On the subject of “real estate never goes down:”
When we came up into Wyoming, Wyoming had been enjoying strong real estate prices for a decade or more. They didn’t see the insane gains that were seen in California, Arizona, Nevada, et al, but strong pricing power. Properties went on the market at price $P and they didn’t negotiate off that price. They just waited until they got it. The last time Wyoming saw any serious slowdown in their real estate market was the mid-80’s, when the oil slump in TX/OK happened. A little bit of that slopped over into WY.
Anyway, in mid-2008, we’re in a realtor’s office and discussing an offer we’re putting in. We offered $X and the agent told us this offer “was less than the people owning the house had paid a year earlier.”
We said. “OK,” and received this news with no reaction on our part.
The agent again said “Well, I don’t know if they’ll even consider this offer... it is less than they paid for the property a year ago!” being very emphatic about the mathematics of the situation.
Without being annoyed, I just said “So....?” and the agent looked at me as if I could not possibly be serious. My wife added “Real estate prices *can* go down, you know...” and the agent and the owner of the brokerage looked at us as tho we were at a funeral and had just broken wind loud enough to cause an echo. My wife and I looked at each other and smiled, then turned back and said “It’s true. We’ve seen it happen. We can assure you that these things DO happen.” I added “I can assure you, it is going to happen here, too.” By that time, I knew how bad this mess was going to be. When I started to describe the couplings in the mortgage market, the idiocy at banks, the leverage that was involved that was going to unwind... and then I made a prediction that Fannie and Freddie were going down for the count, they were broke/busted/done... you could see two things happen: The agent/owner’s faces registered alarm that they had a customer that knew this much about the mortgage market in *their* office (”Who let this guy into the state, much less our office?! How do we get rid of him before he tells anyone else?!”) and then they registered dread - sort of a “If he’s a newcomer and he sees the big picture of what is going on, the gravy train really is over.”
Today, the Wyoming market now realizes what I had suspected in 2007-2008: That a lot of the price appreciation in properties above $250K was due to people packing in equity from OTHER real estate markets, ie, that the local economy does not and can not generate the cash flows to service a mortgage on a property higher than $300K in price. You see properties under $250K moving pretty well right now... and you see mega-buck homes built in the boom that have been on the market for four to five YEARS... with an 8% reduction in price every 18 months or so. Absurd prices, where people just cannot grasp that the underlying funding of the market has changed for possibly decades to come. I see ranches here that can support only 100+ cows going for $4 million. When I see these, I laugh my ass off and ask “So, tell me, is the seller growing dope or do their cattle poop gold nuggets? I’m just asking so I know whether to buy a special harvesting rig or truckloads of rubber gloves as my inputs...”
Real estate agents don’t seem as amused as I am, tho.
Back to the CRA: The CRA might have contributed a bit to the issues, but no one had to force the banks to make PRIME, CONFORMING loans. They just did. And their underwriting standards on PRIME, CONFORMING loans were every bit as shoddy as the sub-prime, NINJA and other crap paper. All we have to do is look at the default rate on prime paper, and we see that it is absurdly high and CRA doesn’t even enter into that tranche.
The bankers’ underwriting, funding, and assignment practices we’ve now learned, were shoddy everywhere. The bankers did this to the US, and it was their greed. I maintain that the banking industry was infuriated with envy following the dot-com bubble. Bankers think that they should be making the billions, not any smelly little engineer/geek off on the other coast. In their fury to get even with the techies, the bankers developed a system of finance which allowed them to get rich just as quickly as engineers did in Silly Valley, but with much less work and a whole lot of fraud.
“Today, the Wyoming market now realizes what I had suspected in 2007-2008: That a lot of the price appreciation in properties above $250K was due to people packing in equity from OTHER real estate markets, ie, that the local economy does not and can not generate the cash flows to service a mortgage on a property higher than $300K in price.”
At the housing bubble blog some of the investors talked of formulas they use for buying houses- they’ll pay 100 times monthly rent for a normal property. Maybe up to 120 times if the neighborhood has something special going for it.
Then you take the median income for a region, and use the old formula of 2.5 times income for a mortgage loan. This gives you a ballpark idea for what sort of prices ought to be supported by a local economy.
Applying these metrics to prices in SoCal made you shake your head in disbelief. The coyote had run off of a very high cliff and was suspended in space. When he started falling it was going to be a looong way down. My dire predictions were hooted down by my RE pals. “You don’t know anything about real estate! Shut up!”
Well I didn’t know all that much, they were right about that. But I did know more than they did, something that still sticks in their craw. Prophets of doom tend to get blamed for the doom itself.