What has been the catalyst in spurring the housing bubble and subsequent burst that has left us in the mess we are in today? Was it the run up of prices? Was it greed? Was it poor advice given to buyers by Realtors and lenders? Was it lax underwriting guidelines? Was I the government’s proclamation that everyone should be able to achieve the American Dream of home ownership? The answer is yes to all of the above.
The housing prices escalated at ridiculous rates – far above historical percentages that had been established over decades. Builders couldn’t build fast enough to satisfy the demand which drove up their prices. Buyers were having a difficult time being able to purchase a home and therefore bid up the price of the home above what they were willing to pay for a house originally. It was a stressful and fascinating time to be a Realtor. Buyers were mad that they had to bid so high to get into a home and sellers were mad at Realtors because their neighbor’s house sold for more money than theirs did – no one was happy. Yes, over escalating prices were one of the causes that affect us today.
The greed factor came into play with “flipping”. Many people bought homes from builders. In most cases, as they went through the lengthy construction phase and because of demand, prices escalated. You could buy a house, not do anything to it other than wait until it was ready, then raise the price and sell the home for a profit – many times for tens of thousands of dollars more than their original purchase price. It seemed as if everyone had a story of someone who did this so they tried to do the same thing. As the saying goes, too many chefs spoil the pot – well same thing happened in the new homes arena. As prices declined, buyers bailed and builders got left holding too much inventory. Also, greed came into the picture with people using their homes as a piggy bank and not a savings account. How many people do you know that refinanced not just once but many times and bought properties, fancy cars, and vacations they normally would not have been able to afford? Greed is not good Gordon Gekko and it has affected us today.
How many inexperienced, uneducated people got into the real estate and lending business when the times were good? Hundreds of thousands got into our businesses. Whose interests were they looking out for in the transaction? One guess, not the buyers – theirs. They got into the business for what was believed to be easy money. They gave advice that wasn’t the right advice about the market and where prices were headed. They got people into loans that were not right for the people they gave them to and as a result, they defaulted. Poor advice definitely contributed to people’s over exuberance in their decisions on purchasing and financing properties and it is taking its’ toll on the market today.
Was it the policies that were put into place that lead to lax underwriting guidelines a cause that lead to where we are today? You better believe it! These loose guidelines resulted in allowing people who should not have become home owners to become home owners. In my opinion, this probably had the biggest impact on how everything listed above was able to occur. What were the guidelines that were slack you ask? Here are just a few: debt to income ratios up to 45%, no income no asset loans, loans up to 125% of value if combined with other liens, minimum FICO scores of 620 for prime loans, 10% down payments for financing investors, interest only loans and of course the teaser rate loan products. Without these underwriting guidelines being loosened, we wouldn’t have had the ability to do all that was stated above.
Was the government’s belief that everyone should be afforded the American Dream of Home Ownership a contributing factor? Of course it was. Not everyone should be a home owner. Credit scores need to be higher to be considered prime. People should have some skin in the game and not be allowed to finance above the sales price to get into a home. People need to verify their employment, prove they have cash reserves, and provide tax returns, etc. in order to obtain financing – it is common sense. The problem today is the virtually the same legislators who made these loans possible have swung the pendulum too far the other direction and are hampering our recovery efforts in the housing sector of the economy. FHA costs have risen, talk of raising down payments to 20% are going to hurt the market, stricter ratio requirements are in place and the overall costs associated with a loan are up 8.8% over last year as reported by Bankrate.com. These trends have to stop if we want to see true recovery in the housing market and the overall economy.
Real estate has always been the key to getting the economy out of its slump and the longer housing languishes, the longer we will be in a recession. What we do know is that more strict underwriting guidelines are not the answer. Responsible lending and more educated agents and lenders providing the consumer the right information are going to be part of the solution but getting the underwriting guidelines back in line with reality is the catalyst to recovery. Get it? Got it? Good!
Now, go sell something!