When Did We Begin To Know?

Several times recently, I have had conversations with friends, family and clientele.  And often, the question arises, "Myrl, when did you begin to know we were trouble with the housing market?"

I remember the first time the question came up, my mind wandered back to the summer of 2005, when I was out viewing properties with a buyer, and prices seemed so artificially high.  Shortly thereafter, I began to wonder more about the question presented in a News 10 piece, "Is California's Housing Bubble About to Burst?"  Elizabeth Bishop, the author of the article, nearly mirrored my precise thoughts. Yes, prices seemed fairly outrageous - yet the bubble seemed quite resilient to every pinprick being sent its way.  Jobs were plentiful in our area, and unemployment in California and nationally, remained low.  The economy was continuing to sustain growth, and our housing inventory that summer was exceedingly low, while demand was high.

In the marketplace, we began learning some buyers were purchasing with subprime loans, with little or no documentation.  However, most of my clients were affluent, which were selling and pulling equities from smaller homes and moving up.  Others had great jobs.  They easily qualified for home mortgages on the merits of their income and assets.

I suspect very few real estate professionals could have conjured the nightmare that was brewing in the mortgage lending business, which would eventually invade Wall Street and the Banking industry.  There was the packaging of mortgages into derivatives, with each package creator putting their fees on top of the product and marketing to investors.  There was so much money to be made in the mortgage industry, that originating loans for the purpose of a home buying experience wasn't enough for financial gurus. 

When more home loans became toxic, they began to combine packaging the risky loans with the good mortgages, and a lethal soup swirled in the credit default swap world. 

Question: Who among you had even heard of a credit default swap, prior to a year ago?  Credit default swaps dwelled in a murky world of packaging mostly toxic mortgages, and selling them to financial investors, Insurance companies, etc.

Credit default swaps became the vehicle which facilitated $400 billion of bad mortgages, to get pumped up on steroids, and cause an estimated $63 TRILLION dollar global meltdown.  Wall Street had literally turned the mortgage derivatives and credit default swaps market into a global Pokémon card mall.

Back to the alternative world where reality often gets into mischief - While focusing on the big picture of our current economic crisis, I believe there has been a concerted effort to present smoke and mirrors in hopes of deflecting the larger share of blame onto unsophisticated buyers, who were encouraged in their eagerness to purchase homes they could ill afford, and really weren't qualified for.  They were often lured into risky mortgages, with teaser introductory interest rates, which became disastrous household tragedies, when mortgages began to reset and payments in some instances, nearly doubled.

I think that our current real estate crisis reinforces the tenet that we cannot make informed decisions, when we are dwelling in a vacuum of information.  As real estate professionals, we perform our work, based on what we know, or have education and knowledge of - We cannot know, what we cannot know!

We hope those charged with certain responsibilities of oversight to insure folks can make decisions based on an arena of transparency, disclosure, and necessary diligence are in place and functioning properly. 

We have learned there are sometimes unseen alternative realities, which often dwell beside us, of which we are totally unaware.

We have heard a great deal about a number of first time homebuyers, who represents the tip of the melting iceberg, caused by certain subprime lending practices.  But we also hear tragedies, from those doing everything right.  An example is the couple that purchased a moderately upscale home after saving 25% down, at the height of the market in Summer 2005. 

Because Mr. Home Buyer's employer transferred him to the East Coast, from our area, they placed the home on the market for sale a year ago.  Since then, they have essentially chased the market downward in the hopes of pricing the house to sell.  They are currently upside down in mortgage balance versus home value.  They are reluctant to walk away.  Their lender won't renegotiate their loan, because they are not behind in payments.  These factors are affecting regular folks, who did everything right!  What choices do they now have? (1) They could quit the job on the East Coast, and move back to our area.  However, the couple is in their 60s, and finding a different job with the income, of the present job may prove quite difficult. (2) They could hand over the keys to the bank, but they aren't of the mindset, which can accept that as an option. (3) They can continue to make payments on their now upside down mortgage.

If you were in these folk's shoes, what would you do?