Will It Happen Again? By Bill Roberts

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Services for Real Estate Pros with Brooks and Dunphy Real Estate DRE 00527512

Will it happen again, or should I say,  “Will they do it again?”

It worked out so well, so, of course they will do it again.

What am I talking about? Just one of the greatest transfers of wealth in our history.

And that is what the real estate crash of ’07-’08 was. When all was said and done millions of people lost everything and a few Wall Street types ended up with it.

If you did something that gave you huge returns beyond imagination, wouldn’t you do it again if you could?

Of course!

And if nobody “knew” what you did, it would be easy to do it again. Because no one would be looking for it or expecting it.

So how did they do it?

They created a “bull market” in real estate by having a prolonged period of time with very low interest rates. Speculators “discovered” that they could buy something and sell it a few months later for a great profit. How did they know that? Well, if the speculators bid up the purchase price chasing after a limited supply of houses, the people that just wanted a home would have to pay more.

But the people that just wanted a home didn’t really care about the price they paid, just how much it would cost each month. The lenders were in on it. They kept monthly mortgage costs down by providing negative amortization mortgages, with little or no down payment and very low monthly payments.

Of course the lenders wanted to make money on these loans, so they put in a clause that allowed them to “reset” the interest rate to a more realistic market rate at some point in the future. And of course, the loan would have to become “fully amortized” which meant that the payment would necessarily go up.

But they said, ‘Don’t worry about it. You can re-fi.”

Well, enter The Federal Reserve. They “control” the interest rate that the bank has to pay for their money. See my post Do you know what happened?- For a more detailed description of just what part Alan Greenspan played in this giant shell game.

But here is the really sad part of this story. They are going to try to do it again.

Real Estate prices have been moving up steadily for the last several years. Only low interest rates can make them “affordable,” and “flippers” depend on an ever-increasing real estate market. So, if (and when) interest rates “return” to normal (whatever that means) the real estate market will crash again.

Up ‘til now mortgage rates have remained low, the hedge funds that ended up with most of the foreclosed homes from the last crash want to unload them, and they have been. They can’t maintain their ROI that they need to keep their investors happy. Soon this will come to an end.

We will need to build more houses to keep up with demand.

But, new construction is very expensive due to a tightening labor market and entitlement costs. Builders are only willing to build as long as they can see a profit in it for them. If cost of new construction is too high, then they just won’t build.

So, what is going to happen? The “flippers” will abandon the game, just like last time. Home prices will have to come down if buyers can’t afford the monthly mortgage payment.

Last time, the media played its part. Every day we heard about people that were under water. They owed more than their house was worth. Their variable rate mortgages reset. They couldn’t re-finance.

The “media” kept up the story about how “stupid” it was to keep paying so much  for a house that wasn’t worth what they owed. Regular people walked away from their homes. The situation just kept getting worse.

Eventually, almost everybody was under water. So, even people that could “afford” their mortgages walked away. It was only smart to do so.

Will it happen again? It sure looks like it to me. We have recovered from the last crash, so another one could produce similar results.

And the Fed really wants to continue to raise rates. Maybe not this year, but they will do it. Home prices will have to “adjust” to higher interest rates.

Right now the economy is good. But the media keeps saying that a recession is just around the corner. That can’t be good.

Real Estate Crash

It all adds up to another real estate crash.

And a real estate crash means a major increase in foreclosures.

And if it is like last time a lot of those non-performing mortgages will be sold to the same Wall Street types who cleaned up last time.

We are destined to be a land of renters, not homeowners.

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Please comment. All comments are greatly appreciated.

Bill Roberts

 

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Rainmaker
1,290,986
Wayne and Jean Marie Zuhl
Samsel & Associates - Clark, NJ
The Last Names You'll Ever Need in Real Estate

I don't understand real estate from an economic point of view - I just try to sell homes and make people happy - but you've painted a scenario that will leave many people unable to retire.

Jul 18, 2019 08:19 AM #13
Rainmaker
702,304
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Hi Wayne and Jean Marie Zuhl most people in our generation have already "faced" that inevitability.

Thanks for commenting.

Bill Roberts

Jul 19, 2019 06:38 AM #14
Rainmaker
1,895,973
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning Bill Roberts - as Ron and Alexandra Seigel noted history does tend to repeat itself.  We will see and hopefully we don't have what we had before.

Jul 20, 2019 06:47 AM #15
Rainmaker
704,051
Richard Bazinet /MBA, CRS, ABR
West USA Realty - Scottsdale, AZ
Phoenix Scottsdale. Sellers, Buyers & Relocations

..... well Bill, not so sure about that. We may have a situation where the tail wags the dog. And the narrative by the lack of knowledge of the free talking media heads.... well, you know how this goes... blah, blah, blah BS and more BS, lies and made-up stuff. And this whole thing about the market is getting 'politicized' just in time to prep for the next election - manufactured events. Just to prove a point. The American economy has never been better, historically, and neither has in my state. We re running on all cylinders.

Of course, that pisses-off of a lot of people.... Lets not be fooled.

This old-school thing of history repeats itself is for the birds.

None of the economic indicators favor anything remotely close to that in support of anything like a recession and/or a crash, same with the mortgage industry barriers - yet many in the media are trying to sell us the idea. They want it to happen. Timely, isn't?

Jul 20, 2019 11:03 AM #16
Rainmaker
430,256
Tom Bailey
Margaret Rudd & Associates Inc. - Oak Island, NC

Bill, I think the biggest problem last time was (with government encouragement) lower credit requirements. Candidate Harris has been talking about doing it again! That troubles me more than anything!

Jul 20, 2019 02:10 PM #17
Rainmaker
976,885
Jan Green
Value Added Service, 602-620-2699 - Scottsdale, AZ
HomeSmart Elite Group, REALTOR®, EcoBroker, GREEN

I agree with Richard.  As  a former banker, securities licensed insurance agent, and formerly married to a stockbroker/manager, I agree that a lot of realtors didn't know what they didn't know. 

They had no idea that junk bonds were packaged as A paper, being sold on Wall Street inside mortgages.  They had no idea what they were promoting.  There were so many misinformed others in the market and buyers became ULTRA GREED!   

Joe Q Buyer directed the traffic and became an investor even though he didn't know what he was doing.  It was a royal mess!  I'm thankful not to have participated!  And now, I tell my clients that there are many fail-safes in place that would prohibit the major housing recession, but I DON"T have a crystal ball either.  I don't enourage any sale that isn't needed.  Could I make more money - you bet.  But I also sleep at night!  

Jul 20, 2019 04:21 PM #18
Rainmaker
702,304
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Hi Grant Schneider It isn't just that history repeats itself, but money people (the Wall Street types) want and need volatility (where prices go up and down) to make their profits.

I don't see anything that has changed that.

Little crashes have happened regularly in the real estate market for ever, but nothing like we experienced this last time.

I think this whetted their appitite.

We'll see what happens.

Thanks for chimming in.

Bill Roberts

Jul 21, 2019 07:05 AM #19
Rainmaker
702,304
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Well Richard Bazinet /MBA, CRS, ABR I hope you are right, but I doubt it.

And I think you need to consider the nature of the beast. Wall Street types are very creative when it comes to separating you and me from our money.

Bill Roberts

Jul 21, 2019 07:09 AM #20
Rainmaker
702,304
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Hi Tom Bailey Of all the contributing "factors" of the crash you have touched upon the one thing that really wasn't a contributing factor.

Everybody SHOULD be able to own their own home.

Even in third-world countries people own their own homes - EVEN IF THEY ARE ONLY CARDBOARD SHACKS.

But in our "enlightened" country zoning laws keep many people from owning, creating a permanent RENTER class.

Is that really what you want? Who benefits from that?

 

Bill Roberts

Jul 21, 2019 07:14 AM #21
Rainmaker
702,304
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

OK Jan Green Let's see what they come up with this time. All those "safeguards" are really only a way to keep more people from owning their own home.

Now they are talking about privatizing FANNY AND FREDDIE. What do you think that will cause?

Thanks for commenting. Nice to see you.

Bill Roberts

Jul 21, 2019 07:18 AM #22
Rainmaker
976,885
Jan Green
Value Added Service, 602-620-2699 - Scottsdale, AZ
HomeSmart Elite Group, REALTOR®, EcoBroker, GREEN

Maybe some of those buyers shouldn't own homes if they don't have a good credit, don't qualify for a mortgage.  So many shouldn't have qualified in the hay day!  Privatizing might help with renovation loans. 

 

That's a good question Bill.  I do know that renovation loans charge higher interest rates and fees to add energy efficient features to a mortgage - why?  That only keeps people from using the program.   A year ago I helped  a veteran buy his first home.  I ordered an energy audit, used the audit and life-cycle cost of the features to prove they could add them to the mortgage.  The veteran ended up with a more energy efficient home with sealed ducts, more insulation and sun screens on the south and west facing windows. His energy reduction was more than the cost to add the features to the mortgage.  Pretty cool.  I'd like to help more people use that program but again, the fees and higher interest rate keep folks from doing it. Makes no sense!

Jul 22, 2019 08:26 AM #23
Rainmaker
702,304
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Well Jan Green I personally believe that everybody deserves to own their own home.

I live in San Diego. Not far from Mexico. There, anyone can own their own home, even if it is just a cardboard shack. Many homes there started out that way. They have no mortgages, but they have no zoning prohibitions either.

It used to be that way in our country too.

I believe in freedom. Tyranny takes many forms. Denying home ownership is just another form of tyranny.

Thanks for commenting.

BTW I think everybody should be able to make their homes energy efficient if they can.

Mortgage rules, credit rules, and zoning are our enemies, make no mistake about that.

Bill Roberts

Jul 22, 2019 09:14 AM #24
Rainmaker
164,374
John Henry
John Henry Masterworks Design International, Inc. - Orlando, FL
Residential Architect, Luxury Custom Home Design

Great analysis.  But this go-around does not have any of the previous issues as before: anyone who breathed could get a mortgage, builders were constructing specs out the kazoo, etc.  Yes, interest rates are low but I don't see the massive flipping and blow out with product everywhere.  We have tight inventories and builders can get loans to build specs ahead of demand.  This time around it isn't approaching anywhere NEAR the death throes of the last recession and the signs are just not the same.  I don't understand why the media is cautioning us about a recession.  If so it is a stock market construct, I think, that is due to a constant rise in value with little setback.

Thanks!

Jul 22, 2019 10:19 AM #25
Rainmaker
702,304
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Hi John Henry Yes, the flippers are out there. This time though they are actually "adding value" i.e. re-habbing, but they are dooing their part to push values higher. Right now we are at a tipping point IF INTEREST RATES JUMP UP.

An accurate analysis of the real estate market must include affordibility.

The reason builders aren't building enough to close the gap between supply and demand is because they will only build if they think there is a good chance that they will make a profit.

Like you say, they can get the financing to build,BUT they still hold back. Why?

The "dance" is a little different this time, but the result will be the same. A major transfer of wealth from us to them.

Please read my next post What is Wealth?

I think you will see how these two posts link together.

Thanks for commenting.

Bill Roberts

Jul 22, 2019 11:10 AM #26
Rainmaker
3,194,732
Endre Barath, Jr.
Berkshire Hathaway HomeServices - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Bill, interesting "crying wolf post" I think we are a few years away from your theory, because I can not have my dog get a $1million loan without  a credit check as in "stated income", nor can my cats refinance the house without  income verifications... but don't mind me I suffered more in the last turn down because I had integrity....Endre

Jul 22, 2019 11:20 PM #27
Rainmaker
702,304
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Well, my friend Endre Barath, Jr. many of us suffered as you did.

But I think you need to read ALL of my posts on this subject. Fraud WAS NOT what brought the market down, nor what blew it up.

The BOOM AND BUST was orchestrated by the Federal Reserve.

The real estate market is only a sub-set of the total economy. It does not stand alone. We are at the mercy of what 'THEY" are doing to the money, trade, national sovereign debt, and wars and talk of wars.

They wil;l LET it all come tumbling down when they think they can come out on top. I think that day is fast approaching.

Please read my next post on wealth and money.

I would like to hear your take on it also.

Thanks. Nice seeing you.

Bill Roberts

Jul 23, 2019 06:32 AM #28
Rainmaker
509,296
Mary Hutchison, SRES, ABR
Better Homes and Gardens Real Estate-Kansas City Homes - Kansas City, MO
Experienced Agent in Kansas City Metro area

I don't think any lessons were learned last time...b/c you are right, it's happening again.  I want to buy a small starter house NOW and keep it around for my kids..so they have a place to live if needed one day.  Even if prices go down, wages have not and will not ever again keep up with inflation.

Jul 23, 2019 12:50 PM #29
Rainer
309,930
Linda Metallo DiBenardo
RE/MAX Impact, Lockport, Illinois - Lockport, IL

I hope we are not going to become a nation of renters, but I sure do see signs we are headed in that direction.   I see more apartments being built than starter homes ( don't see any George Baileys out there).    

Also no money down loans, or little money down loans and these will be easy to walk away from if the housing market takes a dive.   Banks, lenders will win again.

 

Jul 23, 2019 01:24 PM #30
Rainmaker
702,304
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Hi Mary Hutchison, SRES, ABR Buy that "starter" house a few miles out of town with a little acreage attached.

Bill Roberts

Jul 24, 2019 10:02 AM #31
Rainmaker
702,304
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Well Linda Metallo DiBenardo your observations are spot on. Yes, they are building a lot of apartments right now. Most of the reits and other commercial property owners are getting out of "retail" properties and are going "all in" on apartments.

The best way to "guarantee" that they have plenty of renters is to make it hard or impossible for them to buy homes.

Bill Roberts

Jul 24, 2019 10:05 AM #32
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