Sunday, August 19, 2007

The Sun Sets on the Real Estate Market


As many of you know, I was part of the real estate industry from about 1967 through 1995, both as an agent, then later, a mortgage banker/broker. I went through the rapidly inflating market of 77-78 in the Seattle Area, and also the depression of 80-82. Back then, with fixed 30 year mortgage rates reaching above 20%, two things happened that were significant. One, loans were extremely tough to acquire and two, values plummeted. Homes that were located on golf course fairways, dropped to half their previous value, most of which had accrued in just the prior two or three years. Two, spec building was on fire. large developers had tracts with in some cases, more than one hundred starts all going at once, and all unsold.

A point is reached, and was, where neither the banks nor the builders could stop. Once the point of no return is reached, it is better to finish than to walk away. Finally, condominiums were starting to be the rage, and huge projects were built, usually with adjustable rate mortgages, some of which were negatively amortized. Banks foreclosed on thousands of new homes, both free standing and condos. I had a couple that obtained a mortgage from me on a home, having lived in a fairly new condo. They asked me if I wanted it free. I thought about the leverage aspect, then passed, as the value was less than half of the then existing loan balance. They, like many others, let the bank have it.

The banks, not wanting to keep the properties on the books, sold them for even less, thence depressing the market even more. That was then, this is now.

Here in North Idaho, we have several of the same ingredients, excepting that lenders, having a corporate memory of those other times, don't let builders have that much rope ... Or do they. Today, we see over building, coupled with a lack of demand caused mostly by rates at a 30 year low for an extended period of time. Fixed 30 year interest rates hadn't been below 6% since the fifties or early sixties. The demand caused a boom market, since families could finally afford to either move up in size, relocate, or move down, depending on their individual needs. That need having been fulfilled, there are very few buyers that have yet to buy. Add to this example, the hysterical competition that Banks and Mortgage lenders engaged in, offering adjustable rates when nobody in their right mind would want one, except they could then afford more house for the same payment. Kind of like buying stock on margin. Sooner or later, it catches up with you.

Lenders,, believing in the tooth fairy, thought that values would continue indefinitely, leaving their equity positions either intact, or enhanced. Buyers have disappeared, builders are stuck with unsold units, and lenders are eating smoke. One of the nation's most respected, and largest mortgage companies, just borrowed billions to stay afloat. That would be Countrywide. More are also in the same shape. A severe downturn in construction is inevitable, turning hundreds of construction workers out of work. We have most of the elements for a severe down turn in values due to some of the same factors from my previous example. It seems that history IS doomed to repeat itself.

2 comments:

Anonymous said...

One can only hope, Bob Holland, will die penniless, alone, in the rain.

:)

Anonymous said...

Unless someone drives a stake through where his heart should be, I don't think he can die!