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Its All Alan Greenspan's Fault

By
Real Estate Broker/Owner with J. Luis Properties, Inc.

Ok I’ve had just about enough of this. This article in USA Today has just about pushed me over the edge. It’s no secret the housing market is in a long anticipated glut. The media is pulling no punches in helping cause widespread panic in the housing industry which brings me to my point.

In every financial market there is what is called a cycle. Every economist knows this and after a little self education, I have learned to accept this as a vital part of the capitalistic system we live in. What really drives me nuts is the perception that the rest of the country is full of a bunch of bumbling idiots. The powers that be want us to truly believe in our system and that the so called ‘cycle’ is business as usual. I would have accepted that if it wasn’t for Alan Greenspan. Watching him manipulate interest rates to curb inflation and actually fuel our real estate boom taught me a valuable lesson. Our governing bodies along with the media actually control the ‘cycle.’ How can I make these accusations you ask, easy what is the number one priority of this country? Freedom? Nah. Safety of our citizens? Nah. Democracy? Nah. How about to retain the title of richest country in the free world?

Case in point with every market condition someone stands to make money. In a recession who stands to make the most? That’s right those who have the most. Catch a cycle on the way down and you make the most money. Problem is most people catch the market on the way up, get greedy and stay in too long. People were made rich by investing and liquidating assets over an over again during the real estate upswing, which in turn helps the economy because more people have more to spend. Now those who stayed in too long are stuck with depreciating assets. If you have the resources (liquid cash) you might be able to ride it out, if not you have to settle for a loss. The bad times have to take place in order to have the good times.

Those who know enough about investing invest for long term. This protects against what is happening today in the real estate industry. Even if prices drop to 2001 levels will it really matter in 2027 if you still own the asset? The only real loss is an opportunity loss. You can’t lose any money if you haven’t sold anything. Depreciation, yes. Loss, no. If you believe in our great system then you know that what follows is a recovery period followed by, yep you guessed it, another run up. We probably won’t see another market like the one we were in, but I’ll take that old traditional appreciation of 6%-10% per year market any day. It’s more stable and easier to invest in and valuate real estate. It’s also easier to spot something that’s overpriced and avoid it altogether.

My advice is if you didn’t buy at an extreme bargain this past year then you might have to wait about another 18-24 months for things to stabilize. If you try selling now then you most undoubtedly will loose money. If bought at the beginning of the upswing and try selling now, understand that you lost opportunity and you still stand to make a profit if you sell now, just not as much if you would have sold last year. The amount of profit depends on the part of the country you’re in.

What I think slipped passed our great leaders, is that with the appreciation of home values comes higher tax bills and insurance rates. Then again, there’s money to be made writing new policies and collecting higher taxes. Will it ever end?

 Noel Padilla

'Doing Business Right'

Suzanne Marriott
Keller Williams Arizona Realty - Anthem, AZ
Associate Broker, CLHMS, e-PRO
Poor Mr. Greenspan.  He is gone from his position, but his legacy lives on.  When does he get "off the hook" for the market conditions?
Oct 27, 2006 04:32 AM
Jeff Corbett
BoomTown - Charleston, SC

Thoughtful and provocative Noel...Its the old 90/10 rule...90% of the money flows to 10% of the people...those who understand the basis of your post. 

The Dow is trading near 12k, even higher than the Clinton administrations glorious run past 10k.  Anytime someone 'loses' in cyclical market play, someone else 'wins'.   Same thing in the RE markets...

The information is out there...look past the noise, especially the media, stop pointing fingers, educate yourself and prosper!

 

Great post. 

Oct 27, 2006 06:19 AM
Timothy Mertzlufft ABR, e-Pro
Prudential Rubloff Properties - Chicago, IL
Great Post.  As far as market conditions are concerned, the media is a constant battle for us.   I have found that with sellers this constant down market talk has allowed me to get the pricing right from the beginning.  Also, talking to buyers about "Seller concessions" has brought my inventory of ready willing and able to purchase clients to very comfortable levels for me.
Oct 27, 2006 07:06 AM
Robert Rees - Austin Real Estate
Robert Rees Realty, Inc - Austin, TX

Great Post, Unfortunately the whole country didn't have the kind of appreciation that some parts did. 

2 years ago Austin was struggling to have positive appreciation rates. Now we are about 6-8% and Austin's happy about it now. 

Oct 27, 2006 07:25 AM
Noel Padilla
J. Luis Properties, Inc. - Kendall, FL
CDPE

Wow! When I wrote this post I feared being too critical and getting bashed for it. Looks like I’m not the only one with my head out of the sand. Thank you all for your support.

 

Suzanne we probably will never forget Greenspan and his effects on the economy, they will by far out live us.

Oct 27, 2006 07:56 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Noel,

I will criticize your affront on Alan Greenspan and his policies.  Greenspan was the architect of the "soft landing" and he did it through easy money policies.  Alan Greenspan saved this economy from three crises in his tenure: 

1- The aftermath of the S & L collapse. Congress allowed the thrifts to gamble with the depositors money.  Their response when the cowboys had screwed up by loading up the bank's portfolio with junk debt was to form the RTC, securitize the bad debt, and give an implied gov't guarantee (remember Brady Bonds?).  What everyone forgets is that Greenspan was quietly lowering the discount rate from 1991-1994 while tightening bank reserve requirements (pretty savvy stuff),

2- The collapse of the Asian "Tiger" economies in the late 90s.  Greenspan predicted stock market bubble after the Asian financial crisis of 1998.  he proactively eased reserve requirements and lowered the discount rate for 18 straight months to avert a liquidity crisis.

3- Salvaging the post 9-11 economy.  Greenspan, again, saw the need for liquidity in the economy after 9-11.  He knew that the GWOT would be costly and that the confidence in the American economy  was paramount to world peace.  He ABSOLUTELY argeted a low fed funds rate in order to restore confidence.  He recognized a glutof capital in the world as net consumers were becoming net producers.  Greenspan attracted those funds to the US from potentially skeptic trading partners (Red China, India, Russia, and the newly formed EC) by injecting liquidity into the system.  Funds that easily could have gone to renegade trading partners and rising money centers (Can you imagine France or Madrid as the world money center?  Two countries that are exteremely friendly to radical terrorist groups).

Sometimes, life is about more than just you ( a topic we Americans fail to comprehend).  Alan Greenspan was a banking genius who balanced the need for domestic growth with the importance of our country's banking susytem as a safe haven for int'l capital.  A lesser Chairman would have focused on a "planned" economy neglecting the geopolitical needs of the GWOT.

I won't bash you for being critical just naive when it comes to the world of money and banking.  Greenspan will go down as one of true heroes of the "American Century".  It was never his job to create an orderly, planned economy like the one they had in Moscow or have today in Beijing.

 

Oct 27, 2006 11:36 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

I almost forgot.  Alan Greenspan dealt with the October, 1987 stock market crash just two months after his appointment. The world's most celebrated stock market lost 20% of its equity in two trading days (the majority of it on Monday, October 19, 1987).

Manipulator?  Greenspan?  Thank God! 

Oct 27, 2006 11:41 AM
Noel Padilla
J. Luis Properties, Inc. - Kendall, FL
CDPE

Brian I'm afraid that our October 1987 maybe around the corner. Take this for what its worth: Begining last year these hybrid loans started wreaking their havoc. The ballon payments and ARM's started maturing and ajusting respectively. The only problem was that the fed had been inching up rates so we started seeing huge increases in monthly payments thus affordability problems. People couldn't refi any more to get a better rate because they were non-existent. I read an article about that time in the USA Today that entires blocks of neighborhoods in Philidelphia were being forclosed literally. The banks couldn't even start foreclosure proceedings because they didn't have enough employees to process the paperwork.

This year foreclosure are up at record paces. I read somewhere in one of the blogs that the powers that be have legislated to do away with stated income loans and the only way most would qualify is with a fully amortized product. This means its even harder to refi loans that desperatley need to refi, go figure.

Which brings me to October 1987, these foreclosures cause three things more inventory, discounted property (from disrepair/week market) and less qualified buyers (foreclosure disqualify most form getting a mortgage). This in turn undoubtedly will push prices even lowwer, and judging from the unprecidented run in real estate the last five years coupled with the exotic mortgages these homes carry will push this market into the tank.

This is all speculation and the fed could sink rates and try to avoid this but I don't think he will be able to. They are too many forces with too much momentum working against him. The powers that be could always bail out the industry but I doubt it, too much money to be made by the top 10%.

Of course I could be wrong, God I hope I'm wrong!

Oct 27, 2006 02:18 PM
Noel Padilla
J. Luis Properties, Inc. - Kendall, FL
CDPE

I'm not critizing Greenspan, I think he's a genious also. I criticize our system and those who manipulate it for their own gain without caring about the affects it has on others. So I guess we pretty much agree. Don't get me wrong I wouldn't trade it for anything else.....that's the beauty of it we can all actually have an opinion it without worrying about a knock on our doors. 

Oct 27, 2006 02:26 PM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Noel, We will definitely agree about the ARM resets. 

I wrote a blog about the effect of the ARM resets about a month ago.

The interesting thing is this.  In a free market, there will always be opportunists.  We actually count on them to inject liquidity into a system.  We count on the people who "capitalize" (I won't use manipulate because it's an inaccuarte portrayal) on changes in the economy.  These "capitalists', while they seem somewhat self-centered to the masses, are actually the ones who "save' the economy from collapse.  Now that may seem hard to grasp because there has been rampant fraud in the real estate markets but it is true.

The "capitalists' will save the real estate market from complete collapse when the foreclosures hit next year.  I think it's a safe bet that homeownership will revert to the mean of 50% of the population over the next five years from its present 50%.  Why is that?  The prices are just too darn high!  20% of the population can't afford their properties!

We agree on the short-term prognosis for housing in the US.  In fact, I am banking on it...literally.  I intend to be one of those "capitalists" who "save" the economy. 

Noel, I think you'd enjoy www.PIMCO.com.  Click on US and read the "Housing report" 

Oct 27, 2006 05:33 PM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Gosh, we're both loquacious tonight.  The stated income loans were absolutely misabused for out an out fraud.  They need to be replaced by "no income qualifiers" and full doc.  The people who will be harmed had no business buying a home in the first place.

It may sound col-hearted BUT...if you really can't afford the price of admission...don't dance. 

Oct 27, 2006 05:36 PM
Noel Padilla
J. Luis Properties, Inc. - Kendall, FL
CDPE
Brian I can’t believe I ignored that aspect of the economy. Thanks for pointing that out, it will definitely make me sleep better at night (And I’m not being sarcastic)! That’s probably one of the main reasons we have avoided bad recession periods. The overall better understanding of our economy by the masses, have kept recessions in check. With the globalization of our economy, there will be no shortage of ‘capitalist’ scooping up good investments in our country. As we all know, the Sheiks are always ready, willing and able to sink there cash in the US. Thanks for the education Brian. Its people like you I count on to help me gain knowledge and get through those tough listing appointments……while I’m at it, kudos to all of you for your help!  Noel
Oct 27, 2006 11:08 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

wow..... of course I coming late the party here.

Noel, great post with some good information. Unfortunately, Mr. Brian Brady beat me to some points at hand.

I think two things have to be pointed out here. I agree with Brian for the most part. Greenspan did save us at times. And think we are missing part of the problem from the past. Our administration. We have to look at the Clinton era and realize that he had a large part in what has happened. Politics has always been a part of economics. That is why you appoint someone like Alan Greenspan to handle that side of things. But the President and his cabinet also influence the market by certain decidions that they make. And not to bring politics into this, but history has shown that the Republicans are known more for helping the business.

You also mentioned in one of your comments that you can see that October of 1987 is around the corner in regards the stock market. Well, the basic math that usually happens is if rates are down, the stock market is not so good. Rates go up, the stock market is better. The reason real estate was your best investment in the last 4 years was because of houses appreciating at record levels.

Overall, this could all be debated because a lot of this will be opinion. But we can go back and look at certain facts also. But the biggest thing is that Alan Greenspan can't be held responsible for all that has happened. Again, Brian made some great points to what he has done for us. The general public has to go back and look at the hard facts of what OUR government has done. Greenspan was just a part of this. There were many other decisions made that has affected our economy to where it is now.

Oct 28, 2006 12:58 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Oh no, Noel.  It looks like the Belonger/Brady team found you.  Actually, that's a good thing.  

Noel, I'm completely biased because I did my senior thesis on why Greenspan needed to continue the "revolutionary supply-side policies of Paul Volcker" back in 1989.  I had no idea that he would become an even more important Fed Chairman with even more challenges.

Oct 28, 2006 07:08 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590
How does this post not have 100 comments?
Oct 28, 2006 07:09 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Tag me...Brian...tag me... okay...  I am in...  lol

Noel...don't get me wrong. You did bring up a good topic. But I don't think Greenspan is to blame. Sure, he had some faults... but where we are at this point in time is not because of him.

I truly believe you need to go to the other side of politics. Meaning.... from top to middle. The President, Congress...etc etc. They can make the changes in regards to how loans are done... what could be stopped. PREDATORY LENDING.... this is more of a cause than what Greenspan had to do and what he had to deal with.

And like Brian said...there should be more comments about this.

Oct 28, 2006 07:17 AM
Noel Padilla
J. Luis Properties, Inc. - Kendall, FL
CDPE
Its All Alan Greenspan's Fault........Alan Greenspan. Watching him manipulate interest rates to curb inflation and actually fuel our real estate boom taught me a valuable lesson. That's it those are the only two references I make to AG. I didn't think I was blaming AG, I was more trying to put blame on congress and the media. Maybe I should been a little clearer, then again I wouldn't have got so much attention.....AG's policies are a lot more interesting subject to talk about and debate than those page chasing whoremongers on capitol hill.
Oct 28, 2006 08:30 AM
Noel Padilla
J. Luis Properties, Inc. - Kendall, FL
CDPE
Actually 100 comments was my goal. Some good dialogue here, really deep stuff.....there's always a lesson to be learned for those with an open mind at AR.
Oct 28, 2006 08:40 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
Noel..... here is something that I wrote. A Predatory Lending Bill that is SLATED for 2007 & what does this mean........  I think this is where we need to begin. I think this is half of the reason for bad mortgages in a market that might be so so.. There are a few contributing factors.
Oct 28, 2006 02:32 PM
Jeff Corbett
BoomTown - Charleston, SC

Greenspan saw a recession staring his tenure straight in the face...after the dot-bomb exploded, the economy needed another sector to start pulling its weight and pick up the major stock markets 'correction'. 

During a time of economic boom, interest rates are higher, mortgage and revolving, across the board.  So, why not gradually floor the cost to obtain a home by slashing interest costs...to spur the greatest housing boom we have ever seen.  It kept our overall economy out of a recession. 

So we cycle back, the Dow is closing at all time high's, the economy is strong by traditional indicators, and so the housing market MUST cool.  It is time for a correction...all part of the cycle.

Noel your post content is right on...but sticking it to Greenspan seems a little harsh.  As I stated earlier, it is a matter of the 90/10 rule. 

Only 10% of the people realize that they should be looking to acquire property now and into the next 6-9 months. With interest rates still at (historically) very affordable levels, the investors who got out of stock and into property in 98-99, have made enough money to afford more property, at a now discounted price. 

Of the other 90%, some will continue to afford the rate adjustments due to an advantageous refi, increased or well budgeted income, others will lose their homes.  How the 90% splits between the two subgroups is moving toward the latter group in larger and larger %'s.  This will cause a price recession, although 'correction' is probably a better term. 

Someone will buy the foreclosed home at a discount and make a short and/or long term profit...due to their recognition of a good deal and how economic cycles work...the 10%'ers.

Oct 28, 2006 03:51 PM