Realty Check

Housing Market Downturn Query: Your Email Replies photo composite

A few days ago I asked why the home builders didn’t see this downturn in the housing market coming. Apparently, the question struck a chord with a lot of you out in the realty trenches:

Larry W. writes:
As a builder myself, I'll admit that I had a very uneasy feeling - here in suburban Chicago - back in the summer of '05. Sales of the $300,000 homes were beginning to slide, and demand was evaporating in the summer heat. For ourselves, we decided to re-tool - to examine the market and go where our competition was not - into lower cost housing product. Our belief was that market demands were shifting, and that by going to a lower cost, more affordable product we would have see better opportunity in the years ahead.

So, Diana, you ask - How are you guys doing? Well, I'd say just OK. When we embarked on the lower cost initiative, we could not foresee the storm clouds gathering in the sub-prime lending arena. Clearly, many first time buyers (our primary market segment today) are in search of mortgages that may fit into the sub-prime category...while there are, of course, many who still qualify for conventional mortgage products. In addition, the rapid rate of building in Florida, Arizona and other locales led to - in the words of our former Fed Chairman - an "overexuberance" of confidence in the housing market. This, coupled with better than average fundamentals in interest rates, unemployment, etc., led many of us to believe that there were no indications that anything would change in the near term. How wrong we all were.

In the meantime, the media channels across the US were touting American's new-found wealth in housing, and had been doing so for years. Magazines were publishing "Top Markets for Appreciation!", as though awarding those who bought (ex; South Florida) for their wisdom in "getting in early". This, in turn, stoked the fires for investors to jump in to an ever greater degree. Few in the media asked if storm clouds were gathering. Even in '05, when things started smelling bad, mainstream media was touting the great housing bonanza continuing unabated across the land.

Hindsight is a wonderful thing, of course. And, in hindsight, we were blinded by continually escalating starts and (apparent) demand. Today, we all ask how it happened. And - to some degree - I do believe that mainstream media exacerbates the news. When markets are good, they are characterized as REALLY good. When they turn south, it leads the evening news every night. Neither one is good, yet the consumer gobbles it all up. Is media the CAUSE? Of course not. A contributor, certainly. We are, in fact, all contributors - are we not? Builders build wildly, reporters report aggressively. I think we all share some responsibility. What do you think?

Karl says:
I am a real estate agent in Phoenix, AZ and I have been in this biz for over 20 years. Far and away, this is the worst market I have ever experienced and I have seen some whoppers let me tell you!! The buyers with whom I have been working of late by all reasonable definitions of that term are not buyers at all - merely "look-ers" and "wait-ers". What's a hardcore, professional real estate agent to do? More importantly, what's a serious seller to do in a market like this - give their house away? Some actually are doing just that - but to the banks and other lenders holding their notes; via deeds in lieu of foreclosure!! It's absolutely pitiful what I have seen lately, Diana.

And the true irony of the whole pathetic situation is the buying public's reluctance to jump into this market and make the best home deals of their lives now that they have the selling public and homebuilders just where they want them - on their knees crying, begging, and pleading their broken hearts out!! My God, it's unbelievable, Diana! Buyers have been moaning and groaning and complaining non-stop in past years about skyrocketing home prices and the greed of sellers and homebuilders, and now that these same sellers and homebuilders are beside themselves with grief and sorrow and are willing to do almost anything to sell their homes, the same buyers are just standing there with their thumbs in their ears like imbeciles waiting for the invisible bottom to hit them in their thick skulls!! It is absolute insanity out there!! The dreams of homeownership have been committed to the funny farm. It is now a field of tears.

From Terri M.:
I'm one of those mortgage brokers that everyone's bashing these days. I predicted this "slump" over a year ago - the stuff I've seen would make your head spin. And my updated prediction? This is only the tip of the iceberg. I think this is going to be something that we've never seen before. Down here in the trenches it's pretty unbelievable. I did my first mortgage in 1980 & it sickens me what this industry has turned into. Yes, there are "bad" brokers; I myself worked with one that tried to get a loan approved for a beautician that stated her income as $8K a month. But the programs that were being offered by these investors...sorry, but they deserve what they're getting now.

Mortgages available to people I wouldn't lend a pencil to! Realtors & builders also had their part in it. Pushing higher priced homes & then strong-arming the loan officers ("if you can't get them done I know another loan officer that can"). And let's not forget the homebuyer. Oh, the stories I could tell you! O.K. 1 prime example: Couple in their early 20's. I had to turn them down for their mortgage because their monthly payments were already at 54% of their GROSS monthly income - & that was not including their proposed house payment! He got mad at me - saying I was the only person that had ever told him no to a credit request.

My response was that's exactly why I had to. His response was he'd find someone else to give him the loan, and he did. Sorry, I can't feel sorry for someone like that when they wind up in foreclosure. It's gotten almost impossible to get a loan approved, between standards being tightened to the level we were at in the 80's, appraisals being shredded, and the public either having bad credit or being over-extended. And it's going to get worse. The ARM's that are scheduled to reset are double what they were last year, and '08 is about the same. I've moved over to doing commercial loans instead...and I'm renting.

And from Paul:
I have been a mortgage loan officer since 1992. Here's what is going on in Chicago. Inventory is increasing everyday. I work in a community that had 12 homes in the 1.1 million and above bracket sell in the last 12 months…there are currently around 60 homes at this price point available in Elmhurst, IL…just five years of inventory. I just laugh when I see all the Wall St gurus who say we are close to a bottom in real estate…close? Again, five years worth of inventory on the high end homes.

The people who are in my industry and are not delusional know we are far from a bottom. I expect home prices to continue to go down. I expect inventory to continue to increase. I expect for housing to go through a real tough time through 2009-2010. I also expect that what is going on with housing will ultimately trigger poor consumer confidence numbers and spillover to the entire economy. I expect a recession to occur…this is not going away anytime soon.

Questions?  Comments?