Mortgage Crisis, Bailouts, and the Consumer Credit Crunch

There has been much written about these topics, but here is my $.02.

For years I thought coming out of college in 1992, with a degree in economics, put me at a disadvantage employment-wise. I had studied and written about the then recent S&L crisis. I was interested (and had done an internship) in commercial real estate, yet there was an abandoned office tower in downtown Norfolk that was 90 % complete and had gone bust.

At the time I was very financially conservative and focused on building my savings to buy my first home. It was then that I started following the residential market. I had a construction background and I thought Virginia Beach real estate was a bit undervalued compared to other populated areas. I searched for homes to fix up and re-sell or carry as rental property. By ’95 I had my real estate license and by ’99 I had purchased two small homes in a great neighborhood, the first becoming a rental when my wife and I moved into the second home. My goal was now to buy and fix up a modest single family home every few years, maybe build a portfolio of 4 or 5 rental homes, and rent them out for the long run. For this I would need 10-20% down payments along with good credit.

The traditional way of thinking was headed for a change. First, the “Dot Com” stock market correction in ’99 got investors looking more aggressively toward real estate. Then, the events of 9/11 seemed to alter everything. We were told that spending money was the only way our economy would survive. Low interest rates were the name of the game.

Then it dawned on me that a healthy economy now depended almost entirely on consumer spending. How did “Savings” become a dirty word? The low rates that boosted spending also discouraged saving as yields on deposits seemed insignificant.

I had now become unable to pursue my goal of acquiring rental properties as the numbers just did not work. A property that sold for $150k in ’99 and would rent for around $1200/ month, was now $350k in 2004 and renting for $1300/ month. Everyone seemed to want residential rental property. People wanted in no matter what it cost. “Creative” financing took over. We saw homeowners leveraging their own homes to free up money to buy investment property. A terriffic six percent, 30-year fixed investor loan was still not good enough for many.

We saw things such as new construction listings that gave discounts to unrepresented buyers who used the builder’s mortgage company, appraiser, and settlement agent. Buyers had no problem doing this as the motivation to buy overpowered reasonable logic. Even using terms like “liar loan” had actually become acceptable when referring to certain mortgage products. It now even seemed that everyone and their brother had started up a mortgage brokerage.

For most people, a home purchase needs to return to what it had always been looked at as – a place to live that happens to be a good long term investment. When variables such as location, price, build quality, etc., are truly considered, one can still do well buying residential real estate. No one however, should automatically assume that a home bought today will be able to be sold in 2 years and leave a profit for the seller. I welcome a “return to normalcy” even if a few down years are necessary.

Please post your comments and opinions.

-Mark