January 2009

Written by: John Polson November, 2008

The end of the beginning, not the beginning of the end.  Perhaps this is the best phrase that I’ve heard in recent months that describes the road ahead for our economy and for housing.  It all seems to have begun with the Housing correction that seems to have begun over 3 years ago in the 4^th quarter of 2005 when the pace of home sales began to decline after years of booming growth and expansion.  Upon reflection it is much easier to see now some of the unsustainable business practices of the mortgage industry and poor oversight from government that contributed to that unsustainable boom.  As home prices rose drastically from 2001 through 2005, and mortgage companies thrilled in the profits they realized from originating loans, it would appear that greed and the ultimate search for higher profits for each current quarter, the future be damned, resulted in business practices becoming “the norm” that in other times and that most of us thought were not only unacceptable, but downright foolish if not illegal.  These practices included but were not necessarily limited to, mortgage companies making loans and enticing borrowers to borrow for homes that ultimately they could not afford.  By looking at previous years escalation of home values, which in part was artificially driven by a market demand that was not representative of the true market due and compounded by several factors  including: the speculation driven by manipulative investors (whose business practices were also profiting from the mortgage companies poor lending practices) followed by lenders enticing borrowers to take on loans that were not only beyond their true ability to repay, but that were based upon unnatural principles such as 100% financing, sometimes up to 105% Loan to Value, meaning that before even moving in, buyers had negative equity.  On a $400,000 home that meant some buyers might have had $20,000 negative equity, meaning the bank was paying Them $20,000 to move into this house and asking nothing of value up front from the borrower.  So who’s surprised that after that buyer has made 2 years of payments at $2,400 per month, having already made $20,000 at closing now that the house is actually only worth $350,000 there’s nothing keeping them from simply walking away from the house.  Not only have they nothing to lose, they’ve basically made $70,000 by walking away.  Now here’s something even more troubling that has occurred.  Before the bank takes that house, that same buyer can go out and possibly get a loan on the same or larger home that’s actually priced at $350,000 that has a monthly payment that’s $400 less than their previous payment.  Once they’re in the new house, the other house gets foreclosed on and the buyer washes their hands of it. 
So who’s responsible??  The government?  The mortgage Company?  The buyer??  The Realtor?? Perhaps in some cases… it’s all of the above.  In many cases there’s a strong possibility that the buyer and the Realtor were essentially victims of circumstance, the Realtor because their job is to locate a property for the buyer.  And in the heat of it, there were times that Realtors knew that the buyer couldn’t afford the house but had no other choice because the market didn’t have homes in their price range that were acceptable.  Some of these markets were so crazy with price appreciation that it was all the agents could do to locate a acceptable home for a buyer, and oftentimes before a contract could be written, the seller had already received 5 offers, each of which were for $1,000 more than the other highest offer(s) and sometimes for $30,000 even $40,000 over the actual asking price.  We all know that Market Value for any property (and any product or service for that matter) is what someone is willing to pay for it at or within a given time.  Under Normal circumstances Market Values are tricky to determine but are based upon other sales of similar properties (comparable’s / comps).  Under the circumstances that presented themselves with the Market we faced in 2004 and 2005, the demand had shifted to a higher level that took it off the scale for normal business.  The normal rules for market valuations didn’t apply because the rule book was thrown out.  Speculators drove part of this (one part of the greed that drives profits in any market) job growth drove part of it (this is the one part that we could measure in some of these markets) but the other parts that were unnatural were the predatory lending practices which included: No Doc / Stated income loans (the so-called “Liar Loans”) and Mortgage originators that actually continued to coach buyers to take on loans they couldn’t afford.  They might even convince the borrower that all they had to do was make the payments for at least 6 months then refinance the property when the value went up 20% and they’d have equity in the home, they could then sell or refinance and cash out with maybe up to $100,000 which they could use to buy a new car, vacations and diamonds.  The American Dream!!! And it was a GREAT Sales pitch, and a LOT of Americans bought into it.

The part that I find the most difficult to swallow is… this was allowed to go on by these lenders, and the government Knew about it.  Most of us who own homes and who have owned homes in the past and/ or who truly attempt to be fiscally and financially responsible know that get rich quick schemes usually are too good to be true.  Unfortunately (as we see now) a LOT of people SAW and witnessed and heard stories of Others who WERE doing this.  I know of several Mortgage Originators who participated and DID This on their own and had windfall profits on real estate investments that they made and they tried to get their customers to buy in and do the same way, in return they originated more loans, made profits for their companies and as a side effect, put people into loans and convinced them to buy homes that they never really could afford in the first place.  Owning a home is a long term thing for most people.  It is not something to be taken lightly, it is a responsibility, and it is a dream for most people.  Real Estate for most people is the most significant investment they will ever make and also for most people the greatest source of wealth.  Unfortunately the responsibility of homeownership seems to have gone by the wayside as even average home buyers were convinced that they don’t have to stay in their home for more any more than 2 years, thus making your average home buyer now a ‘speculator’ in the market, a position that many already know is fraught with risk and potential disaster. 

Realtors in this market for the most part had to deal with the circumstances which they were confronted with.  Finding a home for a buyer in an inflated market that they could afford at that time, as most buyers need a home immediately in order to provide a place for family, a place for home, close to work and where they can raise their children safely.

On the other side, Realtors as agents for the seller (listing agents) have to do their part to obtain the best possible price for the seller. 

So where does this take us today? 

More importantly than ever, it’s critical now to know and understand the market in which you are buying or selling.  And this is another reason it’s so important to work with a REALTOR®.  Particularly you want to work with a REALTOR® that you can trust and who knows your market.  I have been asked at times to help sell a property in an area away from my home market and when that happens I am glad to help that seller or buyer find a REALTOR® in that market that they can work with and who knows that market and in whom they can trust.  I sell Real Estate as a business and for a living, but I do so by giving buyers and sellers full representation and part of that involves knowing the market, I can’t do that as effectively as they deserve if it is not within my market, so that is why I refer that business when it comes up.  But no matter who you choose as your REALTOR® make sure that they know they’re market and choose someone you can feel good about, because ultimately finding or selling a home is not just a business transaction, it is a relationship process, and your REALTOR® is in part your coach, psychologist, your local expert, your counselor, and a friend, and it is generally our goal to make sure you are happy with this very significant choice of buying or selling your home. 

So where are we now?  As we enter 2009 we are seeing many new opportunities and many changes on the way to our economy, to our government, to our way of thinking about our world and our place in it, but we have not arrived yet a new beginning.  That may be in the cards for the future, but up to now at least what we’ve been dealing with as the world sees the economic challenges become more clear with each passing day, we’ve realized we’re perhaps at the end of the beginning, not the beginning of the end.  Any recovery for our economy is going to be a process, rather than an event.  And I believe that it will start and and with housing.  The downturn started 3 years ago as home sales began to slow and it will recover over the coming years as home sales begin to improve.  And that can only happen as buyers become once again confident that purchasing a home is indeed a good investment.  Truth is, owning a home is now, as it has always been, one of the best long term investments you can make, but now we realize that it comes with a responsibility, a responsibility of choosing the right home carefully, of taking care of it, and as with any life choice, of being diligent in how we live with it, and for a while at least we’ll need to focus on the basics that a home provides: shelter, security, a place for family, and…a safe investment. 

I would love to hear your thoughts and feedback.  Please e-mail me at johnpolson@pleasantlife.com

Thank you for taking the time to read.

Sincerely,

John Polson