David B. Manley, President, Gold Coast Inspections, Coral Springs, Florida
Home Values Plummet, Who’s To Blame?
If you turn on the news, there is a blitz of blistering comments condemning the lending industry for the current housing crisis. There’s an epidemic of foreclosures and spiraling home prices. Thousands of homes within the foreclosure process daily with no end in sight. The so-called experts, whom are an executive from the NAR, a real estate agent, lender or someone who’s written a book of flips, reporting better news is just around the corner. This is a bit hard to believe (at least in our market) considering there is a 4 to 5 year housing inventory with more on the horizon. But what we really need to ask ourselves is “How did this happen and who’s to blame?”
I’m not going to pretend to be a road scholar and offer my infinite wisdom on global or national economics. We live in a today, in our own backyard society and that is how I am going to offer this opinion.
Well, for those whom drink the Kool-Aid, it really isn’t just the lender’s fault. There is plenty of blame to go around. So in efforts of cutting through the industry friendly outlooks and all the other “kick the tires on this one” sales pitches, I thought I would share some other views or cruel reality on the issues we face today.
Not Another 911 Soundbyte!
The scary events of 911 nudged the boulder off the hill. It seemed like minutes after the Twin Towers fell our 401 k’s sank faster than the Titanic and President Bush smiled and told us to go shopping. We were told not to fear traveling and go to Disney as we listened to graphic stories of high-jackers taking down planes with picnic utensils. This was the critical moment when consumer confidence started to crumble.
As the market started to tank, loan rates dropped and so did credit score requirements and minimum down payments. Let’s face it, lenders make money off of loans and when real estate transactions slow, the immediate knee jerk is to open the gates for more volume. Hence the immediate push of aggressive loan programs such as paperless, no money down, no income qualifiers, zero interest, ARM’s, etc. Everyone was banking (pardon the pun) on the market getting better and coming out the other side as a winner.
Share The Dream
Families finally get their shot at the American Dream, something reminiscent of the 50’s with exception of a few tiny concerns down the road. Intro rates of 4% converting to 11%, the interest only program shooting from 3.5% to 13% with additional principle. These are all factors that can take a $1,200 payment to $3,000 overnight. And if that wasn’t enough, our elected officials in Washington D.C. approved legislation granting credit card companies the ability to charge up to 30% interest without any legitimate reason. Did I mention investors putting down payments on first phase homes at full price? Oh, but not just one… three and four at a time.
And The Wind And Rain Came Down From The Heavens
A series of hurricanes that Noah couldn’t have predicted hit us like a knock-out punch in a heavy weight fight. Now we have massive property damage adding to the beginning stages of a slowing housing market. Think about this; a slowing market equals a gradual increase of inventory…right? Then property damage takes inventory off the market and delays additional inventory from normal attrition. Follow me so far? Then the influx of the future inventory of homeowners wanting to leave the market because of various reasons: job transfer, retiring to the Carolina’s, Hurricane Fear Syndrome or a sick Aunt. Then “BAMM” all of these properties hit the market within a relatively short timeframe and needless to say, there is more inventory than the market can handle. But wait, there’s more.
Most of us have homeowner insurance but have failed to actually read the policy. Well, it’s not that we haven’t…it just made us cross-eyed trying. I read mine four times, sent it to my attorney and finally gave up. What most didn’t realize were the multiple deductibles, limitations and exclusions. As the “happy-go-lucky” homeowners that we are, we just assumed that we were covered and XYZ Insurance Company was going to greet us with a smile, fork over a check and rub our bellies to soothe our discomfort.
While FEMA was putting the blue tarp on your roof, you had your insurance agent on one phone and the eighth roofer on the other…realizing that this was not going to be as simple as you thought. At the end of the day, you find out that you have a $1500 standard deductible, a 2% or $8,000 hurricane deductible and no code compliance coverage. What this meant was the $40,000 roof that had 30% damage (and replacement is mandated because Florida Building Code requires a full replacement if the damage exceeds 25%) was going to be partially covered but now was to cost you $30,000 once everything was said and done.
Is anyone still wondering why there were so many tarps, two years after Hurricane Wilma? Let’s not forget those whom where wiped out by Katrina and insurance companies disputed flood coverage vs. windstorm damage that to this day, have left folks homeless.
I’m not sure about you but I don’t think many average, middle-income families have an extra $30,000-$40,000 tucked under the mattress unless they liquidate little Johnny’s college fund. By the way, I didn’t mention other damages like windows, fences, screen enclosures or the family mini van. The damage from these storms took an enormous amount of cash from homeowners and put it in to the hands of a few.
The storm passes and restoration starts. As the checks start flying out of the insurance companies like egg rolls at a Chinese Buffet, the company executives realize they’re in deep water. Homeowners receive their insurance renewal notices and their rates have shot from $2,800 a year to $7,000. To add insult to injury, the previous year’s premium had been escrowed and a very large check now has to be written to the insurance company to continue coverage. You don’t have a choice in the matter because your lender requires you to have coverage. How’s the bank account now?
Was Tallahassee Asleep At The Wheel?
It’s easy to blame our officials up north for our grief. But there is the question as to whether this could have been foreseen. Gov. Crist was seen on the news, praising residents for their resilience as he courted special interest groups (the insurance lobby). He made speech after speech about how he was going to help the Florida homeowner through this crisis. There was an enormous amount of time wasted before he actually put a temporary halt on insurance premium increases. Unfortunately, this happened after insurance companies took a 100%-300% increase.
Now those that are in the insurance industry can stomp their feet and squawk about risk, loss and blah, blah, blah. But it’s funny when the companies are making money it's privatized and when there’s losses it’s socialized. The insurance industry has made a ton of money off of Florida homeowners and there has to be an assumed risk on both sides. I didn’t see any share holders giving their dividends back or agents taking a lesser commission in prosperous years past. Instead, let’s jack up premiums to “get ahead of the perfect storm.”
Plenty To Go Around
Don’t think for a minute that we have come to the end of those whom had their hands in our pockets. You may have a homestead exemption, but until recently that didn’t limit the county and municipalities from getting their share. Year after year, during this crisis, we’ve witnessed double digit increases in our taxes while our city officials spent time at luxurious executive retreats and liquid lunches on the taxpayer dime.
A staggering market we are in. Companies laying off, jobs shipped oversees, U.S. farmers getting paid not to grow, $5.50 for a gallon of milk, gasoline prices at an all-time high, $10 billion a month in Iraq and the constant borage of unethical behavior in Washington is, with out a doubt, fueling the fire in our plummeting housing market.
Pick A Card, Any Card
No so fast, just when the lenders thought I was going to let them off. Let’s be honest about some of the loans out there. I am hoping that there really is a judgment day because for some, there is going to be hell to pay.
The bottom line is that there were a boat load of bad loans. Most because shifty loan brokers knew their loans were going to be packaged and sold off to major banks. These so-called loan professionals took advantages everywhere they existed and I sincerely hope there are more criminal indictments in the near future. Knowingly falsifying docs and not disclosing rate adjustments is just wrong and there is no defense. A business philosophy consisting of “How can we make this work,” is much different than “Is it going to work.”
At the very least, buyers should have been well informed as to what that payment was going be once the intro rate was up and based on their income and debt, whether they would be able to make that monthly stroke. This is even more important in the lower income bracket where most are not the best educated and simple math can seem foreign. People’s lives were crumbled and we are all paying a heavy price.
Send Them The Keys
Getting back to the investors that decided to buy properties three and four at a time, it was actually cost effective to walk away from their 5% deposit rather than follow through with the transaction. There is a laundry list of them that stood to loose $80,000-$100,000+ per property if they had closed. So, they just simply walked away. Now those same properties are selling in upwards of $200,000 less than those properties that initially sold leaving homeowners within sought-after communities upside down.
Then there is the buyer who bought their home at the peak of the market, realizing that their gorgeous country club estate and “great” loan program was about to kick them in the back-side. Doing the simple math told them that it was going to take at least 8-10 years just to break even on the purchase. So what would any self-absorbed capitalist do? Send the keys to the lender. I kid you not! Companies such as Bank of America, WAMU, Countrywide, Wells Fargo, etc. were about speechless when envelopes with keys in them started showing up in lieu of a house payment.
But these weren’t the only individuals that gave up the keys to the farm. The hurricane survivors mentioned earlier, it was just too much. Bad loans, insurance and tax increases, extensive repairs, $70 to fill the gas tank and a job loss took some who actually tried desperately to save their home.
In The End
Americans are a bit smarter than people think. When someone gets on the television and says the poor economy is something in our head and we’re just a bunch of whiners, I have to say that it is not a thing of my imagination that the saying, “Most are only a few paychecks away from being homeless” has actually become a reality. The current housing market has been created from a series of events that were and were not within our control.
At the very least, we all have to take a very deep breath, tighten our belts and keep pushing forward…with a smile. Get up in the morning and ask ourselves what we are going to do to help today.
Are we going to sell that home to a client that we know he can’t afford?
Are we going to sign docs on a loan that will end up ruining a family’s life?
Are we going to overlook issues so we’re not labeled a “deal breaker?”
Can we encourage our peers to bring a consistent level of ethics to the table?
I own and operate a successful inspection company in South Florida and the one thing that I have always kept in mind is, “It’s not about that one deal. It’s about every deal, every transaction, every client, every day.”
Perhaps that is why my company has performed over 4,000 inspections and is having a record year…just maybe.