Sunday, September 23, 2018

This morning I spent a little time flipping through channels looking for something, other than 24/7 coverage of Hurricane Florence, which is currently hammering the Carolinas on the other side of the country.
 It was during this remote control poking exercise that I came upon a small segment of the news devoted to reminding us it has been 10 years since the 2008 financial meltdown.
It isn’t the first time the reminder had come up in conversation this week. My neighbor had mentioned it while I was out on a walk. He had noticed Sacramento finally has more homes for sale than we’ve had for a while, and prices seem to be holding steady; or even dipping a bit in some areas. “Are we headed for trouble, Myrl,” He asked? “I certainly don’t think so. I believe we are finally entering the realm of a more balanced market,” I replied!
It’s no secret back in 2005 and 2006 we experienced a ravenous feeding frenzy in real estate, like no other I had experienced in my 25 years of previous real estate cycles.  It didn’t end well, and became the precursor to the financial meltdown soon after.  

Here’s what is significantly different this time around.  In 2005 and 2006, the housing market was flush with easy mortgage lending.  In the marketplace, we began learning some buyers were procuring subprime loans, with little or no documentation.  Few real estate professionals could have imagined the nightmare brewing in the mortgage lending business, which invaded Wall Street and the Banking industry.  Mortgages were marketed as derivatives, with each package creator putting their fees on top of the product and sold to investors.  So much money was being made in the mortgage industry, that simply originating loans for the purpose of a home buying experience wasn't enough for financial gurus.  
When more home loans became toxic, they began combining and packaging risky loans with the good mortgages.  A witch’s brew swirled in the credit default swaps realm.   

Credit default swaps were sold to financial investors, Insurance companies, etc.   They became the vehicle allowing $400 billion of bad mortgages, to get pumped on steroids, causing an estimated $63 TRILLION dollar global meltdown.  Wall Street had literally turned the mortgage derivatives and credit default swaps market into a global Pok√©mon card sale.
Fast forward to today!  What is different, you ask!  (1) In today’s world real estate professionals often see far more cash transactions.  In other words, homebuyers have a significant amount of skin in the game! (2) Lending practices are significantly tighter than the years leading up to the meltdown.  Many folks have experienced more difficulty obtaining a mortgage today in comparison to several years ago, when liar loans and low documentation were often the rule of the day.
While it may be difficult for some younger and first time homebuyers to compete for homes when housing inventory is low, and the marketplace is flush with cash, as it has been in the more recent past, it does provide an environment for home equity to be established. However, as we approach this time with a more balanced market providing a little more inventory, opportunity for first time and younger homebuyers, who often have less cash, is arriving.

From a personal viewpoint, my concern during the last couple years with low inventory, was home values could become artificially high, especially, when new home building wasn’t keeping up with demand. However, I’m much more comfortable where we find ourselves today, in a more traditional balanced market, which is usually the norm, rather than the exception!

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