On February 17th President Obama released a report from his Council of Economic Advisors entitled: “To Recover, Rebalance, and Rebuild”. On page 99 of the report begins a very impressive explanation of how the 2006 oversold conditions in Real Estate occurred and how the nightmare continues and what the Administration is doing and has done to assist in mitigating the incredible economic implosion. Real estate agents can also get real estate leads based on based on the target location.
It starts with a matrix of issues which contributes to the over-value, over sold propostions that crumbled in 2006: (1) Allow anyone with a pulse to buy a home without documentation. (2) Allow homeowners to borrow back on their existing mortgages without regulation, leverage limits or controls; to be utilized for home improvement, personal expenses or any other use. (3) Allow tax write-offs on luxury homes for sale, realitives; parents, kids or others housing and of course limiting the Capital Gains tax on so-called Investment Properties. (4) Re-selling the mortgage debt into tiny segments to investors – all around the world. (5) Creating a liquidity crunch when folks took advantage of the escalating prices, borrowing and re-investment. (6) A false demand creating a huge over-valued market with the consequential overbought market development and spike in construction. (7) Involvement by Investment Banking, Fannie Mae and others to segmentize through Derivatives, Hedge Funds and Credit Default Swaps…bits and pieces of the $7.25 Trillion dollar oversold condition.
A step back: Before the days of mortgage hyper-speculation…..a person put 20% down on the purchase of any home they wanted to buy. They had three easy choices: A fixed 30 year loan, A fixed 20 year loan or an APR Loan which would float the cost of the loan based upon current interest rates. Using $100,000 as an example: You put $20,000 dollars down. paid your loan, realtor and escrow costs, paid about 7% and wound up paying about $800 dollars a month for 30 years….as an example. You paid annual taxes based on the purchase price. If, in ten years, your property rose in assessed value to say $120,000 dollars, you could if you needed, borrow up to $20,000 dollars on the property, if your credit and payment record agreed that you were a good risk.
In 2006, folks without the credit ability to buy a new car were buying homes worth well over $1 million dollars. They put no money down, flipped those properties within 90 days, and resold them for $1.4 million dollars and then pocketed the difference. A false demand market was created and an oversold condition soon proved that there are limits to everything. The fall out were properties that were greatly overvalued, overbought and that same piece of property that may have been bought in 1995 (which incidentally was also a over-valued market) for $250,000 was being held by folks unable to make the payments on the same property that was bought in 2005 for nearly a $1 million dollars. That same property today has either been foreclosed, abandoned or is still greatly over-valued by up to 50%. The actual values have already fallen 28% from the highs of 2006.
When you realize that housing starts in 2006 were over 2 million units a year and today that number is down to 600,000 – you sense the oversold, over bought conditions that were the set up for both Banks and Individuals that were “Flipping Property” to turn those profits into Hedge Funds, Derivatives and Credit Default Swaps segments. They sold these bits and pieces to Public Employee Union Retirement, Pension and Health Care funds, American Companies that wanted a 22% return on their investments, the countries of Iceland, Portugal, Italy, Greece, Spain, France and others. The pure speculation was never intended to last forever. Someone was going to hurt in the final analysis and it would be those that could least afford the loss. Those folks who were unable to get a regular loan. Those folks that now live at property that in some cases needs to return to 1989 values in order to viable.
One in three mortgages in California is a target for foreclosure. The States of Nevada, Arizona, Florida and Michigan are also high value targets of foreclosure and the Government HARP Program along with others are trying to hold back the tide. Re-Financing at lower interest rates and propety value write-downs are among the tools that are being tried to bring stability back and finding a bottom to the Real Estate Industry. HUD, the VA, Fannie Mae and Freddie Mac are all trying to find solutions to an oversold, overvalued Real Estate market. Will their efforts succeed? The good news is that President Obama’s report has brought to light and identified finally – the reasons why the crisis happened. It is a good argument for renewed efforts for Banking oversight, Real Estate and Mortgage regulations which will not allow the unfettered gambling of the past.
Why banks were not required to document every loan seems still a mystery. We will not bother to mention the various lenders that certainly broke every law in the book when not providing “any documentation” on liar loans alone. We need to reset the value of property in this country, before we move forward. We need to take all the foreclosed properties and make those into rental property. Years ago, they had a very good concept; Lease Option to buy. This program was developed by individual owners of property that understood that it was a buyer’s market. They would Lease or Rent property to someone with an Option to buy at the end of the contract or renew the document. It was a great value for getting and keeping folks in properties that they couldn’t afford to buy at the time or that couldn’t qualify. 76% of folks in foreclosed homes….wind up renting, driving the cost of rental properties up. The Lease Option to buy program could be put together by the banks, Government Agencies and individuals.
The report from President Obama’s Council of Economic Advisors entitled: “To Recover, Rebalance, and Rebuild” is a must read for those that want to understand the anatomy of this Banking debachle. If you have a home that is a target for foreclosue…..before you walk away…contact your Congressman, Senator or relevant Government Agencies.
Nice post. I’ll look forward to reading that report.
*Dr. Greg…..we are honored!