Real Estate Education Blog

Blogs Karen's Blog Looking Forward

Posted Oct 03, 2009 3:47 pm (11 years ago)

RSS Subscribe to RSS feed

When we take a look back over the past 8 years, we find that the Feds in their attempt to prevent a major recession, reduced interest rates to an eventual all time low. The Federal Funds rate eventually went to a low of 1%, the lowest in over 40 years. Eventually this spurred the discount rate and mortgage rates to drop substantially. This action, along with lax credit and lending policies and the ability of many financial institutions to package these mortgages into so called safe investments, helped spur on the real estate mess we have now. 
     Home builders were often stuck in the middle of this with the dilemma of meeting demands of the public, (pent up demand for new homes) versus raising new home prices just to stem that demand. After all, no home builder could have ever built all of the homes they could have sold in any reasonable timeframe. And people going with the crowd, recognized this ability to buy into an ever-appreciating market for new homes with little money down. This eventually moved itself into the general real estate market as well, especially with the huge amount of liquidity in the markets spurred by the heavy debt burden carried by the government. The low cost of borrowing money made its way into the mortgage industry and helped finance speculators (they like to call themselves investors) as well as those that really needed a home.
      The very day we closed on a home, a person saw the “for sale” sign in the front yard and stopped to talk to us. We hadn’t taken it down yet since we barely closed. We told this person we had just closed on it and incredulously he offered to buy it right on the spot. We told him thanks but no thanks. It seems as if everyone wanted in on the action, regardless of their circumstances. From 2001 to 2006 we saw construction both in residential and commercial real estate as the catalyst that drove the economy. This had the affect of pushing the economy forward despite the problems in other areas. Most people don’t realize what affect construction has on the overall economy. It has a spiraling affect. In construction, you not only have the labor force employed, but you need materials both raw, such as wood, concrete, tile, plumbing, and refined such as windows, doors, heating/cooling systems, landscaping, pools etc.  You also have to consider  about the appliances, carpeting, furniture and electronic components that are associated as well. All these together helped drive Americans to a higher standard of living. And everyone was happy as long as they had a piece of the action. 
     And then it happened. The unthinkable. It all came to a crashing halt. Blame who you will, but it really doesn’t matter at this point, since just about every facet of the economy has suffered. Banks and financial institutions started becoming insolvent due to their exposure to the amount of bad debt and toxic assets. What started on Wall Street as a crisis regarding liquidity in the markets eventually made its way to Main Street. We all know where we stand now that the dust has settled.  Many of us saw the appreciation in our homes evaporate overnight along with our investments. Those of us who have additional real estate are probably stuck with them for now. Many cities such as Las Vegas, Phoenix, Miami and other areas have seen a tremendous devaluation in real estate. In some areas of Northern and Southern California, buying opportunities have now availed those with good credit and dependable jobs with the opportunity to buy into properties that were once out side of their buying range. The renewal process is starting to take shape.
     However, banks continue to face the ever challenging conditions of attempting to divest themselves of homes they neither want, nor can afford to carry on their books. I expect that we will see homes that are on banks books as foreclosed or bank owned, to continue to be slowly dumped back into the market. It is neither profitable nor sensible for any bank to simply dump their inventory on the market all at once. They attempted that early on in the crisis and saw themselves driving home prices down even more. So the only thing that made sense was to stand on the sidelines waiting for some of the TARP (Troubled Asset Relief Program) money to come to their assistance and slowly move those homes back to public auction. It will take a few years for all of those homes, especially in the areas hit hardest, to be disposed of by the banks. Those of us that are looking for good deals on homes for rentals or primary residences should find some exceptional deals.                
     This will require a new mindset on how we view these residences. Just owning something for the sake of getting a piece of the action won’t cut it this time. We need to truly have a plan with a strategy. In other words, what worked before may not work this time around when it comes to buying homes and real estate. We will eventually come out of this crisis given time, but the renewal process will take along time. Homebuilders are now starting to enter the game again. The real estate bubble did allow builders with deep pockets to buy some cheap land and developments. We are starting to see developments that were once dead getting a little action. In the long run home building and real estate resales will all come back to a norm, what ever that norm will be. I don’t expect we will ever see the type of unbridled growth that existed before.   Personally, I think we will all be better off with slow steady growth, a more normal real estate market environment and the return of some jobs. 
     Who would have imagined that in ones lifetime we would see the price of gold go to $800 dollars along with silver to $48. That all happened in the early eighties when the Hunt brothers tried to corner the market on silver. Silver then plunged over night to under Ten dollars while gold stayed up around four hundred before it eventually fell back to the two hundred level. Now we have gold prices sitting at one thousand dollars. The next thing to burst could be gold prices. We saw that happen earlier in the year with commodities such as oil.   What about inflation? In 1982 the inflation rate was nearly 18 percent. At that time you could even get a money market fund paying around 21%. Yes, really. I know because I had one with Dreyfus at the time. Then along came the stock market crash of 1987 when the market gave up a sizeable amount of equity. I could go on from there with the 1993 peso devaluation followed by the dot com bubble. So where does this really leave us at this time. Are we poised on the precipice ready to fall into the great abyss? It will depend on a number of things. We can’t spend our way out of this mess, not this time. The government has to come to its senses and decide that we need to curtail debt and spending. The idea of simply printing money will certainly exacerbate the recovery and renewal process over the long run. We cannot simply print up money without eventually decreasing the value of it long term. If we continue down this path we will become a third rate country, especially if our currency continues to loose its value. The so called stimulus was not really a stimulus. The vast majority of the 787 billion was earmarked, and yes I use that word earmarked, for government socialized agencies. It didn’t help Boeing Co. in getting the 787 Dreamliner off the ground. It surely didn’t reinvigorate our heavy industrial base. And not a single home builder was bailed out. The Government simply gave money away, and mostly to the banks.  
     So where does this place us with regard to home building and buying for both residential and commercial real estate. Well, without a crystal ball it’s hard to say for sure. This much we know, we haven’t seen anything like this in our lifetime. Suffice it to say, there will be fortunes made and fortunes lost. There always are during a time such as the one we are currently experiencing. Let’s just go with the flow for now, and lay our strategy as best we can. We have plenty of history to remind us of where we have been, so we just need to be confident that we will recover from this. After all, we are Americans and Americans are pretty resilient. We have proven in the past, that over the long term we can beat the odds.   There are tremendous opportunities in this market for those that find a new niche for products and services.