OK, so today, I want to analyze a post I wrote back in July of 2006. According to my reserach June of 2006 was the exact peak of the market in my area, Poinciana FL. In July 2006 property values started declining. Since then single family homes in Poinciana Florida have gone from a high value of $235,000 in June 2006 to $73,000 in August of 2010. That's a decline of 69%. That's actually good news since at one time we were down to $65,000. So values are on the upswing in Poinciana Florida.
Here's my post from July 2006. My new comments are in red.
No Money? No Problem!
I Negotiated a deal on one of my listings yesterday. The Buyer is purchasing using 100% financing with Seller paying closing costs. My market is affordable housing with the majority of homes priced from $190s to $250s (How times have changed!) and it seems like most of the Buyers lately have been purchasing with no money down. Now don't get me wrong I am in favor of home ownership for everyone but I fear a lot of the Buyers are going to have financial difficulties in the near future. (That was easy to call)
With high insurance costs, property taxes and mortgage payments I am seeing payments of close to $2,000 per month for a starter home. That's a pretty big nut to crack every month in my area where most families are regular working class people and don't have any reserve funds if they should encounter a financial setback. (Property values MUST be in line with the income of the folks in the area. We got away from this because folks were purchasing property as speculators NOT homeowners.)
Also, a good number of these purchases are being made with ARMs with the Buyers basing their ability to pay on future raises at work or a part time job that they may or may not be getting (But it was stated income! What difference did it make?).
In my opinion, Mortgage Brokers and REALTOS(R) are being overly aggressive in selling folks on the advantages of home ownership without really taking the time to counsel the Buyers on the true costs involved (Did you do this?). And since they don't have to come up with any money at closing they are sitting ducks for Mortgage Brokers who are charging them sometimes outrageous fees for doing these types of loans.
So my challenge to REALTORS(R) who are dealing with first time Home Buyers with a little or no money down is to really take the time to explain the pros and cons of purchasing a home. If the Buyers are fully informed and are wanting to move forward then help them to negotiate fees or guide them to the myriad of programs available that can help them with financial assistance.
Placing a Buyer in a home he can't afford can damage them for years (This statement is ALWAYS true!). It can cause bankruptcies, divorces and even illnesses. So let's "Protect the public" it's what REALTORS(R) are supposed to do. Isn't it?
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So true ... so true! We were just about a year later when the market stepped off a cliff ... Great insightful post. We "all" should've seen it coming ... but would it really have made a huge difference?
Reserve for TLW
Bryant, very interesting.
I remember telling my seller in January 2006 when he was fighting me on pricing that he needed to look at it like this. We've just gotten off of the ski lift at the top of the hill. Our skis are pointed downward. Are you going to let me sell the building from up here at (my price) or from the bottom of the slope (his price) when we wouldn't get any bites because it's overpriced. He allowed me to price it at where I thought it should be, we sold in two months. Right now the same buildings in the area are over $350K less than what we sold for. All of the signs were there that we were headed downward.
Bryant: That was a very insightful post. You were, and are, a true professional. I didn't have a license during the boom, but I imagine during the next one, I'll be preaching the pros and cons, just like you did.
Bryant, I think you saw what many were too greedy to see. I don't see how so many people could have been so blind as to think that what goes up, keeps going up and up with no correction.
I held my breath alot looking at buyers financing and their ratios. But they wanted that property. For most their still their loving it so no loss. Pure gain.
You have great insight. We're we heading?????
Bryant, thanks for the post. Boy what a difference a day makes and looking back, well it was too good to be true or in the case of real estate, sustainable.
BB, Kind of interesting looking back at things like this, isn't it? Done it a little myself, no big surprises except that it's deeper and longer than expected.
Hi Bryant!
We too kept saying that the 2005 market was not a healthy one...values simply can't realistically go up that quickly! I am glad to say that none of my buyers have been in financial straights, except for one who refinanced the house. I strongly discouraged the use of ARMs, and am so glad I did!
Hi Bryant... This was a timeless classic post! It's always interesting to look back and reflect on a moment in time... this was a good reflection.
This is a great post. It was a good post originally. Now it's a great post.
As a case study on how this industry really works, your upated post should be required reading for new and renewing licensees everywhere.
Ah yes, the boom and what always follows a boom, well lets see, it must be a bust! Yes, I remember well and the mortgages were just too good to be true. The NINA was one of those, with No Income No Assets. Just fog the mirror. Buy now and make a profit before closing! Great look back and it does look like you saw it coming!
I do like Andi's ski slope analogy.
I think we all really did see it coming ... but not all of us realized how steep and how long that downhill slope was going to be .....
Yes, BB, looking back it seems painfully clear that we should have seen some of what was coming.
I remember even as far back as 2004 when one of my worst tenants bought a home. This lady worked as an "exotic" dancer and always paid her rent in cash and always late. When she decided not to renew her lease because she was buying a new home, I was blown away. She could barely scramble together $700 or so per month and yet she was buying a home. Pretty frightening.
Hindsight is 20-20.
Broker B, wow! Reading that today makes it sound like you may have had a little crystal ball in your briefcase. Still, I think we all got a bit nervous about how we would feel if our 2006 buyers called in a few years to say they got Dream Job in Paris and needed to sell. I can remember at the height of the bidding wars that I might not be too thrilled to get that call. And we haven't seen a dive that Florida has.
BB, I saw it coming as I pay attention to the market with graphs etc. I just didn't know what to do about it! You see the freight train coming and you ?????? We could NOT outrun this train.
BB - went back and read the original....wasn't featured then..Got down to comments and read this one...
Bryant, So true and very good info. I agree and disagree. I agree, because so many loan officers don't know what they are doing or just are looking at their wallets and not the clients.
Why I disagree about realtors jumping in is because too many of them don't know what they are talking about also. I have had some realtors ruin a deal for me or lose a deal and had them go to their loan officer who gave very poor service and a worse deal. It's a catch 22.
I am very good at what I do and one of the first things I get is the clients goals..... and in regards to the arms. Sometimes they can't be helped. Example: If I have a client that has a 580 score and can't go FHA, the next available solution is sub-prime and do a 100% loan. And because these rates are a tad higher, I need to offer them a 2/28 arm just to keep their payment down. If I give them a 30 yr fixed, the rate is now going to be about 3/4% higher, on the average. Sure, they run a risk with an arm, but I tell them that I will come back and refinance them in 1 to 2 years, depending if there is a pre-payment penalty.
But everything that I offer them in regards to rate and fees is going to be the same profitability as if I were to give the an FHA deal or a person with 700 credit scores and great assets.
Again, I see your point.
But if I don't do this, someone else will. But usually at a greater price to the client. The worst part is that many of these loan officers and lenders will take advantage of someone with less than perfect great. And yes, these Options arms are only for the SAVY client or experienced real estate investor.
I know one company that this program is 90% of their business...and yes, we will see a huge foreclosure rate in the next 8 to 14 months. Again...good topic...but a very fine line when it comes to realtors stepping in. Even if they thing their loan officer is the "BOMB", "the best".... are they sure about this?
LOL Seriously.... people need to make money....realtors want us to cut fees or give better rates. I don't see realtors usually..I saw usually, cutting their commissions. I only see it when the deal is going south and they chip in to make it work. Again...good topic though.
Sorry for the babble...
jeff belonger
and I wondered........... 2/28's ???..... that was a good strategy to recommend?...let us pre-approve you at a lower rate (so you can qualify) and we will refinance you (if we can) in the future.....i wondered then and i wonder today..... what ever happened to the thought that people should be qualified on what they earn as it relates to the rate they should be paying? it seems that your post and the responses contained a great deal of prophetic information.
Thank you for sharing you thoughts
Very good insight and a great flashback post!
You, sir, are a prophet!
Holy cow! Prices are off 69%??? Wow! I thought the 5-10K we were seeing price dropping here was bad. Great post!
This has bothered me over the years and I've kept in touch with my Buyers who paid zero down or paid the down-payment but needed Seller assistance with closing costs. So far, everyone has done fine. One Buyer lost her job (single income) so she rented out rooms to friends to get by until she found employment again.
And during the stimulus shopping frenzy, I told Buyers that it was a good time to buy IF they didn't pay more than they were currently paying in rent, IF they were prepared to replace a broken hot water heater and IF they felt certain that their job was stable.
And your last paragraph is spot on - it IS our job to protect the public. Home ownership is not always the best option.
Wow , -69% is a whole lot of upside down !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Are there some ghost towns there ???
very true and great blog!
Hindsight is perfect. We should have all been more realistic about the direction of the market in 2006. We forgot that, for most people, houses are supposed to be purchased for homes...to live in...not to flip as commodities.
We didn't see a huge ballooning of prices, so didn't see as great a price drop as you. But I'm happy to say none of my buyer clients have lost their homes, though one had to sell for less than they paid.
I did see it coming because it was like a repeat of the energy industry crash that devasted Oklahoma starting in 1982. Remember that inflation was running rampant then and people were doing negative am or adjustable rate loans on inflated prices of homes. Sounds familiar doesn't it. In 2005 and 2006 I was overwhelmed by California investors who wanted to buy Oklahoma homes but they were also buying in your area. They told me that they were doing negative am loans, and of course they called them option arms or pick-a-pay if it was World Savings. They did this and still got negative cash flow, but they were going to flip and get rich. Countrywide was letting them also commit fraud by booking homes as second homes instead of investment. Those who do not remember the lessons of history will be doomed to repeat it. It will happen again.
Great way to reflect on past.. Classic...You sure do have a way of expressing things.
That was a very insightful post Broker B back in the day. I also took a look at the loan products being brought to the market and the fact that most folks were not buying what they could afford but the size of the loan that was possible so they bought more expensive homes.
That's when I renewed my contacts with the companies I had worked with in the 90s that handle REOs.
I agree with Gabrielle (#1) We're in the same area and we were just exactly a year later. So, we certainly should of seen it coming! We were certainly thinking about it but really thought after so many years of our regions appreciating values it couldn't happen to us the same as it is other places. The Northwest was fortunately for many years exempt from other trends around the country... I'm in the choir Bryant... so your sermon (just kidding) is well heard. So many got the fever... and we forgot about "us" collectively... Thanks for the post.
This is a great blog piece. I remember back in the autumn of 2005. I was out showing property, and it struck me that the prices of homes seemed artificially high. Yet, folks were all working, and the economy appeared to be growing and resilient to any prick to the inflationary balloon.
What we didn't foresee was the effect of having Wall Street packaging up mortgages and selling them in the derivatives market, which ultimately became a toxic slurry of credit default swaps.
Toxic slurry they drank like Koolaid. Well said, Myrl.
Greetings Broker Bryant
This is an excellent reblog of your older material. In particular, one part caught my attention:
"(Property values MUST be in line with the income of the folks in the area. We got away from this because folks were purchasing property as speculators NOT homeowners.)"
With regards to the still ongoing housing bubble, your statement reminds me of the saying "Nail, meet hammer." You have nailed it sir. Housing prices will not stabilize until they are in line with the wages of the consumer in the respective area. Efforts to maintain escalated prices are prolonging the inevitable - parity between wages and cost. All forms of financial assistance to the purchaser, be it government contributions, seller kickbacks, or special tax incentives are, in some way, added back to the price of the home further delaying stabilization.
When home appreciation is measured in tenths of a percentage point each month, year after year, then we'll know prices are starting to stabilize and the rest of the economy can start to grow again.
Thank you for your candor, and the honest evaluation of your profession and your local real estate conditions. Oh, and many thanks for letting a consumer provide a perspective on your blog.
Kind regards,
Harry
Bryant, that is a jaw dropping price decline. So many people who have to sell have been massively hurt.
Myrl: That indeed is what we didn't see. It wasn't just that everything was appreciating like we could consider it an ATM God given right if we owned real estate. Well said...
Bryant--That is a brilliant post. I have been suffering under the dilusion that the peak was late 2004 or early 2005. Your statistical date moves the high point up, so, perhaps, the recovery will be somewhat delayed. My sense is that we are looking at 5 year cycles here.
When we are recovered, we may never see the values of 2005-2006. The lending landscape has changed, and the leverage is just not there.
Harry, what a golden nugget; "...further delaying stabilization". I could not agree more.
Great post. 69% is a huge number in terms of depreciation. I feel for Poinciana, FL. What's the affordabilty index in your area?
Amazing how many people didn't see that bubble bursting. I was a new agent then, and I'll admit I didn't have a clue what was going on.
Bryant - this post stands so true today as it did back in 2006
Bryant, my respect-o-meter for you just went up 100%. I never worked with any buyers who were not eminently qualified for their loans and the only two who did interest only were savvy and were counseled about the pitfalls of such loans. But I knew a couple of gals who were well known around Orlando who 'could get a loan for anyone if they were breathing.' Congratulations on the upswing in pricing :)
Bryant, I wasn't in the real estate business at that time, but I remember housing prices soaring in So Cal and wondering who's buying at these prices? The "how" is no longer a mystery to me. Like Lyn #17 says, I have heard from other real estate professionals who were in the business at the time say they knew we were headed for a crash but didn't know what to do about it. Great post,
Times have changed and fortunately our thinking as well. our comment "protecting the public" is key. I think as an industry we failed.
I remember in 06 when I first joined AR, and your market was good. Of course it was crap up here in MI and had been since 2001. That is when Ford started their restructuring.
Bryant,
Fascinating that you have the posts from then. Interesting to look back and see the changes that you nailed pretty well, considering this has been a huge hit.
Speculators did a ton of damage driving pricing artificially high. We need to have a majority of end-users with some strategic investors to keep the housing market more slow, steady and solid.
All the best, Michelle
BB, feel a little prescient today? You called it.
I only represented one buyer who chose against my recommendation to use an option arm. His purchase was up for short sale for six months, just forclosed. Another of his homes is listed short.
All the market...
Really did was go back to normal. Remember? When we first started in this business, people bought homes to live in them, not to flip and turn a profit. RE is a fine example of what can happen when money and greed come together. It's like a time bomb. We both knew the implosion was right around the corner. We felt it. We sensed it. Yet, we were powerless and couldn't stop it from happening. I remember reading the penny down mortgage signs and thinking, this is going to implode. And implode it did. I can still see it in my minds eye. Really :)
TLW...ROAR!
It definitely seems there is only an upside to a $73,000 house!
OK so once again I have been a bad blog host!!! This damn works keeps interfering with my blogging.
Dealing with a 70% decline in values has not been easy. My income dropped right along with the property values! But such is life. Just have to sell that many more properties.
I have been watching the MLS and it is amazing how many foreclosures I see hit the market that are homes I sold a few years back. I see them just about ewvery day. It's sad.
But I guess all we can go from here is up. I hope.
BB - We are all dealing with the fallout of a declining market, but I have to hand it to you a 69% drop is one wild ride! As TLW says, the market basically went out of control and is back to normal - house as a home, not an ATM. In my market prices spiraled out of control from 2003 to 2005/2006 and we're now back down to 2003 prices. You must have to deal with a lot of pain, lost dreams, dashed hopes, and despair. I don't know how you do it. I admire you and TLW for your strength. One or the other ought to write a book. You both know how to survive tough times with intelligence and grace.
BB- This is a great post. I do wonder about your statement where brokers are charging outrageous fees for these 100% products. Ther has been so many changes in our industry that most lenders are placing caps on how much a loan offier can charge. Just wondering what these folks are charging your buyers that the lender is allowing it. Thanks!