Part eight of “I Survived Real Estate 2008” picks up with Rick Sharga of RealtyTrac talking about a discussion he had with a man who handled the REO assets at a credit union. The man was wondering if RealtyTrac could supply him a list of who owned the firsts on a list properties. Rick was surprised since he thought that would have been information that was gathered. The man said they did not have the information as little information was gathered on the first mortgage and little was taken on the homebuyer.
Rick says this downturn is different from others in that other downturns were preceded by an economic downturn. RealtyTrac feels this kicked in first quarter of 2006. Unemployment was historically low as were interest rates. Rick sees we saw capitalism at its worst. We saw Realtors and mortgage brokers getting greedy along with Wall Street. Tools were being used in ways they never should have been used. The wheels this time all came off at once.
Bruce says there are a lot of new people in business. The greatest bull run got more and more people in and they rationalized that it would continue. Bruce talks about the discussions people make in a boom market and why it’s unwinding. Bruce also mentions a bet with a friend he made where he thought oil prices would be at $50 before they hit $150. This was when the price was $142.
Bruce asks Richard Lambros how the building industry looks at this market and the possibility of building. Richard talks about the builder journey through the last few years. This is a housing crisis combined with a credit crisis. Richard brings up how most people don’t like the solutions being presented but feels the solutions may be less painful then letting it correct on its own. He says builders are really in a position of waiting and the core issues are still an issue. California homes are very expensive to create and the government doesn’t seem to realize that.
Bruce asks Richard if when building resumes if the size of the homes will decline. Richard says the average went from 2,200 to 2,500 square feet and builders were looking at demand.
Bruce says he thinks this is an unusual event and this might never been happen again in our lifetime. Prices might skew so low that it will eventually attract mass migration. Once our home prices dip below those of neighboring states, we win the climate and coast battle and win migration. Once we get the migration, building will really be up and running again.
Tommy chimes in and says there are other states that had the same inventory for half the price of the states that got overheated. Overheated states have to come back to “normal.”
Bruce says he agrees but says that’s part of the reason he loves California real estate. California wins so many tie breakers. There’s exciting volatility you don’t get in other states.
Bruce talks about Fannie and Freddie and if we’ll see them stay in private ownership.
Christopher Thornberg says they are clearly insolvent and he doesn’t know what they will do or how they will react. Typically they overact.
Bruce asks the panel if the government writing these big checks will increase inflation and if we’ll see much different interest rates three years from now.
Christopher describes the two ways our government pays the bills; issue debt or printing money. Christopher says our government assumes that investors have confidence in the system. If investors see the bottom drop out of the public bond market and the treasuries go crazy then there’s a problem but he says we’re far from that. Christopher says interest rates are now adjusting for the increased risk. Eventually they’ll come down when this crisis passes.
Bruce talks about when he became an investor he refinanced his house at 17% interest. Many people were telling him at the time he’d never see single digit interest rates again. Bruce says interest rates can be very high as long as the income to median price ratio makes sense. There could still be a healthy market.
Rick talks about market psychology and how nervous buyers and lenders are at the moment.
Bruce talks about the velocity of price drops in the market being historical and some are unaware. 35-50% price declines are shocking.
Joel discusses a Zillow study where 7 out of 10 people thought their home was still appreciating. Christopher Thornberg calls that homo-illucination and what it stands for.
Bruce asks Phil Tirone if lenders are skewing too conservative and not making loans at all. The automated underwriting was such a blessing at the time because it made things ease and now it’s making it worse. Phil describes people putting 50% down and he still can’t get financing because his client’s credit score is low.
Christopher says those automated systems were a disaster and that lenders knew how to manipulate the systems. Philip says these systems did help cause the problem. Christopher says once the price gets down low everyone will qualify.
Bruce touches on affordability. Bruce describes affordability and what it solves and does not solve. He describes past cycles and what he looks for in a turned around market.
More in the last and final show. See also the video on YouTube or Google video.
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Silverstar Finance and Janet French - silverstarfinance.com
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The Naked Real Estate Investor Club - Rosie Nieto - nakedrealestateinvestorsclub.com
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Virtual Real Estate Tour and Layla Tusko - 1wealthcreation.com
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