Francisco Chronicle's real estate section cover story on September 30, 2007 implies that a Bay Area home owner is about to take a loss of $57,000 because he needs to sell as a result of a job transfer. A year-and-half-ago a real estate agent urged them to list it at $930,000, they held off, and it is now on the market for $868,000. At a glance, that looks like a flattening market scenerio. But is it? What's the real story?

I am a local real estate broker and I believe our national economy is in serious trouble. Articles like "Bad Timing" from The Chronicle are a large part of the problem and I'd like to offer serious insight into what the problem is (or isn't).

The glaring omission in The Chronicle story is the mistake the subjects made in "over improving" their house for the neighborhood -- not bad market timing as the front page headline implied.

Perhaps the writer intended to infer that the fact that they can't sell for more than they paid is related to the "crash" but obviously the fact that they wouldn't even admit to the reporter how much they paid for their improvements suggested that even they know they over did it -- marble and granite counters in the wash room of a home in American Canyon described by the writer as "a large, nondescript house on a smallish lot." The subjects committed one of the top three most egregious real estate mistakes -- they over-improved for the area. Sure they won't recover their improvement costs, but that has nothing to do with the current market.

The home was purchased in 2002 at $424,000, which puts them at a $400,000 to $500,000 gain before they spent it on extravagant home improvements more suitable for multi-million dollar mansions in San Francisco.

The fact that it was "appraised" at a price greater than what it is now listed for is equally misleading as it implies that the appraisal is somehow a validation of what the house is worth. Not at all! Appraisal is an art that is largely premised on the past. In dynamic markets, especially down markets, appraisal is notoriously unreliable. "The best indicator of the true value of a house is what a willing buyer will pay a willing seller."

As told, the Chronicle article is misinformed media portrayal of current market facts and it is creating a potential crash that will be harmful to more than just certain homebuyers/homeowners. I believe that the recent news of the bank in London that suffered a depression era "run" could happen here, despite federal regulations that were implemented in the 1930's to prevent such a thing.

Those regulations and the people who wrote them had no idea about the proliferation of the media in forming public opinion and how quickly it is done today. The portrayal of the "subprime" lending problems as endemic to the entire marketplace, the presumption of rampant fraud in all mortgage lending and the use of terms like "credit instrument derivatives" and even basic benign acronyms like FNMA (fannie mae) made to sound ominous is very dangerous. There are many, many examples of how the results will manifest themselves.

I am not an apologist for the undoubtedly fraudulent practices of some mortgage brokers or the role of Wall St. in the problem, nor am I just another real estate cheerleader.

No one is more critical of them than me and, more important, I recognize my selfish point of view in all of this.

But, having said so, I am a veteran of the S&L crisis of the mid 80's and the role the media had in it and the amazing similarities of that period of our financial history are yet unmentioned in the press. I was a bond trader specializing in mortgage backed securities (yes, the very ones so much in the news today) and I think I am uniquely qualified to understand what is going on today and in what ways it is similar to the 1980's.

We desperately need to make the public aware of what errors were made in trying to "correct" the abuses of that era so we don't make similar multi-billion dollar mistakes and the accordant economic suffering that will certainly accompany them.

I wonder if the writer of The Chronicle article is sufficiently interested in learning more or just another sensationalist.