Back in the still-uncertain days of September 09, every market pundit had his or her own letter for what shape the recovery would take. I blogged about Ben Bernanke’s “U,” Liz Ann Sonders‘ “V,” and Nouriel Roubini’s “W” here. Though one could argue the jury is still out, I think it’s fair to say that Liz Ann won round one.  The recovery is looking and feeling like a “V”  — and in fact is falling pretty much within historical patterns. (Full disclosure — I had my money on Nouriel.)

I recently spent 20 minutes listening to her most recent webcast, and it all sounds pretty seensible.  What I like about Sonders in particular is that she’s basically a contrarian. So many people are betting against the stock market’s phenomenal rise right now — and in favor of bonds — that she thinks that the bears are refusing to accept the fact that a solid recovery is in place.  I like the way she puts it in a related article:

Skeptics are often the loudest folks in the room, and the bear case is often the more “intellectual” case, but the market has a tendency to reward the minority view, not the majority view.

What’s all this got to do with San Francisco residential real estate?  One of her points touches on a theme that I’ve sounded here recently. As everyone knows, interest rates are likely to rise as the economy starts to strengthen and the Fed starts turning off the easy credit spigot.   Sonders is not predicting the stratospheric rates that occurred in the early 1980’s.  Nevertheless, it doesn’t take much of an increase in rates to have a significant impact 0n the amount of house you can buy.

Say you’re thinking about borrowing $700,000 on a 30 year fixed rate loan at the current rate of 5.25%.  Your payment would be just under $3,900 a month.  Now say that interest rates increase by just half a percent to 5.75%.  Your monthly payment would increase to just under $4,100 a month.  Maybe a difference of $200 a month doesn’t sound like that much:  a couple of fancy restaurant dinners would would cost the same.

But look at it this way.  Say that the the maximum you’ve decided — or the bank’s decided — you can afford to pay each month on your mortgage is $3,900 a month.  Now that half percent increase in rates means that the maximum loan you can qualify for is around $662,000.  That’s a loss of $38,000 in the amount you can borrow and the amount of house you can buy.

It’s also a heck of a lot of fancy dinners.

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• Investors Should Give the Recovery Some Respect — but Watch for Rising Rates (dailyfinance.com)

It’s hard to remember just how close to the brink of catastrophe we seemed to be just a year ago.  Major financial institutions – failed.  Credit – impossible to get. Sales—anemic.

With the benefit of hindsight, not to mention survival, some are now criticizing Paulsen, Bernanke, et al., for their haste in rescuing the financial system, but I, for one, will reserve my scorn for the appalling judgment of the likes of Morgan and Goldman and their obscene bonuses.

How did the San Francisco market do?  Here’s where we are for single-family homes (click to enlarge).

We ended the year still down 18% from our all-time high of June of 2007.  That puts us at around the price levels of the spring of 2005.  Not great, but during those scary first months of the year when there was no bottom in sight, we were down to price levels not seen since early 2004.

It’s also interesting to see how Days on Market (DOM) inversely correlates with price, at least over longer periods.  In addition to the very regular seasonal dips in price every December/January, it’s easy to see that as DOM lengthens over time, prices decline.  While DOM remained less than 40 days, prices stayed high.  The correlation isn’t perfect – and certainly not on month-to-month time-scales — but it looks pretty good to me.

So for the “half-empty” crowd, the bottom line is that we’re still down 18% from our all-time highs.   The story looks much more positive, however, if you look at 2009 in isolation.

Now a 23% gain for the year ought to be making people feel pretty good.  Note that median prices have been in the $700,000 to $800,000 bandwidth for the last three quarters.  The dip in the waning months of the year can be attributed to seasonal factors.

I can already hear the nay-sayers arguing that looking at year end numbers is arbitrary  or, worse, distorts the picture.  (These are the same people who don’t believe in celebrating their birthdays!).

I’m certainly not arguing that happy times are here again.  But , if nothing else, that 23% increase confirms just what a wild ride the last two years have been.

As for 2010, I confess I’m beginning to feel a bit more optimistic than I was a few months ago.  Manufacturing seems to be continuing to expand.  There are some signs of job growth.  Still, Europe is now looking shaky and, closer to home, one should never discount the ability of our politicians to screw up the recovery.

All things considered, though, I’ll take my glass half-full please.

On the anniversary of Lehman Brothers’ demise and the near-collapse of global markets, it seems appropriate to take a step back from our little corner of heaven for a wider view.

Given where we were a year ago, the world seems to have heaved a huge, if cautious, sigh of relief.  During the chill days of February, the stock market had lost more than half it’s value.  Now it’s down “only” 35%.

San Francisco home prices have also improved.  In January home prices were down 37% from their all-time highs. By July prices had recovered 11%. In August, however, prices fell back 2%.  That’s a pretty stiff drop. (Click the chart for a big version.)

A sign of things to come?  Who knows.  Everyone seems to have a different letter of the alphabet – or at least the nether end of it — to describe the shape the recovery will take.

Ben Bernanke’s is a long, flat “U”: he thinks we’re on the way, but it’s going to be slow going.

Liz Ann Sonders, Schwab’s chief forecaster and one credited with having seen the train-wreck coming, holds out the possibility of a “V”, in which the economy bounces back like a “coiled spring,” propelled by low inventories and a recovering housing market.  You can dismiss that view as self-serving, but I prefer to give her the benefit of the doubt, especially since she’s been right before. Though I’m not sure she’s right this time.

The one that worries me the most, though, is the “W” , otherwise known as the dead-cat bounce or “double-dip” to cat-lovers.  Nouriel Roubini, no slouch at forecasting himself, has recently said that there’s a “small probability but rising” that we’ll not only run out of steam but fall back again, victim to enormous deficits and the premature closing of global cash spigots, among a host of other ailments.  To that rosy picture, he adds the specter of stagflation, as unsustainable budget deficits lead ultimately to higher interest rates while the economy remains weak.  Perhaps that’s the “X” scenario.

As for San Francisco, the housing market certainly seems sunnier these days, with volume at decent levels.  But I wouldn’t be surprised to see it turning colder, along with the weather.