Real Estate Head Says U.S. Economy In Uncharted Territory
INDUSTRY NEWS
June 9th, 2009
Joel Singer, Executive Vice President of the California Association of Realtors, addressed hundreds of Realtors at a luncheon during the Legislative Days real estate conference held in Sacramento this past week. He spoke about the current state of the housing crisis and where we might be headed. He also took a look back in time to touch on what happened to bring the world financial markets to their knees.
Today’s real estate market is experiencing the sharpest downturn since the Great Depression. He cited cultural and behavioral changes that distinguish this market decline from others in recent decades. The breakdown of financial markets is unparalleled in U.S. history. What happened?
The mortgage market implosion was due in part to Wall Street involvement:
- Inexorable demand for product-housing
- Leverage-zero down, even for high credit risks
- Fractionalization/Securitization-creative Wall Street investment packaging (derivatives)
- Products of mass destruction-Variable interest loans were time bombs
- Faulty incentives-Loan officers were rewarded for pushing risky loans
- Upfront profits were emphasized over long-term loan viability
Main Street consumers made matters worse:
- Elected to borrow money using unsuitable loans-interest only, Option ARM’s, Etc
- No skin in the game-no downpayment loans, even for those with poor credit
- Financial illiteracy-borrowers claimed they didn’t understand loan terms
- Affordability realities-runaway demand spiked home prices upward due to inventory shortages
Wall Street replenished lender’s capital by buying up mortgages and repackaging them for investors. Borrowers accepted risky loan terms even when they qualified for stable fixed-rate loans. These risky loans, that straddled borrowers with payments that jumped considerably after a short period of time, were designed to reward the investor with higher returns and the loan officer with higher commissions. The worse the loan was for the borrower, the more the loan officer was financially rewarded.
Joel stated that Lehman Brothers was capitalizing their cash to the tune of 640 to 1. The U.S. economy became reliant on the housing industry as a major component of the overall economy. This had not been the case up to this point in our country’s history.
He believes we are seeing the tail of the first wave of foreclosures. Now that the voluntary moratorium on foreclosures has expired, another wave of foreclosures could hit the market later this year- just as the market slows for the holidays. He hopes lenders will quickly list and sell REO’s, which are currently in high demand.
I will be reporting additional economic information in posts to follow, stay tuned!
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL ESTATE PROFESSIONALS GMAC
CORNER OF COURT AND PLACER IN REDDING
QUARTER CENTURY LOCAL REAL ESTATE EXPERIENCE
