by Osman Parvez
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The financial market meltdown today was historic. Wall Street reacted to the failed bailout plan with a 780 point drop (8%) in the Dow, the largest one day point drop in its history (though not on a percentage basis).

As I recently wrote in Stock Market Crash – A Few Thoughts, it’s important to understand that our local and regional housing markets are not immune from what happens in the financial markets. With that said, since the sub-prime driven credit crunch began we haven’t had a single client walk away because of a lack of mortgage availability. All our clients have been income and credit qualified and they’ve shopped at price ranges that were comfortably affordable. They’ve been putting 10% to 20% down and they’ve found it fairly easy to find an attractive mortgage rate.

From our experience with our buyers, the crunch hasn’t really reached the consumer. But that could change quickly if banks continue to balk at lending to each other (mostly due to fear of each others distressed balance sheets).

What does that mean for you? It could mean a period (likely short) where mortgages simply aren’t available, regardless of credit quality. If the secondary market stops trading security mortgage products (or derivatives), it might even mean rewinding the clock to a time when mortgages stayed on the books of your local savings and loan. Rather than using automated lending systems to originate “conforming” loans, buyers would sit down with bank officers and have to satisfy the local lender’s risk hurdles. Bottom line? Better get to know your friendly local banker and even if she’s your sister-in-law, expect higher rates regardless of how well qualified you think you are.

If the credit crunch depends, the other side of the coin could be a massive shock to local employment. Companies small and large depend on credit markets to function. While a permanent disruption is very unlikely, a short term lack of credit will alone be disruptive. Plus, consumers without credit, freaked out by the possibility of unemployment, will buy less and save more. That may sound like a good thing (and is a good thing for our planet), but if it comes on too quickly or goes too far, it will likely result in massive “right-sizing” by companies. Remember, jobs are the most important driver for a real estate market.

Meanwhile consumers and companies alike will continue to try to unload unnecessary assets. Stuff like second homes, luxury cars, planes. You name it. This is called deleveraging and it’s a vicious cycle that feeds on itself. As asset values fall, banks are forced to sell assets to maintain capital ratios, further feeding the cycle. Ultimately, prices fall far below intrinsic value and the cycle will eventually reverse. But it could be a very painful experience to get there.

JP Morgan is now predicting three possible scenarios for the housing market. According to their base estimates, current prices to the bottom of the cycle will be an 8% drop nationwide. Florida and California will drop 16% and 10%, respectively. However, if the recession is “deeper”, it could be 11%, 21%, and 14% respectively. JP Morgan’s “severe recession” scenario predicts 20%, 36%, and 24% respectively. Hat tip to Calculated Risk, an excellent (and often very bearish) blog.

What about Boulder? As you’d expect, we’re seeing spot price reductions now on the high end of the market where current inventory is +18 months of supply (as show in the last luxury home index). For the entry to lower mid-range, prices have been holding steady or even increasing. I should emphasize that I’m talking about select observations and not on an updated analysis.

The truth is we’re in uncharted territory now and nobody really knows what’s coming next. There’s a lot of maybe’s and could be’s in everyone’s forecast. For buyer’s, a real opportunity to pick up bargain priced properties might be around the corner. Or maybe not. Stay tuned for next month’s update to the indexes for the real numbers.

p.s. Without getting too political, I’m proud of the representatives in Congress who voted down the plan. Rather than prolong the pain and reward banks that made risky decisions chasing inflated profits, they made a hard choice and said no.

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