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Just back from the Fisher Center for Real Estate and Urban Economic’s semi-annual symposium on all things real estate.  (FCREUE is the real estate department within UC Berkeley’s Haas Business School.)

Ken Rosen is the Center’s oft-quoted co-chair and quietly advises real estate investment funds with over $300 million in assets.  Most of the time these symposiums take a very high-level view of real estate:  it’s an asset class to be compared to other assets, and the focus is usually on institutional investors and broad real estate segments.

But with the housing melt-down, recent symposiums have been very much about the lowly residential market, both national and local, albeit within the wider context of the economy as a whole.

Rosen almost always delivers a fact and slide-packed economic forecast. It’s a big part of why I go.  Here are some of his current observations and predictions:

• The Shape of the Recovery:
  • Chances of a fragile recovery:  55%.  We’ve already had a big bounce; he expects a slowdown for the rest of the year (This is  a broken “W”)
  • Chances of a moderate recovery:  35% (This is the “U”)
  • Chances of a mild recession:  10%, (Think an “L” with a sinking bottom.)

• Jobs: He thinks the job situation will turn around by the end of 2010 (other speakers weren’t so sure.)  San Francisco has already started adding jobs.

• Interest Rates:  Rosen thinks that the Fed is already missing the boat on inflation and that it’s inevitable.  Just as important, he thinks that the Fed should already be raising short-term interests, though he thinks it’ll keep them at near zero for another six months or so.

“Two years from now, short term interest rates will be back up to 4%.”

As for 30 year fixed mortgages, if rates go up to 6%, the real estate market will probably still be ok.  If they go to 7%, we’re in trouble.

• Home Prices. US Single family home sales will look good for the next few months but then will slow towards the end of the year.  Lots of people are coming back on to the market because they see movement and because of the tax credits.

And now the takeaway:

“If you feel secure [in your job], now is a good time to buy because interest rates are going to go higher and prices probably won’t go much lower.”

Oh, and one last thing:  Short China real estate. They’re in a massive bubble of their own.

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I really couldn’t find a suitable graphic for a falling shoe….

Thanks to my reader JC for pointing out the San Francisco Chronicle’s September 21 article on the $30 billion or so in “option ARMS”  that are going to reset, starting in 2010.  These are not the subprime ARMS that caused the derivative markets to unravel, the ones that closet reactionaries are still all too eager to blame on the avaricious poor (now is that an oxymoron?) who signed up for them.

No, these are the the loans that the relatively well-heeled and savvy took out to buy their higher end homes.  They appreciated the “options” an option ARM offered.  Like being able to pay just the interest for the stated fixed period of the loan — often 5 years — rather than paying down the principal as well.  Or even paying less than the interest due and rolling the balance into the principal, just like those negative amortization loans that got us into so much trouble in the 1980s.  (We really never learn, do we.)

According to the article, fully 1 in 5 of every home loan made in the San Francisco Metropolitan Statistical Area from 2004 to 2008 was an option ARM.  Since most of these were 5 year option ARMS, the leading edge of these loans is about to hit market.  Here’s why it matters:

After five years, or once the loan balance reaches a certain threshold above the original balance, the mortgages “recast” and borrowers must make full principal and interest payments spread over the loan’s remaining life…. [N]ew payments average 63 percent higher than the minimum payments, but could be more than double in some cases.