From Boom To Bust

The market conditions that led to the current real estate crisis are the result of pro-longed historically low interest rates, lax mortgage guidelines that were bent, and even broken in some cases, and the philosophy that anyone can own a home.

It was never easier for consumers to purchase real estate than between 2002 - 2006. Many unqualified individuals, who couldn't get a car loan, were able to buy real estate with little to no effort and 0 money down. Theoretically, if interest rates kept dropping, this would not have been a problem, because the home owner could just list and sell or refinance if they ran into any trouble. Buyers felt invincible because many were able to buy and hold for 6 -12 months and experienced 20% -50% increases in equity. But as rates climbed, the equity in these homes began to diminish, which meant that these unqualified buyers with no money in the bank were stuck with homes and mortgages that they couldn't afford.

The end result of this boom and the bust that followed was historically high foreclosure rates, difficulty for qualified buyers to attain a decent mortgage and a declining real estate market that is one of the factors contributing the current recession.

All of this leads me to question why unqualified buyers were permitted to purchase real estate. Simply put, it was greed. Many buyers were given bogus loans that kept their payments low for a few years while the owner was only paying interest. When these loans adjusted the owners were left holding a mortgage note that they could not refinance and a home that now had negative equity.

I hope the lending industry learned their lesson. If a buyer doesn't have money in the bank, a minimum of a10% down payment, and is using more than 30% of their salary to pay a conventional mortgage, they should not be permitted to purchase real estate. Only time will tell if these lessons were learned. 20-30 years from now, once the industry recovers and rates have risen and come down again and the leadership has changed, could we be having the same conversation? Will history repeat itself?  It will be interesting to see what the future has in store.