Opportunities in a down cycle market
At the end of the day we will probably regret more things we didn’t do in life than the things we did. Recognizing opportunities is difficult when caught up in life’s immediate realities but history can provide us a window to the future, keeping events in perspective including real estate cycles.
This is my fourth real estate correction in my 34-year practice. Each was the result of different economic or political forces and each resulted in declining property values. Not surprisingly each downturn was followed by a strong rebound.
Oil and gasoline or the lack of suitable supplies fueled (forgive the pun) the real estate recession in the 1970’s. The 1973 oil embargo by OAPEC resulted in government gasoline rationing and price controls. The cost of a barrel of oil quadrupled within a year. The shock plunged the New York Stock Exchange 97 billion in six weeks and the country entered a period of high inflation and an economic recession. Real estate values declined, as did the migration to the developing suburbs. Realtors who could afford to pay the high cost of fuel couldn’t buy any because their license plate didn’t end in the correct number. I was previewing neighborhood properties on a bicycle.
In the early 1980’s, inflation resulted in mortgage interest rates soaring above 14 percent. The higher mortgage rates prevented most homebuyers from qualifying for a loan even if they were willing to pay the high interest. Sellers offered buyers the benefit of assuming their existing lower rate mortgage with the balance of the seller’s equity paid over a period of time or when financing became available. Creative seller financing included: seller carried second and third deeds of trusts, contracts of sale, wrap-around mortgages, balloon payments and lease-options. Then making matters worse, the courts stopped creative financing, preventing buyers from assuming a seller’s lower interest loans. The monetary/inflation crises of the early 1980’s prevented many from considering homeownership.
My third real estate recession beginning in 1991 was the result of job looses primarily due to defense industry cutbacks. California had been the beneficiary of the military industrial build-up during much of the 1980’s under President Regan. At the end of the Cold War, the Clinton administration and bi-partisan Base Realignment and Closure Commission closed military installations all over the state including three in Sacramento. Between 1991 and 1995 a million Californian workers were displaced by defense industry curtailments. Families who are unemployed don’t buy houses.
It’s probably too early to call the exact cause of our current real estate downturn. The flippers and investors have taken much of the blame but they have always been a factor in any market. Builders did what they do best. Overbuilding has led to declining property values but is overbuilding the direct cause of the market’s decline or were builders the recipient of other market factors? Subprime lenders will face increased federal and state regulations for their role in the problem. The reality is, subprime lending has helped far more families into their first home than it has harmed. More people own a home today and will tomorrow because a lender took a big risk making a loan to a credit-challenged borrower. The media, politicians and consumer advocates continue to look for easy high profile targets to blame for our current predicament. This market correction, unlike the other three, is occurring during an expanding economy, historically low interest rates and a plethora of financing options. What’s up with that?
One thing that all our past economic and real estate down cycles have in common is they all bounced back. The Arab oil embargo in 1973 led to increased domestic exploration and new emphasis on alternative energy sources and conservation. The out of control of mortgage interest rates of the 1980’s led to a tighter monetary policy by the Federal Reserve, which was ultimately responsible for ratcheting down the interest rates to historically low levels. Displaced defense industry workers in the early 1990’s found employment in the emerging technology sector and the more recent availability of easy financing and low interest rates has resulted in the highest percentage of homeowners ever. Despite affordability critics, more Californians own their own home today than ever before.
While there are many real problems with our current market such as: poor mortgage choices by some borrowers, over-building by some builders, predatory lending on the part of a few lenders and inflated home prices, I believe much of the malaise in the housing market is based upon a lack of confidence in its return to some normalcy. Although past performance is no guarantee of future results the odds are favorable that it will.
This is my fourth real estate correction in my 34-year practice. Each was the result of different economic or political forces and each resulted in declining property values. Not surprisingly each downturn was followed by a strong rebound.
Oil and gasoline or the lack of suitable supplies fueled (forgive the pun) the real estate recession in the 1970’s. The 1973 oil embargo by OAPEC resulted in government gasoline rationing and price controls. The cost of a barrel of oil quadrupled within a year. The shock plunged the New York Stock Exchange 97 billion in six weeks and the country entered a period of high inflation and an economic recession. Real estate values declined, as did the migration to the developing suburbs. Realtors who could afford to pay the high cost of fuel couldn’t buy any because their license plate didn’t end in the correct number. I was previewing neighborhood properties on a bicycle.
In the early 1980’s, inflation resulted in mortgage interest rates soaring above 14 percent. The higher mortgage rates prevented most homebuyers from qualifying for a loan even if they were willing to pay the high interest. Sellers offered buyers the benefit of assuming their existing lower rate mortgage with the balance of the seller’s equity paid over a period of time or when financing became available. Creative seller financing included: seller carried second and third deeds of trusts, contracts of sale, wrap-around mortgages, balloon payments and lease-options. Then making matters worse, the courts stopped creative financing, preventing buyers from assuming a seller’s lower interest loans. The monetary/inflation crises of the early 1980’s prevented many from considering homeownership.
My third real estate recession beginning in 1991 was the result of job looses primarily due to defense industry cutbacks. California had been the beneficiary of the military industrial build-up during much of the 1980’s under President Regan. At the end of the Cold War, the Clinton administration and bi-partisan Base Realignment and Closure Commission closed military installations all over the state including three in Sacramento. Between 1991 and 1995 a million Californian workers were displaced by defense industry curtailments. Families who are unemployed don’t buy houses.
It’s probably too early to call the exact cause of our current real estate downturn. The flippers and investors have taken much of the blame but they have always been a factor in any market. Builders did what they do best. Overbuilding has led to declining property values but is overbuilding the direct cause of the market’s decline or were builders the recipient of other market factors? Subprime lenders will face increased federal and state regulations for their role in the problem. The reality is, subprime lending has helped far more families into their first home than it has harmed. More people own a home today and will tomorrow because a lender took a big risk making a loan to a credit-challenged borrower. The media, politicians and consumer advocates continue to look for easy high profile targets to blame for our current predicament. This market correction, unlike the other three, is occurring during an expanding economy, historically low interest rates and a plethora of financing options. What’s up with that?
One thing that all our past economic and real estate down cycles have in common is they all bounced back. The Arab oil embargo in 1973 led to increased domestic exploration and new emphasis on alternative energy sources and conservation. The out of control of mortgage interest rates of the 1980’s led to a tighter monetary policy by the Federal Reserve, which was ultimately responsible for ratcheting down the interest rates to historically low levels. Displaced defense industry workers in the early 1990’s found employment in the emerging technology sector and the more recent availability of easy financing and low interest rates has resulted in the highest percentage of homeowners ever. Despite affordability critics, more Californians own their own home today than ever before.
While there are many real problems with our current market such as: poor mortgage choices by some borrowers, over-building by some builders, predatory lending on the part of a few lenders and inflated home prices, I believe much of the malaise in the housing market is based upon a lack of confidence in its return to some normalcy. Although past performance is no guarantee of future results the odds are favorable that it will.
posted by Ken Calhoon at 8:10 AM
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