Tag Archives: real estate bubble

Not Partying Like its 1999

Are you better off today financially than you were three years ago?  Five years ago?  Twelve years ago?  For a large portion of Americans, the answers are no, no, and no.

The listless stock market, crashing real estate, rising household debt, and increased unemployment have sent combined sucker punches into the gut of the U.S. economy.  The country is staggering around trying to find its way, while the politicians ineptly put the finishing touches on a collapse.  Of course, a full economic collapse is not a certainty and perhaps is not even probable, but better leadership at the top will be needed and soon.

The stock market rose mightily in the late 1990’s, then crashed, and has since risen and fallen several times.  A person who bought stock ten years ago would, on average, be in about the same place with that stock today.  Experts have varying opinions on whether stocks are currently overvalued, but my opinion is that picking stocks now feels a lot more like speculation than true investing.

The tech bubble of the 90’s soon gave way to the real estate bubble of the following decade.  Similar types of gurus exclaimed that this rise in real estate was no bubble and gave all of their self-serving and crazy ideas on why values would continue to climb.

Almost all real estate markets have gone backward over the last 5-6 years.  In Las Vegas, current prices are at the same level that they first reached in 1999.  Phoenix is at the same level as in 2000, while the figure for San Diego was 2003 and for Detroit 1993.  These statistics are from the Case-Shiller 20-city composite index report.

My strong belief is that none of this would have happened if the banks had used reasonable loan criteria and if there had been more owner-financing.  With the latter, a mortgage note (a.k.a. real estate note) is created between a willing buyer and seller, without any bank interference.  The transaction is transparent and there are few chances for fraud to occur.  The holder of the mortgage note can even choose to sell the note to a mortgage buyer to get some money out of the note more quickly.

The federal government, which can be blamed for much of the real estate market fiasco, has thrown all sorts of ill-conceived programs against the wall to see if anything will stick.  Unfortunately for all of us, these programs have wasted hundreds of billions of tax dollars with little to show for them.

Piling on to all of the bad news is that unemployment remains stubbornly high and many Americans are carrying debt loads way above where they should be.  People without adequate incomes cannot bring down their debt levels, so a near-term solution is not at hand.

So, where do we go from here?  The expense cuts currently being thrown around by the politicians don’t nearly far enough to address the nation’s debt problems.  Deeper cuts, closing of tax loopholes, tighter regulation of Wall Street, and reform of entitlement programs and pensions are the only ways that I see for the country to make a comeback.  That will mean some serious pain for the citizens of this country and some hard decisions by the politicians.  On the latter point, I remain skeptical that the bureaucrats are up to the task.

In search of an honest politician

The United States faces an incredible number of issues, yet so many of them could be solved with just a little foresight. Unfortunately, politicians are rewarded by getting reelected, not by offering viable long-term
plans for the country.

A case in point is the current status of Wall Street reforms.  The largest banks have only gotten bigger since the financial crisis began – so much for addressing the “too-big-to-fail” rumblings.  Plus, Wall Street quickly reestablished its propensity to pay out large bonuses to their bankers for taking speculative risks.   Derivatives, which were a contributing factor in the real estate meltdown, currently stand at ten times the planet’s gross domestic product.  Someone is going to get burned when those take a fall, and the taxpayer is usually the one to take the hit.

Although there have been a few reforms, the bankers in Manhattan are smart enough to always find new loopholes.  The old problems have most definitely not been fixed.

Since my business is mainly real estate – as a mortgage note buyer – I have a particular interest in how that industry is affected by government policies.  Let’s see how the elected officials have done so far:

1) The homeowner mortgage modification programs have used up a lot of media ink, but helped few people.  FAIL!
2) Fannie Mae and Freddie Mac, the government sponsored entities that buy loans, continue to need huge amounts of bailout money, and will cost taxpayers hundreds of billions of dollars.  FAIL!
3)The obvious necessity of requiring home buyers to put decent down payments of at least 10% when purchasing was put aside by the FHA raising their own down payment requirement from a measly 3% to a laughable 3.5%.  FAIL!

The housing market needs to go through a natural market recovery, which it can do if left alone by the Feds and the states.  The real estate bubble took years to build, and it will take at least that many years in which to recover to something approaching normality.

If the government will stop butting in, the housing market will have a chance to catch its breath and stabilize.  Community and regional banks will be more willing to lend as the volatility decreases.   For those situations where banks prefer not to tread, owner financing
can pick up some of the slack.  When a mortgage note (often called a real estate note) is created, a much more transparent and honest transaction occurs.   The former property owner also has the flexibility to keep the mortgage note or to sell the note to a mortgage buyer.

There are lots of viable solutions to the economy and housing market.  So far, the bureaucrats have only made the problem worse, and Joe Six-pack has no clue to the long-term implications of government policies and programs.   Will those few politicians who still have a brain and a heart for the country, please take control!