The Real Estate Blame Game
Have you ever been around young kids who are in the midst of a squabble and each of them are blaming the others for some play time that went awry? By the time you try to figure out what the raucous is all about everyone is so involved with telling you what the other person did wrong, that the only steps you can take to calm the issue is have them go to their room. It may not completely solve the issue, but the quiet certainly is welcome.
I have come to the conclusion that the real estate bust that has been hanging on to this country for the last few years is the same type of problem. I recently attended a seminar on Leadership in Real Estate, and although the information was very perceptive , there was too much chatter in the room about what caused the real estate crash and trying to decide who or what institution was to blame.
Let me tell you the facts, as I see them, about the real estate market:
First of all, I do not know everything about “the reason” why the real estate market crashed. As a loss prevention professional before getting into real estate, I do know that when you have a disaster there is always – and I repeat always – more than one thing that went awry. Before we can fix the problem we need to fix each and everyone of those things that went wrong. We are still like little kids screaming what the other person did wrong.
Second, there is enough blame to go around to everyone involved. Lets accept that, roll up our sleeves and say “Where do we go from here?” All to often, I hear people talking about the problem as though they know what “the” reason is. There is no “the” reason, there is a multitude of reasons – accept it, get over it and move on.
Let me list some of the reasons that I believe are responsible for the housing collapse. These are listed in no particular order and I am sure there are many more:
First, getting a mortgage became too easy. I am not talking about conventional mortgages, but I am talking about these no-doc loans, interest-only loans; loans for 125% the value of the property, these types of loans. Mortgages were given to people who did not have to supply any evidence of income. To correct this some elected officials now want to require 20% down in order to buy a house. That is not the solution to this problem – it is exacerbating the problem and is going from one extreme to the other.
Second, equity loans were used extensively for everyday living, and not to increase the value of the property. Having a second mortgage, or home equity loan, became the norm instead of the exception. All to often, the equity was cashed out for items such as vacations, a new car, or to pay off high interest credit cards. Unfortunately, many people reused the credit cards and now had the equity loan and the credit card payments. Unfortunately, many people had little to no choice but to do so.
Financial institutions issuing mortgages sold the mortgages and did not have any “skin in the game.” Years ago when you wanted to buy a house, you went to the local bank who determined the risk involved in giving you a mortgage. If the bank did, they held that paper until it was paid. Now when a mortgage company gives you a mortgage they “securitize” the mortgage by grouping or bundling many mortgages together and selling them to a third party. The idea is that by doing so, if a few of the mortgages went bad, there were enough in the securitized instrument, that the value would not decrease significantly. Unfortunately this lead to mortgage companies giving mortgages to people who had little to no chance of paying it. These securitized instruments were then sold and resold on the open market. The securitized instruments were sold as secure mortgages, when in fact there were not. This was the time bomb that was waiting to explode and take everyone along with it. Who ever was left holding the instrument when the market went down was the company that got hurt.
Financial institutions are allowed to hold assets on the books as cost rather than value. This has been, and will continue to be, a serious problem for the real estate market and the economy as a whole. Mortgage companies that foreclosed on a property in which the mortgage was $250,000 can hold that amount on their books, even though the true market value of the property may have dropped 50% as is the case in some areas. Therefore, the property is being held on the books as a $250,000 asset, when in reality its worth is only $125,000. There is no incentive for the banks holding that property to sell it because it will diminish the banks worth. The inflated amount they have on the books is a smoke screen to the value of the bank.
The point that I am trying to make is that if we want to talk about blame, there is plenty to go around., but we need to talk about how to fix the problem. More often than not, recessions have been pulled out of the downward trend with the help of the real estate market. Until we get behind programs and legislation to support that endeavor, we will more than likely continue to sputter in our recovery.
Fortunately, Williamson County, Tennessee, where I live and work has not been hit as hard by the recession as many other parts of the country. There are clear indications of upward trend in both number of homes sold, especially new construction, and to a lesser degree, the price of homes. Williamson County actually had a 16.9% increase in the sale of homes in September of this year.
If you are thinking of buying or selling real estate, anywhere in the country, talk to a REALTOR. They have the facts for your local area to help you decide what is right for you.
As always, if I can help with any of your real estate needs, or to answer any questions you may have, please don’t hesitate to contact me by text or phone call at 615 417-8182 or email me at RolandLow1@gmail.com.