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9 things to learn from this real estate bubble and collapse

By Marc Rasmussen

Real Estate Agent with DWELL Real Estate

January 23, 2009 10:41 PM

1. Real estate prices can go down BIG.

I've been selling real estate for about 9 years now and throughout that time I have seen a flat market as well as the huge run up and now the collapse of prices. I think everyone knew that real estate prices can decline but I don't think too many people expected such huge declines. In some areas of Sarasota I have seen 50-60% declines in price.

2. Everyone can be greedy

People from all walks of life got caught up in the greed of the buying frenzy of 2003, 2004 and 2005. The young, old, middle aged, retired, working, Realtors, lenders, teachers, white collar, blue collar, educated, experienced, novice, smart, dumb, rich and poor people were buying real estate for the sole intent of making money.

3. Pay attention to your gut

I remember going to a restaurant with my wife in 2004 and 2005 and overhearing people at the neighboring tables about how they purchased a pre-construction condo or single family home as an "investment" to flip in 12 months. Everyone was a real estate genius back then. My gut was telling me that there was a problem on the horizon.

4. Be careful being a sheep

You can make a good return on your money by being a contrarian. Sometimes it is good to go against the grain. When everyone was buying in 2004 and 2005 I should have been selling all of my properties. Perhaps I should be buying in 2009 when the herd is selling.....hmmm.

5. Real estate is a long term investment

During the frenzy people expected huge returns on their real estate investments. If they didn't feel like they were not going to make 50% to 100% on their money they then were not interested. If you are looking to buy real estate be in it for the long haul.

6. Banks can be stupid

Many people put most of the blame for the real estate collapse on lenders and their loose lending guidelines. They definitely deserve some blame. However, during the frenzy can you imagine these banks saying to their shareholders, "We know there is huge demand for money right now but we are going to tighten our lending guidelines to make it harder for people to borrow and ultimately have fewer defaults." It may have been the wise thing to do but shareholders would have probably been irate. Banks were under tremendous pressure to write these mortgages during the boom times. Regardless of whether it was the right thing to do or not.

7. It takes longer to find a bottom than a top

Rising market: house 1 sells for $350,000 in January 2004, house 2 sells for $360,000 and house 3 sells for $365,000 in February 2004. In March 2004 a seller lists his home for $380,000 based off of the previous 3 sales.

Declining market: house 1 sells for $280,000 in March of 2007, house 2 sells for $270,000 in April 2007 and house 3 sells for $265,000 in May 2007. It is very hard for a seller to list his home for $260,000 in June 2007 based off the previous 3 sales. That may be where the price needs to be but sellers are reluctant to do that.

It takes time for sellers to accept a declining market. Thus a market drop takes longer than a market rise.

8. Real estate prices can't outstrip incomes for long

The price of a home needs to be relatives to incomes. It is that simple. In New York City where incomes are large prices can be large. In the backwoods of Georgia where incomes are low real estate prices are low. Deviations can and have occured but they come back to normal with enough time.

9. The real estate boom and bust affects everyone

Even if you did not participate in the real estate market fiasco you are still affected by it. The recession and government bail outs are a result of this real estate collapse.

I would love to hear what you have learned from this real estate cycle.

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Allison Stewart

St.Cloud Homes - Saint Cloud, FL

St. Cloud Fl Realtor, Osceola County Real Estate 407-616-9904

Hi Marc

It is a cycle. Even back in 1929 housing sales were reported to be up 6% following the crash. Long term is the key and buying when the market is down is the way to insure long term captial investment realization.

Our economy is price driven. There is also a supply and demand dynamic in effect. Currently we have oversupply. The benefit to consumers in a oversupply market is a larger selection of inventory from which they can choose. This was not he case in 2004-2005 when demand was higher than supply.

The good news is over time the market will improve but it will not be immediate nor will it be as dramatic as it was in 2006- we are not at the end of this by a long shot-but homes sales ARE being achieved by people with ebnough foresight to know that prices are inching up be it ever so slowly.

So good luck and sell well!

Jan 23, 2009 10:58 PM

Janice Roosevelt

Keller Williams Brandywine Valley - West Chester, PA

OICP ABR, ePRO,Ecobroker

I especially liked the sheep point. It's as Warren Buffet saids, be greedy when everyone else is fearful, be fearful when everyone else is greedy

Jan 23, 2009 11:00 PM

Bruce & Mary Smith

Savannah Lakes Homes - McCormick, SC

REALTORS, Savannah Lakes Village McCormick SC

Hi Marc! Thanks for putting our thoughts into words. I was an educator for many years and always said that anyone who had gone to school thought they knew enough about education to run a school or teach a class. In the same way, often the public does not believe us when we give them comps and tell them what the information means in regards to the price of their home in a certain market. They think that because they live in a house, they know more than a REALTOR. Good info!

Jan 23, 2009 11:10 PM

Michael Setunsky

Woodbridge, VA

Your Commercial Real Estate Link to Northern VA

Marc, you're right on target. The real estate market is cyclical and has always turned around in the past. I'm sure it will turn around in the future. We can look at this period of time as a correction in the market. Good Points!

Jan 23, 2009 11:23 PM

Martin Dorgan

Prudential Indiana Realty - Columbus, IN

Most Real Estate cycles come around every 6 to 9 years, the latest cycle has been nearly a 15 year upswing, sure its had a few minor dips, but overall its been constantly climbing. Just match it to the rise in personal debt over the same time frame. Problem is, and will always be, Greed breeds Contempt! So the banks and mortgage companies and even Realtors, all fell into the same trap!

When the banks got more money, and the mortgage companies got more money, then wall street got more money, and the Realtors got more money all because greed had taken over because of the contempt for what each saw going on. Big Mistake!

Each group is and was Guilty! Whether they chose to see their guilt or not, and just continued to go with the flow.

For Realtor's, and agents, it was more tempting to ignore the scenario because of the paycheck at their closing. Rather than lose the sale, and maintain their Ethical Responsibility to "Inform" their client of how unwise it was to over extend themselves, maximize their home purchase, or simply tell them what would and could happen with an "ARM". And that is only one example.

The 2005 through 2007, "ARM" mortgage loans are set to re-adjust, that is where you will see the next wave of projected Foreclosures, estimated to be between 1.5 and 2 Million more homes. But do you really think? That our economy and the rising unemployment is going to help, not likely.

Here is a suggestion for the mortgage companies and banks! When a home owner is about to be foreclosed on. Renegotiate the mortgage! To a point that is mutually adequate to keep the home owner in the property. Because that is the ultimate goal. If the home owner and the mortgage can't be initially re-negotiated, go to plan B. Plan B, let the homeowner continue to live on the premises in a rental scenario, and possibly give them a chance to repurchase the home, later for a set negotiated price, using some of the rent payment as equity. Plan C, If the mortgage company or the bank can't negotiate with the home owner, simply rent out the property to other tenants. That keeps some of the finacial burden on the bank or mortgage company lightened, and being payed. But it also maintains the property value somewhat, and keeps the neighborhood market values somewhat intact. If they evict the home owner or if they simply walk away, the home sits vacant, and creates multiple costly problems.

What have I learned, more than I care to know, about the past government of this country, about the Greed in the various sectors, about the lack of vision some politicians have, about the appathy to correct the issue logically. Hopefully our new government can correct this issue.

My real wish would be to sit down and talk with Barack for a few hours, I have some great ideas that are grass roots and beneficial to local regional, state, and National benefit, and my wish for the future would be simple! Politicians in all forms of government, "Open Your Eyes!" See the big picture! When you want to try to correct something Do NOT! Try to slide in bull**** into your proposed bill. Remember you are governing FOR THE PEOPLE! not the guys, who you have your hand in their pockets.

Jan 23, 2009 11:47 PM

Charles Stallions

Charles Stallions Real Estate Services - Pensacola, FL

850-476-4494 - Pensacola, Pace or Gulf Breeze, Fl.

I love your points and they should be well taken. Your point on the bakers is probably true about any share holder run company and is why our Auto giants cannot compete with foreign run companies.

Jan 24, 2009 12:15 AM

Toronto Condo

seoer - Alameda, CA

most realistic acres cycles become around every 6 to 9 age,the latest cycle has been nearly a 15 gathering upswing,reliable its had a few samall dips,but oerall its been constantly ascension...Condominiums Toronto

Jan 24, 2009 12:23 AM

Mark MacKenzie

Phoenix, AZ

I think what a lot of people are going to be surprised by is how long it will take to find a bottom and then how long it will take for those prices to reach their high water mark again.

Jan 24, 2009 12:34 AM

Steve Zarry

House Buying Now - Austin, TX

Austin Central Texas, Real Estate

Good list! Banks had bad lending guidelines and the housing inventory was too much for the demand. Then more inventory arrived on the market, because of foreclosures. As a result, banks stopped lending money to "anyone" which produced even more inventory. Reduced inventory and better lending practices will help fuel the housing market recovery.

Jan 24, 2009 12:48 AM

Anonymous

Ernest O'Dell

I think Martin Dorgan gave several cogent points in his reply.

But, in looking for places to lay blame, yes -- perhaps -- blame can be assigned as he noted. But where did this all begin?

Mr. Dorgan noted "...the lack of vision some politicians have" and "...the apathy to correct the issue logically" and he's right. But I would take this one step further.

There were bills passed in previous administrations which required banks to loan money to people for housing to put Americans into the proverbial "dream." Later, the debacle started 30 some years ago was worsened when penalties were exacted upon banks and mortgage companies if they didn't "play along" with the government's game. But the whole premise of loaning someone money who had no ability to pay it back was the basic flaw in logic. I can guarantee you, if I were to try that, and I couldn't pay it back, the bank would laugh me out of town -- after they throw me out the front door.

I -- as well as anyone else -- must learn to live within my means. And if I flub it up, I shouldn't expect someone else to come in and fix my mess.

It's the little "pork" earmarks, and major legislation, that is causing the problem because politicians, in general, are not the brightest bulbs in the value pack. Most of them are lawyers, and I don't know of any who have ever worked in the real estate industry.

And, as noted by Bruce & Mary Smith "...They think that because they live in a house, they know more than a REALTOR" can not only be applied to the home buyers, but also to the politicians as well. Just because I bought and own a Mercedes and Bentley doesn't mean I know how to work on them. I think the same logic could apply to Bruce and Mary's statement.

When these elected officials quit trying to slide the bull**** past us and into their proposed bill, maybe we will quit firing them and electing someone else.

What? We haven't done that yet?

Remember: they work for us... the "We the People" in that all too famous clause. They don't work for Fannie Mae and Freddie Mac.

Perhaps a little prison time for some of these vulture would keep their hands in their own pockets and out of yours and mine.

Good luck!

Ernest O'Dell - Guerrilla Real Estate Marketing

Jan 24, 2009 04:45 AM

#10

Louis Cammarosano

Smaulgld LLC - Hampton, NH

Smaulgld

"real estate prices can't outstrip prices for long"

Correct the only way they were able to do so was by easy interest only credit.