Many in real estate are now acknowledging that something is broke, and no one seems to know how to fix it. I guess if we are still holding our breath for the borders to be fixed by congress, waiting for a fix for our national real estate crisis will be no different. Most of us started to realize a lot of the change last summer when Countrywide started to go into a meltdown mode. Around the same time in the Atlanta area one the largest mortgage lender in the south Homebanc got out of the mortgage business. On August 7, 2007 they shuttered their mortgage business. At their peak, Homebanc was doing over 5 billion in mortgage loans a year mostly in Georgia and Florida.
At the time of all these mortgage company melt downs, as a nation we were assured at the time that sub-prime was the problem! We were also reassured that sub-prime was only a fraction of the mortgage problem in the nation, and now almost a year later there still is no fix from many of the solutions offered. Has anyone been counting the time?
As a nation and as an industry we anticipated that a rate cut(s) would help. Well they didn't. What about the bail out of Bear Stearns wiht taxpayer money? You remember the Bank that was too big to fail? The only person that may have benefited from that was Secretary of the Treasury Paulson the former CEO of Goldman Sachs Group Inc. His competition was just vaporized. Bear Stearns wasn't even classified as an institution that the Federal Reserve has any jurisdiction over. No one questioned that. In May 2008 our 9th month of the credit crisis Paulson, along with JP Morgan and Leyman Bros announced we were almost at the end of our troubles. The fact is since then; Leyman Brothers is now the discussion of having major credit issues. That was this weeks news...noteven a month later! So where are we in this mess?
Interest rate cut after interest rate cut and out 30 year fixed rate conforming loan is probably about the same or higher than last year. A proposed fix of raised Fannie Mae and Freddie Mac limits to cover the cost of obtaining what was once considered a jumbo loan in some high priced areas of the nation didn't seem to work I understand there are very few takers, and sales remain lackluster in those higher price ranges. In fact in most parts of the nation yes activity is up, but a large percentage of sales are bank owned, foreclosures and short sales with large seller concessions to the buyer. Those sales can damage a market even more by dragging local home values further down as those sales now become the neighborhood comps.
In the Atlanta area I notice a lot of new home subdivisions seem like ghost towns. In a recent visit to one subdivision where I did not identify myself as an agent...I noticed there had to be about 200 homes built with only a handful occupied. When I asked the onsite sales person what was happening, she explained "Oh we're the areas largest volume builder!" My comment to her? "Since nothing appears to be selling, how's that working for you?" She didn't get it. As some new homes are now sitting on the market in some subdivisions for close to 3 years, where will the changes the Federal Government enacted start to kick in? From the rate cuts one thing we have gotten was higher gas prices which has only placed more of a drag on the economy.
The real issue which no one is talking about is the banks. The lenders made a lot of bad loans with very few of them having PMI. Basically the 80/10/10, the 80/15/5 and many of the 100% loans avoided any insurance to cover the loss in case of default. The fact of the matter is that the banks made bad, and fraudulent loans on products that have declined a lot more in price then they are willing to admit. The new lower rate cuts have should have helped, but where the banks make the money on the spread, they are hoping to pocket the difference with a larger spread..., but no one is biting. Since they are not passing on the reduced rates the credit crunch is getting deeper. Why aren't the banks admitting this? If they did admit the real losses, the banks would fail. They're broke! It is simple math. That is why the heads of Wachovia resigned this week, the head chairman of WAMU was stripped of his title this week. That creates a dilemma for the Government - how do we really fix this mess? Since mortgage application declined big time again this week I have to stop and ask some questions!
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Jim,
I hear the Chinese and Saudis have a lot of money... And something tells me that they are waiting for their rebate checks for some more....
In all seriousness, until some serious investment (and incentives) goes into Alternative Energy in the U.S., the $600 Billion going out of the country every year for our energy needs is not going to help anything out...
As for housing... tampering with the conditions in the forms of cutting interest rates, raising FHA limits, free money, etc... only delays the process of correcting what was an artificial boom in the first place.
Jim, good questions.
Is real estate local? Yes. But is it affected by the national and global economic context? Oh yes, and we're seeing that now.
IMHO, the crazy lending practices are just a symptom of the fact that we Americans have less buying power than our parents did -- a lot less. This is macroeconomic issue, and opinions vary widely, but TV keeps telling us we need the American Dream, the house, the car, the flat-screen HDTV. So both parents have to work to make that happen? OK, we did that. Now two incomes aren't enough -- we need crazy financing to keep up the appearance of economic growth and prosperity. Now that that scheme has failed, how will we keep our image of world economic powerhouse intact ... without actually producing anything (except more consumers with credit lines).
Oh, jeez, don't get me started!
The thing I do not want is Congress to try to fix "things". That is a recipe for a longer term market slump. Let the free market work - it will clean things up considerably faster. Prices need to reach equilibrium in every market.
The growth in prices from 2001-2005 was not normal. It was a speculative bubble with cheap and easy money.
The real estate industry was, and is , a victim of its own success. The "easy money" people rushed in drove up prices, rocked the boat, and destroyed a good market. The market now needs a cartharsis of foreclosures and falling prices instead of a Congressional Panacea.
I haven't purchased any investment properties since 2004 - prices were to high. Prices are getting better now.
Las Vegas Real Estate - Paul Francis, ABR,CRS (Coldwell Banker Premier) I like the phrase "Artificial boom" Even though it was credit, it was real money to someone. Our tax paid dollars are not artifcial. Equity losses are not artifical. Bank losses to someone (shareholders, bank patrons ) are not artificial. They will be real losses to someone, someones pension, and some banks eventual failure.
Cynthia Calisch and Preston Larus (Keller Williams Realty) The illusion of wealth may be a society of a service sector driven society that does not manufacture anything.
Spencer Hill (Hill Asset Management) I think prices are going to get a whole lot better also. I agree about government interferance, but they've already started bailing out their own....and it isn't for the home owners.
Yes, things are definitely broke. I've heard it said that if it ain't broke, don't fix it. Looks like a little bit of fixing is in order.
The problem now is that lots of homeowners are losing their homes to foreclosure. AS professionals, what are you suggesting to people who come to you and they need help? Can you help them?
Are you looking for a solution to help save the home, or do you venture more towards providing an exit strategy? What route do you take with such homeowners?
For those of you who refuse to do short sales...what is your strategy for the homeowner? Are they a dead lead for you, or do you have any solutions for them? If they are a dead lead, do you refer them to someone, or wish them luck?
Gregory Lohr (Freedom Foreclosure Prevention Services) In my market it is still hyper competitive to get the listings. I do not get the opportunity to get on that many listing appointments right now. If I had the opportunity to refer them to someone that could assist them that would be great.
Jim,
Artificial Boom reference is in relationship to the easy lending standards and practically free money that was given away as the banks were trying to meet the demand of investors packaging up as many loans as they could -- which created prices to go up (more buyers) and home builders to build more homes (higher supply).
Now we are sitting on the highest amount of vacant homes since 1956 and that's excluding rental homes --> http://www.cbsnews.com/stories/2008/04/28/business/main4050898.shtml?source=RSS&attr=_4050898
I have a friend that worked in the Sub-Prime department of a rather large bank as an underwriter until 2006 --- find these guys and they'll tell you what the standards were to get a sub prime or Alt A loan.
Pull the new home permits (public information) and check out those numbers and follow the big increase right along with the big increase in the use of ARM's.
Yes -- the losses are real dollars (and taxpayers money) but we seem to have forgotten what these same banks and homebuilders were making pre- 2006 and the massive bonuses the big decision makers were making. Trust me, I know a couple of developers that until recently were rolling in the dough and you can take the top real estate agent in the world and they had nothing on these guys in terms of income. (In fact, I can't think of any real estate brokerage owners in our area that had anything on some of these guys.)
Unfortunately, policies were created to get out of the last recession through low interest rates, etc.. and the boom in housing sales and the economy was because of these policies --- not because there was any real growth in incomes, etc.. (Spending on goods that kept the economy going was created by the creation of new ATM machines with four walls and a roof in the form of refinancing and building a bunch of homes that nobody is now living in...)
Meanwhile, Hundreds of Billions of Dollars were leaving the borders of the U.S. --- to countries that are now pretty powerful economic wise. Read this article from the New York Times -->
http://www.nytimes.com/2008/02/28/business/worldbusiness/28fund.html (While the main subjects mentioned did not directly make their money from the U.S., they did indirectly.)
Precisely why I mention that real investment money needs to go into alternative energy technology such as Air and Solar -- to help stop the bleeding of over $600 Billion plus going out of the United States every year for our energy needs. The technology is there -- it just needs incentives for more investment to make it more mainstream -- which creates real jobs and keeps the money in the U.S. which creates real wealth resulting in a solid economy. Much like what technology did for the U.S. in the 90's. (T. Boone Pickens just recently announced he is investing $2 Billion dollars into the largest windfarm in the panhandle of Texas -- that should certainly tell you there is opportunity to make money in this field because he's not going to invest in anything unless he's going to make a killing.)
You can only build so many homes until the inventory surpasses real demand which as you mention above in your visit to a new home builder -- is the exact same problems you see all over the place. As I've commented before on your posts -- buying $500,000 homes as "Investments" that can only be rented out for $1,400 max certainly is no investment -- but it was done left and right in Las Vegas and other areas because of no down payments, creative financing, real estate always goes up in price, appreciation rates are 10%+, etc... which is now all coming back to bite everybody in the you know what.
So... my reference of "Artificial" is due to how we got here in the first place. Kind of like getting a Million dollars in credit and saying you are a millionaire.
Tampering with conditions that are only going to prolong the pain is no solution... petitions to permanently increase the FHA limits are self serving IMO, and I don't know how tax credits to new home builders are going to do anything but help new home builders. There certainly is no shortage of inventory...
I know... somebody reading this is going to think that I'm all gloom and doom but actually, I'm more positive on the real estate market for Las Vegas then I was in '05. I just don't support self serving band aid fixes and have a pretty decent background in Finance, Statistics and Economics with an understanding of who REALLY benefits when the Kool-Aid is getting passed around.
By the way... check the corn crops status for this year and consider that 25% of corn grown last year was used to create ethanol to help offset oil usage -- could be a reason why Oil is taking a big jump...(Huge Jump Today) -- that and the normal stuff that goes on in a certain region of the world.
Yes.. the losses are not artificial.... Neither is inflation, oil prices, where the money is going, the cost of living, etc.. etc.. The false sense of Wealth was....
Policies that need to be made are solutions that stop the bleeding in the first place.... Not polices pandering for votes.... Until then... it's just a crutch to help somebody hobble along with broken legs that need to be reset and mended properly. As they say, sometimes it's got to get worse before it gets better.
I certainly don't mean to rant but I certainly don't want my statement of "artificial boom" being taken as a statement that everything going on today is artificial. Was money really "lost" or did it just go somewhere else? When a "market mover" sells a big % of stocks in a company and the value tanks, did the money just disappear?... Or did somebody make a lot of money and a lot of people lose money? Is this where all the money went? --> http://www.economyincrisis.org/articles/show/1066 (Interesting reading especially the debt numbers.)
The money that "everybody" is losing went somewhere. All of this stuff and warnings have been preached for years that it was going to eventually happen... people just tend to listen to what they want to hear and not what they need to hear... until something happens that wakes them up and unfortunately that usually does not happen until there is a major crisis.
By the way... my roommate at UGA was from Alpharetta -- love it there. (And of course... Athens)
Take Care and Save Your Money....
Las Vegas Real Estate - Paul Francis, ABR,CRS (Coldwell Banker Premier) First of all you wrote an awful lot of incredible and substantiated points. I agree with you on all. We have such a lack of leadership at every level of government in this nation. It is sad! Also, I am against any band aid fixes! What's the point? I love your line..."Kind of like getting a Million dollars in credit and saying you are a millionaire." I love it!
I've worked on Wall Street, worked in NYU commerce and business library in NYC. I was on the executive board of a union in Washington DC. We used to run a small union, participate in arbitrations, negotiate contracts, set up lobbying etc. We are in for some rough times, but there will be some incredible opportunities.
Jim really good post, there are as you pointed out a whole lot of reasons why we are in the mess that we are in, creative financing, intrest only loans, 150 percent loans, loss of good jobs, the rising cost of everything, people buying homes they really couldnt afford, and more and more lately people owe more on thier homes than what they are worth, second mortages to pay for everything under the sun, too many investers, who are they going to sell to? Too many homes being built but not enough occupied, and the list goes on and on and on---Bart
BART WHITMORE REAL ESTATE CONSULTANT (THE REALTY MARKETPLACE) The problem is where do we begin fixing this. First of all we must be financially prudent in our own lives, Accountability and maturity go a long way. Next we need to have our politicians accountable for all these issues. Never mind the golf games and watching our American Idol and wasting time watching Nancy Grace on CNN. We voted the bums in office. We need to make the right choices on whom we elect and know where they really stand on the issues! Double Talk will not be accepted! Accountability counts!
Phil You raise a lot of great ideas. First of all the big todo about illegal immigration has not been brought up this year. Concress never completes any work! Hot air! The deficit and Social security are a mess. Balancing the budget? Forget about it. Very scary and no solutions offered because there are no leaders in Washington at any level. I cannot even call them men! Opportunists that are too busy looting the land.
Great post as usual Jim. You really make me think which is why I like reading your posts. Plus it raises even more great questions and comments. Thanks!
LaNita Cates (REMAX of Joliet) Thanks LaNita. I do a lot of research, and I look at other markets. I am astounded of the inventory that is out there. There are markets that I am very familiar wiht (looking for myself) that I personally know homes are on the market for several years. I think the buyers are noticing this too. First impression at some homes seem to be a steal, but when you think about it...why isn't anyone buying these homes after the price has dropped 200K? The problem is much bigger than anyone in our industry is letting on, and yet I do not see the politicians doing anything constructive to address the fundimentals. That is what happens when you have a weak government. They are trying to prop this up until after elections!
Hi Jim: I would argue that since real estate is cyclical, we're in the midst of a down cycle which may not correct for a couple more years. It probably wouldn't matter what the Fed. or anyone else is doing right now. I am heartened that they're trying though. Ultimately time will correct everything. Over time properties will begin to sell and at increasingly higher prices. When the consumer starts feeling better about their own situation we'll see the floodgates open again. I expect that to start happening next year although our next protracted boom probably won't occur until 2012 or so. Thanks for the great post! You elicited some great responses!
Paul
Paul McFadden (Exact Financial Group I totally agree. However there are normal cycles and there are bubbles. What we have here is an epic even. This is not a segmented part of the economy as what happened when we had the problems wiht REITS in Florida years ago. This bubble has invaded every segment of real estate. Commercial from what I've been reading is next.
Time does heal all wounds, and I do agree it is going to be a while before real estate resets to the healthy side of the equation.
Sheik Ali Sheik Omar (SAO & Co, Chartered Surveyors) Very well said. Most folks do not understand that rael estate can be graded. Let's take the same home on a level lot, a home on a hill, a home in a flood zone, a home wiht a water view, a home on a busy road, or one out in the middle of the country. The are identical, but yet each will have a different value. Most agents, and consumers do not understand the fundimentals. Location, location, location!
Jim, What a great, in-depth post about the facts! Very good. I agree and the government has not been much help. Sadly, I think the lenders are getting what they asked for, loaning money to anyone that could breathe. Now, we all paying the price.
The media is not helping! Even in my stable market, because of all the negative media, buyers believe they can steal a home. When will it ever end? Let's hope it turns around soon, for all of us.
Huntsville, Alabama Real Estate Agent Elizabeth Ramsey Cooper (Remax Huntsville/Madison) At some point it will end. Normally in a business cycle demand wanes when prices are high and sales slow...prices correct to market adn it starts all over again. The problem is this time there was fraud. No money down for folks that should not be in a home ever. In Georgia this accounted for over 52% of all morgages for several years in a row. New agents think no money down is normal, no it isn't. Normally 20% down was needed. The problem is today that even if a newspaper never wrote a story on the economy...we would still be overwhelmed with foreclosures.
New agents feel that buyers are just going to pop back into their listing and write an offer, they won't. There is another problem, no cash.