Deja Vu All Over Again (part one)

Denver’s Rocky Mountain News carried an article in the November 3rd edition headlined “Denver Builders skirting bottom. The article, written by long time real estate reporter John Rebchook, spoke to the plight of the home builders and made reference to this downturn being “different from the one two decades ago” As Paul Harvey says, there is a “rest of the story”.

It is definitely true that this downturn in housing is different from the one that occurred in the second half of the 1980’s. The major difference is this slump is nation wide, rather than restricted to the so-called “oil belt”. However, the root causes are very similar.

In the early 1980’s, mortgage interest rates escalated from the 9% range prevalent in the late 1970’s to a yearly average 0f 13.75% in 1980 and then to the untenable level of16.04% by1982. Those rates put a damper on all home sales. So how were homes sold with interest rates so high for so long? Creative financing became available. Many variations of “creative financing” were invented and practiced, including ARM’s, owner seconds, and even a few schemes that resulted in prison sentences. The home builder community, with more than ample assistance from the mortgage lending community, came up with the 3-2-1 buy-down. This concept also had multiple permutations, and quickly came into widespread use in the resale market. At that time the traditional home mortgages were largely replaced by the hundreds of mortgage products available today. From the point of view of the consumer, the difficulties that arose with 3-2-1 buy-down’s were much the same as sub-prime loans offered since early 2002. The home buyer (borrower) benefits from a low initial mortgage payment, rising within a few years to an amount the consumer cannot, or chooses not, to afford. The 3-2-1 buy-down mortgages offered to consumers in 1983 were becoming foreclosures in the “oil belt” by 1986. The expectation is that homes prices will escalate forever, allowing the homeowner to refinance into a better loan. Few people seen to grasp the concept that the real estate market is a “market”, subject to the vagaries of the world economy, or their own personal economy based on employment. At least the 3-2-1 buy-downs required a least some down payment, which translated to some commitment on the part of the borrower, where most of the sub-prime loans were used to purchase homes with no financial commitment from the borrower. The foreclosure issue will become a non-issue when the sub-prime loans have hit and passed the 2 year interest rate bump. Baring some other unexpected market event, that will occur in the first few months of 2009, 2 years after the the sub-prime loans exited the market.

This time around, the home builder community has changed. Most large home builders are national in scope, building thousands of homes quickly. That, coupled with sub-prime (easy money) loans that accelerated the home buying time line for many first time buyers, and large numbers of home buyers purchasing homes that could not have qualified for a loan prior to 2002 has resulted in large numbers of foreclosures across the country.

Of course, the media and the politicians want someone to blame. The biggest blame must be directed to the public as whole and the “instant gratification” mentally we have all subscribed to. That is not always a bad thing, unless the individual member of the public has no concept of the cost of what they receiving. The political response is to protect the public from themselves, so we see legislative initiatives designed to protect. That gets votes, and to some degree makes the system a little better. But legislative responses seldom address cause and effect, so any “fix” creates other issues.

The current housing “crises” will be but a memory in two years. The home builders are building less homes. This is not good news for home builders, but bodes well for the individual homeowner as the supply and demand curve forces home buyers into resales. Mortgage financing will find solid ground in the next six months, the public and those in the real estate industry will become comfortable with the change in mortgage products, and the media will become focused in new story lines and more current events. In the meantime, many people will keep on buying homes.

-that’s 30-

Tomorrow: Deja Vu Two: Crying

Written by Larry D. McGee, Denver Realtor - Visit Website Sphere: Related Content