by Sean Hess (Sean@StAugTeam.com), Broker and Manager for St. Augustine Team Realty (www.StAugustineTeamRealty.com). Join us on Facebook.
- The 2005 real estate market and the Titanic: it worked about as well for both.
I was interviewed by Flagler College student reporter Nicholas Cardoso last week for a broadcast journalism class and the questions were about foreclosures and the foreclosure market.
In other words, “How did all go so horribly wrong in real estate?”
The reason is simple: banks wrote bad loans which created a false demand.
Basically, banks were writing loans to anybody, especially people who were unable or unwilling to pay these loans back.
Banks were writing loans to people who had no visible or credible means of making the payments on the loan amount. These were the Unable.
Or, the banks were writing loans to people who had no intention of paying the loans back (based on credit score). These were the Unwilling.
Why were the banks doing this? Because they could then carve these loans up, rating agencies would stamp them as AAA+, and Wall Street would buy them. These were called mortgage backed securities.
In the end it was so easy to get a loan you basically only needed a drivers license…no income check, no asset check, sometimes not even a credit check…to buy a house.
So what happens when you flood the market with cash?
In this case it created an insatiable, and false, demand.
False because these buyers should have never been in the market.
Had regular criteria been followed, had the loan amounts been in line with the buyers’ true ability to pay, many of the buyers would have been stuck at a drastically lower price point (and thus priced out of a rising market, which would have calmed prices), or it simply would have knocked them out of the market altogether (and into the rental market).
There is the story of a California strawberry picker who bought a $500,000 house. Seriously? A strawberry picker? Fueling the demand for half-million dollar houses?
For real.
The Upshot
People were fighting over houses. The supply of houses dwindled. It drove the price of houses up and up.
Here in St. Augustine houses that should have been selling for $134,000 were selling for $300,000. I calculated that real estate on Anastasia Island was appreciating at 25% a year. Some homes were appreciating at a rate of $5000 to $10,000 a month.
People jumped into the market that had no intention of actually living in the homes they were buying. Especially new construction. They would contract a home that wouldn’t be ready for 10 months and bet that they could sell it for a lot more when they actaully took possession of it. People were actually selling the new construction contracts for a profit before the home was even built. As the market was peaking some construction companies made an effort to cut the contract holders out at the last minute and sell to someone else, essentially trying to steal the profit themselves.
And then, who knows really why it ended? Was it that the first-time buyers finally got priced out of the market, even with over inflated loan values, and decided to rent? Was it the shock of Hurricane Katrina bumping gas prices to an unheard of (then) $4.00 a gallon with the fear of inflation looming? Was it that strawberry pickers finally realized they just couldn’t swing a $5000 a month payment? Was it just that the bloom was off the real estate rose?
Whatever happened, sales started trailing off locally in September 2005. Inventory, which had been in favor of sellers 2-to-1, switched in favor of buyers roughly 4-to-1 in 12 months.
It took the buying public awhile to figure this out. Prices continued to rise into the summer of 2006 even though the market was becoming bloated. Real estate agents at first thought it was just a correction.
By late 2006 a few sellers started cutting prices. Some were absolutely disgusted that they had to do this. They blamed Realtors for doing a poor job of marketing.
In November 2006 sent out a letter telling my sellers to get out now because “a real estate train wreck” was on the very near horizon.
Two sellers dumped me immediately.
Another seller chewed me out because I only got him $140,000 for his double wide in Flagler Estates, “and he had already dropped the price by $10,000″ based on my advice.
But those that did get their homes in line with the market sold and moved on.
Today that Flagler Estates home would probably sell for $60,000 (or less). I wonder if that guy is still upset about the outcome?
What Role did the Real Estate Agents Play?
After the market crashed I was upbraided by a relative for doing my small part in causing the disaster.
I said, emphatically, “No Way.”
Sitting in my office during the boom years I was deluged with calls from buyers. And I would take their information and give it to one of the several lenders I worked with. These lenders checked credit, income and assets. And so many times they would call back and say, “No f—ing way.”
They couldn’t tell me why (privacy rules), except the occasional “there may be credit issues here.” But these people had enough of a history of not paying the bills that it scared the straight lenders away.
And yet, six months down the road I would find out that these same buyers bought a house. A really expensive house. They would just shop lenders until they would find someone who would tell them what they wanted to hear.
And we Realtors figured, “Well, these banks must know something we don’t.”
We had some idea that these people had terrible credit. But if that really was an issue why would any lender in their right mind make a loan? Unless there were mitigating factors…I personally believed that the banks had some kind of state-of-the-art, high-tech computer algorithm that could sort out the good bad risks from the bad bad risks.
And, finally, in the end all real estate agents had a choice to make. Either choose to facilitate these buyers, because they were the major players in the market at the time, or make the choice not to work.
And if the banks were signing off, who was I as a real estate agent to question what they wanted to do with their money?
Sure there were trolls out there, real estate agent knowingly steering people who should not be buying to disreputable lenders. Every office had one, but they really were the minority. It was the buyers driving the train during that period, and they didn’t need any urging to jump right in.
And one of the secret truths about real estate agents is that they don’t know numbers and trends very well anyway. Realtors are salespeople. They are skilled at being the diplomats who get buyers and sellers to work together through the sometimes turbulent 60-day process of buying a home. I can truthfully say that most Realtors I know or knew got burned themselves by real estate they bought during the boom. They had no idea.
As did Wall Street and everyone else.
The Market Today
The market in St. Augustine is, for the most part, stable again.
Here in St. Augustine, the market for single family homes and most condo is stable and actually appreciating, albeit slightly.
There are just a few less sellers than buyers now, which is what you need to sustain appreciation. And even the builders are starting to build again.
And this generation has learned from its mistakes. I hope.
If you want a group of Realtors that can spot trends and steer you through the market, contact St. Augustine Team or call (904) 386-8327.
