Who's fault is it?

P1050472bw We want  to blame the foreclosures on someone.  We blame sub-prime lenders.  The lenders definitely played a role in this fiasco.  They wrote sub-prime loans with huge interest rates for people who could not pay them back.  Mortgage fraud also played a role, Minnesota ranks 8th in the nation for mortgage fraud and people are in jail because of it.

Many of the people who used the sub-prime loans to buy homes wanted a home worse than anything.  It is the American dream, and so they signed the papers.

During the re-finance craze I received phone calls, email, mail and post cards inviting me to refinance my home and borrow an additional 100K or so against it.  I remember one solicitation offering to lend us 130% of the value of our home.

On the radio, and on television, and on the Internet and in the mail and in the newspapers and in magazines and everywhere all day long the message is borrow, borrow, borrow , borrow.  It has been that way for years.  I go to the local Sears store, and find a jacket on sale, and decide to buy it because I am cold.   They offer me a discount on it if I will open a Sears charge and put the purchase on my new card. They not only want me to use credit for something that I planned to pay cash for,  but they want me to open  a new credit line too.   They will make more money by getting me to use the credit card than they will by selling me the jacket.

Some stores have people right near the front door trying to get customers to sign up for a credit card as soon as I walk in the door.  I have one credit card for personal use and another for business.  I get checks in the mail from the credit card companies begging me to write checks for anything I want and the charges will just go on my card at a special interest rate.  All day every day I am given numerous opportunities to borrow money. 

It really works too because we borrow and borrow and borrow and borrow.  During the refinance boom people took money out and bought cars, vacations, real estate and even college educations.  Easy to do.  As a nation American consumers have reached $2.46 Trillion in installment debt, not including mortgage debt  as of the end of June 2007.  Honestly I don’t even understand a number that big. 

According to the federal reserve Consumer credit increased at an annual rate of 5-1/4 percent in the third quarter of 2007.  In September, consumer credit increased at an annual rate of 1-3/4 percent.

So when it comes time to blame someone who do we blame for the mess we are in?   Every time a consumer gets a loan he or she signs some papers.  Those papers contain a great deal of information about payments, interest rates, terms and what happens if payments are not made every month.  I say the consumer has some responsibility.

But, and I always have to throw those in.  I know people who are not very savvy when it comes to using credit.  They want what they can not afford because they saw it on TV, heard it on the radio, saw it on the Internet, received a post card advertising it and on and on it goes.  So they borrow money. 

Some were taken advantage of and I have met people like that.  I hear their story and I understand how they got in the mess they are in and my heart goes out to them.  I hear two or three sad stories every week from people who are in various stages of foreclosure.  My husband can usually hear my half of the conversation when he is near my office and he knows how empathetic I am and how hard it is to listen to home owners,  who are about to lose their homes. 

Is there someone we can blame for all of the foreclosures?  If there is I would like to know who to blame. 

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45 Replies to “Who's fault is it?”

  1. Patient Buyer says:

    Teresa-
    In a way we are all to blame for failing to learn from history. This reply will not tackle the blame issue, but rather some of the causes.

    Dot-com crash, economy on brink of recession.

    Greenspan attempts Keynesian pump-priming monetary policy, and succeeds in driving short-term rates VERY low.

    The low cost of short-term borrowing causes the non-bank finance sector to invent ever-riskier financial instruments, including the securities and SIVs that provided credit for risky residential mortgages.

    When the cost of borrowing for an asset drops below the rate of appreciation of that asset, a self-reinforcing loop begins. You borrow, buy, and sell at a large profit. Lather, rinse, repeat. Soon, a large number of people enter the “free-money” game and prices drive higher, reinforcing the idea that the asset is a can’t-miss road to riches. The rapid appreciation makes the risky lending look less risky to the lenders.

    Sooner or later, you either run out of buyers, or the cost of debt service reaches the level where the payment can no longer be reliably made by borrowers. The fact that we have had so many mortgage defaults occur in the first few months of origination shows that this bubble ran until its very last breath.

    I’m tired of hearing how exotic lending was a RESPONSE to rising prices. It was the CAUSE. Nearly all home purchases are financed, ergo the supply of mortgage sets the upper limit of each borrowers bidding power. If the bank will lend you more, you can pay more. If the max you can borrow is $250K, then you are not able to create demand for a $300K home. But, if the bank lets you go interest-only, then you can create demand at that higher price since you can service the monthly payment. The, if they give you and option ARM, you might be able to create demand at the $400K price point.

    Where things got bad was when the idea that any house at any price was a winning “investment” became entrenched in the collective psyche. That generated over-borrowing.

    Someone who makes $50k per year can only service the payment on a $300K house during the teaser period. They are essentially making a bet on appreciation. They are buying a house that they truly can’t afford using a risky financial instrument.

    Should we be surprised that this is crashing down? Not at all. Study any of the many financial boom/bust stories in history and they are not that different from this one.

    Here is the big thing that we must realize:

    Most assets such as a house, have several components to their valuation, as follows.

    Part A
    Nearly all houses have a certain basic, INTRINSIC value as a residence. If it is fit for human habitation, it can attract a buyer.

    Part B
    Intangibles – floor plan, location, square footage, etc. These are the subjective factors that then adjust the value up or down. As we all know, much of this is predictable, i.e. nice floorplan or yard, near a park, good schools, etc. Some of course is very dependent on the taste of the buyer.

    Part C
    Here is where the trouble starts. The twin emotions of fear and greed. They drive all market sentiment.

    Fear: “Buy now or we will be priced out of this neighborhood forever.” “If we don’t make an offer today, we lose our dream home.” “Everyone else is getting rich on real estate, the train is pulling away from the station without us.”

    Greed: “Real estate always goes up” “Only rich people can afford our neighborhood now.” “Let’s refi and let the house buy us a new boat.” “I watched Flip This House, and I am going to make a killing doing the same.”
    “I am going to use multiple no-doc loan to buy a real estate empire for myself.”

    Ad nauseum.

    THIS IS OVER. The Part C” component of pricing is missing now. There is no fear of a house getting away from you if you don’t make a same-day offer. There is no fear of missing out on real estate riches. There is now fear of losing money. The greed part is vaporized. We have shattered the myth that real estate never goes down. Foreclosures are rampant. The refi-ATM gambit is no longer so popular.

    Also, many people now have foreclosures on their credit histories. It will be a number of years until they re-emerge as buyers. They will also be more cautious next time. Bidding war? I think not.

    Supply is increasing, demand is decreasing, prices are destined to decline for a while, until the excess inventory is cleared and more important, buyer sentiment returns.

    Everything everyone did during this boom was totally sensible, provided you ignore historical perspective. The excesses increased a little each year, but not enough to alarm anyone. The wisdom of the crowd has failed us once more, and we will now need to pay the piper.

    Patient Buyer

  2. Patient buyer – “The rapid appreciation makes the risky lending look less risky to the lenders” Very true. I also beleive that low rates accounted for some of the real estate appreciation we saw but there was also a demographic trend that played a role making the demand for homes high which also drove up the price. We also “sold forward” in that the move up buyers have moved up and will not move for a very long time. Now we have few move up buyers and fewer first time home buyers. What I am trying to say is the demand for houses has gone down a bit. It will take time to absorb the inventory and for everything to kind of normalize.

  3. Patient Buyer says:

    I believe you are correct.

    As I pointed out though, some of the people that were “sold forward” bought into a marginal situation and are now having their credit tarnished for a time. It won’t simply be a matter of them re-emerging as buyers in a shorter time frame. They have had their personal finances ravaged, and will now probably have to save up a larger downpayment in order to qualify for credit.

    This will also be true for sufferers of self-inflicted HELOC wounds.

    Home ownership in the US has traditionally been around 64% of households. In recent years, that number has risen to 69%. This would be sustainable if this greater ownership rate was driven by rising incomes and greater personal savings. It was driven by increased debt, however. There is a good chance that we may see a reduction in that number, as lending and debt find their traditional levels.

    The mortgage lending industry is changing rapidly. We are not likely to see the return of exotic financing methods in our lifetimes.

    The fallout from the Bush plan, if enacted, is likely to take the shape of ‘unintended consequences’.

    What this plan entails is the government and mortgage servicers being able to force a third party to accept a change to a contract without due process.

    This erodes contract law and MAY make mortgages tougher to get in the future. Lenders will be wary of making money available if they feel that the government may alter the terms of private-party contracts at the stroke of a pen. They may demand higher down payments, higher FICOs, or or higher rates to compensate them for the risk.

    Besides, it is not like it is a bunch of ‘greedy banks’ that hold all this bad mortgage paper. Much of it will turn up in state treasuries (already happened in Florida), pension funds, etc. Can you imagine the lawsuits when it gets found out that some teachers union’s pension funds has a budget shortfall from having a rate freeze crammed down their throats? This will also reduce the revenues for Fannie and Freddie.

    Taxpayer bailout anyone? Get your checkbooks out, America, YOU will pay for this rate freeze, I guarantee.

    Plus, it prevents the market from finding a real bottom and getting on with the business of recovery. If you study the decline of Japan’s real estate market you will find it was the same type of government intervention that cause their ills.

    We are coming off the LARGEST credit party in the history of the world, by percent and amount. Credit crunches always follow, and this time will not be an exception.

    That said, look for more government do-gooderisms that will prolong the pain, and redistribute the penalties to the savers and earners,and reward the gamblers.

    America has a terrible problem with accountability and consequences.

    Sadly, I’ve not yet met one real estate agent who opposes government intervention. The boom was so delicious, I guess they are hungry for more. Good times will do that to a person. They should accept the bust a graciously as they accepted the boom.

    But that’s human nature, and to answer your question, that is where the blame squarely lies.

  4. Patient Buyer nailed it well, and I appreciate that.

    But going back to the whole “American Dream” thang that got us all interested in residential real estate in the first place:

    What was the “American Dream” of Pa Ingalls? Or any newly arriving immigrant?

    Houses as a place to shelter your family, “Part A” above, was what the Dream was supposed to be about. What we’ve seen recently was entirely about making money off of the house, a very different concept.

    I believe that the problem is always our fast-buck approach to life and the simple reality that we, as a nation, don’t make stuff anymore. We have an economy based on selling stuff to each other, sort of a great National Ponzi Scam.

    Realtors like Teresa sell people a home, and that’s always a good thing. Some realtors are more into selling people an investment that they can live in maybe. These are two very different things.

    There is a lot of blame to go around, but to me it comes down to a very different idea of the “Dream” than what built this nation in the first place. What Would Pa Ingalls Do?

  5. Patient buyer – Tax payer bail out, I don’t even want to think about it. I guess I have been thinking about it a lot, I just don’t want to write about it becasue it makes me angry. I actually owe less on my home than I did five years ago. You are dead on about the whole mess being debt driven.

    Erik – “I believe that the problem is always our fast-buck approach to life and the simple reality that we, as a nation, don’t make stuff anymore. We have an economy based on selling stuff to each other, sort of a great National Ponzi Scam.” . . get rich quick, borrow money to do it, the American way. “fast-buck” approach that is where it is at.

  6. My first snarky comment is that the media did it. If only we’d stopped reporting the news during the downturn, everyone would continue to overpay for homes. (I hope you know I’m just kidding here. 🙂

    In seriousness though, the situation the market is in is really tough. On the one hand, you do have all these people who were taken advantage of and lied to. They, like most people in this country, had emotional vulnerabilities when it comes to the American Dream. It’s true: even people with bad credit want to own their own homes. It’s too bad that so many took advantage of this desire, made a quick buck and now those people are left staring at foreclosure.

    On the other hand — some people are just plain irresponsible when it comes to money and credit. I sat back and watched so many peers go through this in college. They took out the maximum student loans because they could. They used credit cards to go to the mall or even to go drinking on Thursday nights. They had no worries or regard for how this would reflect their financial situation in the future, how they would pay this back. It didn’t seem to cross their minds.

    Fast forward to the day when these kids start thinking about buying a home and they are faced again with this now or later path: take the lower payment now and worry about the rest later or wait and save money, clean up your finances for the long term. I think a lot of people who chose the now path figured the house would pay for itself in due time.

    Some of those who waited or decided to go the long-term route by cleaning up finances and saving so they could take a more traditional and stable loan are probably feeling a little bit spit on now that the big plan is to freeze rates for those took the lesser expensive adjustables.

    So to get back to your question, who’s to blame? I’m going to say anyone who didn’t have a failsafe plan.

  7. Very nice Jessica. I have worked with people who want a home so badly that they will do most anything to get one and they are very vulnerable and some are naive. . . not going to touch the “media” part, I could really jump on that. 🙂 I think it is ingrained in our culture that we can borrow against the future and it will be OK.

  8. Some thoughts:

    (1) If homeownership rates return from 69% to 64%, and there are about 110million households in America, that means we can expect 5.5million homeowning households to return to renting. I guess that’s a lot! Maybe it’s a good time to be a landlord…?

    (2) I don’t think that the Bush plan necessarily erodes contract law. It’s a voluntary act of self-regulation by the lending industry in response to social and political pressures. Contracts are not sacrosanct in America; when a large-scale problem occurs (such as the foreclosure crisis) something you need large-scale solutions.

    (3) I do agree that there are some rather unpleasant consequences of bailing out these bad mortgages. We can’t demonize the people who stand to profit from these loans, because those people are us (well, pension funds, retirement funds, etc.). We will indeed bear a lot of the cost of freezing mortgage rates.

    (4) Lastly, I still don’t get the whole “american dream” thing. I’m really not enamored of owning a house. I think I may eventually own one, but I don’t think about it constantly and dream about it and so on. Without sounding too snarky, can someone write a little bit about why people want to own homes so much? I would like to understand this impulse better.

  9. Stephen – Just want to comment on the “American Dream” thing. I meet people who desperately want a home. They can’t affords one, and they look at 100K homes that are a disaster. I have seen people settle for sub standard living conditions just so they could have a place to call their own. My husband and I desperately wanted a home after the children were born. We struggled through the double digit interest rates and waited it out. No regrets about buying it ever. I have not many many people who don’t get it.

  10. Stephen — I love discussions of the American Dream as it was a constant theme throughout early American literature and stands open to interpretation. The concept has more to do with ownership, achievement and control over one’s destiny than home ownership per se, but that’s what it has come to mean in this country. The “dream” can be traced back to the first settlers who lived by the ideal that hard work leads to prosperity and stability, that anyone could essentially come to this country and find their own path through their own work.

    That was then. If you ask me, the American Dream today is to get rich and hard work is optional. Here’s where the homeownership thing came into play in recent years. When values starting shooting up more people I think started to see dollar signs on houses rather than nesting places or routes to their own prosperity (whether that’s a monetary thing or not). This may or may not have been exacerbated by other current events such as the rise and fall of Enron, pension plans and other means to retirement for a whole lotta people.

    Homeowners get many more tax breaks than renters and apparently much more sympathy from the government. The last two administrations constantly propped up “Blueprint to the American Dream” in their political rhetoric.. pushing for higher homeownership numbers.

    At the end of the day the American Dream is still a concept. Hunter S. Thompson explores whether it is still alive in Fear and Loathing, often showing the vile and sad side of it.

    I still believe that homeownership is the path to stability for most people. However, in high-cost markets such as the one I live in, I really think that’s up for debate. The rent vs buy numbers are pretty askew and the question of homeownership becomes one of lifestyle — do you want to own a home you can afford that will create a longer commute and remove you more from the city and the culture and community it breeds? Or would you rather live a lifestyle by your own rules, not have to spend your life in the car or on the train in exchange for giving up real estate ownership? In this case, owning a home doesn’t sound like a dream anymore. The new dream may have to emphasize more outside long-term investment vehicles if you find yourself priced out and not willing to give up lifestyle choices just for the sake of owning that home.

  11. Teresa — you’re right. There is something about owning a home that invokes pride. I feel like all kids deserve to grow up in a home they can count on to always be there.

  12. Patient Buyer says:

    Stephen-

    If it is ‘voluntary’ then why is the government strong-arming it?

    We are talking about securities where the actual investors are pooled and many will not give their permission. The servicers have no skin in the game in a risk of loss sense.

    Your quote:
    “when a large-scale problem occurs (such as the foreclosure crisis) something you need large-scale solutions.”

    THIS KIND OF THINKING is the problem. You have apparently bought into the idea that suspending all sense of accountability is the answer. This comment nauseates me.

    First of all, it assumes that intervening is the morally correct thing to do. Second, you assume that the government will know the correct way to intervene, without creating unintended consequences. Third, YOU ARE PUNISHING people who have saved their money and waited out the mania, but obligating ‘all of us’ to the bailout process.

    You are rewarding those who rushed to buy and were careless, or uniformed, or whatever reason they bought more house than they could handle. You are in favor of setting a precedent that says “go ahead and make the biggest financial decision of your life, and don’t give it a thought – the taxpayer has your back!”

    I’m sorry to be so vehement, but your kind of thinking is going to ensure that these kinds of crisis repeat themselves.

    It falls into the DO SOMETHING!! school of thought.

    Ugh. No wonder we never learn.

  13. Patient Buyer-
    It is frustrating when the government has to intervene when greed has taken hold of the economy. (It’s done it before- The Savings & Loan bail-out in the 80s)

    However, what is going on today is larger than just the housing industry. There is a snowballing effect on the jobs, and global markets. And THAT’s what the government is trying to avoid. The fed is trying to circumvent a major recession in an election year.

    Is it going to stop the hemorrhage? That’s doubtful- it will at best delay it for the next president to deal with.

    Many people can’t even grasp the what happens to their mortgage after they purchase it. But if secondary mortgage holders aren’t making money, they go out of business because that is their business. If they can’t buy mortgages from primary lenders- these primary lenders have no money to make new mortgages. So it gets harder for someone to buy a new home. Which is not something you want to face in a presidential election year.

    If people can’t buy home- less new homes are built, less lumber & other materials are sold, less appliances are sold(less are made), less taxes are paid to the local government and less services are delivered to citizens. People who are struggling to make their mortgage won’t buy new cars, clothes, computers and on it goes.

    Ultimately, the economy comes to a halt. There is a trickle down effect on everything.

    People have to learn to live within their means and its hard for an average American to do when we have built a “buy now, pay later” culture.

    Price fixing and freezing just doesn’t work. So maybe there is a short-term fix for things today- but it’s going to come back to bite us.

  14. Patient buyer – my views are similar. I did not refinance, I pay cash for our cars, and have a total combined credit card debt of $76.34 becasue I left my check card on my desk and went to the grocery store without it. Honestly I think there needs to be more consumer education. I think we all agree that the way we spend and borrow is also cultural and like Erik said we don’t make anything much any more our economy is built on selling each other stuff. The housing market will drag the economy down just as it saved the post 911 economy.

  15. Some follow-up thoughts:

    (1) Regarding the relationship between “american dream” and “stability”. This is indeed an interesting point; from my point of view, stability–at least economic stability–is a function of education and career experience. Since I work in a mobile field (software dev), stability is not measured in my economic commitment to location. It is instead measured by my marketability in a national (and global) labor force. In that respect, being tied down to a specific place (via home ownership) is burdensome. Hmmm. What is this experience like for others? That is, what is the relationship between stability in place vs. stability in employment for other professions?

    (2) Regarding the Bush foreclosure plan: Certainly I agree that we, as taxpayers, shouldn’t have to bear the burden of bailing people out of their own poor decisions. However, we have to deal with the socio-economic fallout of the problem. I’m oversimplifying a bit, but that’s basically the same rationale by which the SEC was originally created: the freemarket exchange of securities led to an unacceptable widespread crash (1929), so the gov’t stepped in to regulate the industry.

    Of course, there’s a huge difference between creating NEW regulations for a sector vs. manipulating existing contracts to control the market. I actually agree that a freeze on ARM’s is a bad idea; I would rather see taxpayer assistance for dispossessed people in the form of rental assistance / financial counseling, in addition to long-term improved regulation of mortgage securities. This is a longer term solution, and it’s clear that politicians are interested in short-term solutions that make a bigger splash in the headlines.

    So, what steps could the gov’t take to address the crisis that don’t include bailing people out? How can we address this public policy issue without altering existing contracts?

  16. This is my kind of discussion. I’m not sure that we can come to a reasonable conclusion we all agree with, but we’re deep into the heart of the matter and touching on the stuff that isn’t usually talked about publicly.

    To me, I don’t think there’s a way out of this that doesn’t include a bailout. I made a jokey reference to what I believe will happen right here last April Fool’s Day.

    I call it the “Helicopter Ben Theory”. Sooner or later we will have to have something like a New Deal, meaning that a lot of money is going to be printed to cover someone’s butt. We got a lot closer to that reality in SIVs recently.

    This may sound awful, but as was said in a recent John Maudin newsletter, Michael Lewitt of Hegemony Capital Management (HGM) said, “As for the risks of “moral hazard” that Philadelphia Fed President Charles Plosser and others have warned about if the Fed were to make such a move, HCM would echo Mr. Kohn’s statement that there is ‘no need to hold the economy hostage to teach a very small minority of the population a lesson.'”

    He also opened with this quote: “The western world has embarked on a speculative journey for which all the historical precedents are ominous.” (Peter Warburton)

    Since I think that we will, ultimately, have to run the presses to print enough $$$ to get out of this, why not put the money where it will do the most good – at the bottom, rather than the top? I think we learned in the New Deal that a kind of partnership with the real victims of cavalier financial games are the ones who we can form the best partnership with to work our way out. Let’s see a federal plan to assume some mortgages with low rates and a substantial degree of forgivesness if they can work their way out of the current problem.

    Either that, or literally drop money from helicopters. It makes more sense to me than bailing out the big guys, as we have already started to do.

  17. Ms. Boardman finds three parties to blame: lenders, people who committed mortgage fraud, and undisciplined consumers, but surely some of the blame should be saved for herself and other Realtors: they’ve perpetuated a compensation system under which they always have an incentive to recommend that a transaction occur, as opposed to counseling a prospective buyer to exercise patience or prudence and not buy, or counseling a prospective seller to reconsider that decision to list.

    I’m not being quite fair to our hostess, who seems more candid in this regard than many of her peers, but in my experience, Realtors often prey upon people’s natural wish for security and stability by emphasizing only the benefits, not the disadvantages, of home ownership, and by encouraging reckless financial decisionmaking.

  18. Bubble_up – I have always counseled buyers and sellers. They sometimes change their minds about purchasing or selling after they talk to me. I am incensed that you would think that those of us who work on 100% commission by giving bad advice or by encouraging poor decsions. Good Realtors make more money on referrals. An unhappy buyer or seller does not give a referral. That would be one built in incentive to do a good job. Yes there are dishonest Realtors. I have no idea what your occupation is but I am sure I can find some dishonest people in your profession.

  19. I don’t know anything about the Phoenix market and so I won’t comment. You are right about our reputations too. I say these words almost every day “real estate sales, 100% commission sales, and blogging are not for wimps”. Thanks for being sympathetic but we are all in the same boat. People with jobs lose them every day. They get laid off, fired, downsized or eliminated. People in many industries and the economy in general benefited during the “hot market” years. As for the reputation thing I guess I would enjoy having a job where I was respected for my hard work and accomplishments, but I don’t and I am not going to let it bother me.

    My apologies. You should not have been insulted on my blog.

  20. Dear Ms. Boardman:

    Thank you for the apology, which only confirms your own good character, already so evident to your many readers. I sincerely hope that you — and your great blog! — flourish through the turbulence ahead.

  21. Thanks, and honestly thanks for stopping by. Your comments do add value and it is a reminder to me about what kind of an impression the general public has of Realtors. I will do just fine through the turbulant times. I have been through them before. I always have enough reserves to make it through lean years becasue I plan ahead.

  22. The topic of borrowing money above and beyond your means came up in our company’s meeting this morning. I think that anyone in a position of money lending should not be blamed as long as they explained the terms fully- Full Disclosure. It is up the consumer to make the end decision as long as they know all the terms.

    Purchasing a house is an emotional decision for many. Unfortunately, it is also a very serious business decision. When consumers purchase a house with their hearts instead of their heads they are at risk to make unwise financial decisions.

  23. A couple of thoughts to add to an already excellent discussion. The current administration is the most business friendly anti-regulatory admin since Herbert Hoover… the fact they did anything, should be a clear signal they are trying to head off a a train wreck of historic proportions. Liquidity is the ABSOLUTE necessity of any modern market- and it is seriously threatened here, in fact it is, for all intents and purposes frozen in some parts of the country.

    Will the G Men get it right? Will the folks who need the help the most get it? I agree with Erik that the help needs to get to the homeowner to help save his house and community. I have less confidence this particular government will get it right…can anyone say dial 1-800-995 HOPE? Katrina? Enron? Ira… it’s a long list.

    As for the prudent man who saved and is doing it the “right way?” and now watches a bailout of some of his less thoughtful neighbors unfold… he should be, if not happy then just glad. If there isn’t a bail out and he has 2,3 or 10 homes in his neighborhood foreclose, the entire neighborhood’s property values quickly go down, homes become vacant and the whole neighborhood quickly deteriorates, much faster than he can get out. And he, and the folks who “did it right” and those who didn’t, all lose together.
    And Theresa, you and I work for the same thing– happy, satisfied, long-term clients. But there is an element in our industry that is entirely greed based with little thought about tomorrow. “Where were the Realtors” is the title of a post I wrote a few months ago, in response to a local scandal involving new homes and one particular “Buyer Agency” firm, which of course was nothing of the kind.

    Who are the guilty parties? There are too many to list, sins of commission and omission, in business, in government and yes some homeowners who should have known better but let their desire for more things inform and persuade their judgement.

    Yesterday was just a start.

  24. well said Terry. As for the bailout I don’t like it either. I have been predicting it for months but this does affect us all and the value of our homes.
    Rebbecca – I wish I could agree with you but I can’t. You are right about the emotional component of home ownership. The people who have commented the most of this post do not own homes. either becasue they don’t have the need or are waiting for that perfect time to buy in a totally risk free situation which will never happen. Maybe your office did everything just so but some offices did not.

  25. Theresa, I think you’re being unfair to your commenters: I didn’t hear anyone say he was “waiting for that perfect time to buy in a totally risk free situation.” Just because someone thinks it’s crazy to buy now doesn’t mean he thinks it’s always a bad time to buy, and it hurts your credibility to confuse the two things.

    There ARE objective criteria as to when it’s a good time to buy a home: an area’s purchase – rent ratio, median income – median price ratio, and historical average rate of price increases are the most obvious ones. By all three of those measures, it’s a terrible time to buy pretty much everywhere.

    Blannti

  26. Blannti – My statement might be unfair. There is a commenter waiting for the perfect time to buy. The conversation has been going on for months but is maybe not evident in these comments. You are correct there are objective criteria. There is more than one way to look at home ownership. There are people like me who consider a home to be first and foremost a place to live. My home is worth about the same as it was last year but that makes absolutly no difference to me. It just means that if I sell it I’ll get less but I’ll also spend less on another home. If I did not have a home I would buy one but only if I knew I would be staying in one place for several years. I honestly don’t think it is a bad time to buy for everyone. I think it is bad for those who see real estate only as an investment adn nothing more. Right now it is not the greatest investment. We never considered any of the ratios you mention when we bought a home. We wanted a place of our own to raise our children and were tired of renting. At the time interest rates were ridiculous by today’s standards. Unemployment was at an all time high and the stock market had just taken the largest single day drop since the great depression. Yet we bought a home and continue to be very happy with our purchase.

  27. Spirited discussion, hard issue, almost (almost) useless to worry about blame at this point we just need to fix it. How does it get fixed? The root of the issue is greed, on the part of wall street and individual buyers and everyone in between. Blame does us no good, but let’s work on fiscal responsibility.

    Luckily I have good Midwestern clients who are looking to buy a home. That’s right, a home, which will be a wonderful place to come home to after a hard day’s work. We can look for homes that have some of the important amenties for them…amenities that will help them enjoy their homes for years to come. We also look for homes that won’t freak them out every time they pay their monthly mortgage. This is fiscal responsibility.

    I have a wonderful client now who said ‘it’s a pain in the ##$%^ to move so I want to find a house I can grow into, call my own for years to come.’ How refreshing is that???

  28. Patient Buyer says:

    I’ve had similar experiences to Bubble-Up.

    I have had many people including realtors and mortgage people act as though I have insulted them when I suggested that price declines lay ahead (obviously I was correct). Some treated me as though I waas a fool.

    My own personal feeling is that as a buyer, I am in a three-against-one fight. The seller, seller’s agent, and my agent all would like to see prices rising.

    Let’s examine why.

    Some background: Often, when I am discussing my frustration about my business relationship with my own agent, people tell me that my agent wants the price of my transaction to be higher, for the sake of their commission.

    I really don’t think so. I think the reason is subtler. My belief is that most agents (like most human beings) prefer getting things done efficiently. Therefore, getting me to accept paying a higher price increases the odds that a sale can be made, rather than dithering over price. But that does not explain their bias toward higher prices. Because, just as easily, they could want the seller to drop the price, “just to get the deal done”.

    I can’t count the number of times that agents at open houses told me that ‘now’ was the best time to buy, and that a house was a great ‘investment’.

    SOME, NOT ALL, realtors have a horse in this race. They have, however well-intentioned, bought into the notion that housing is the ‘best investment’ and that prices ‘only go up’, and that renting is ‘throwing money away’, you always make money ‘in the long run’ etc.

    Declining prices are a DIRECT ASSAULT on their most cherished beliefs, and many that believed theses things are being proved WRONG. No one likes to be wrong. Especially to be wrong in their PROFESSION. Stockbrokers get used to it, but SOME realtors who are experiencing this are getting their first taste of being proved wrong about their financial advice.

    I think that those who drank the kool-aid of ever-increasing appreciation and distributed it freely to others are smarting a bit here, and I’m sure that’s why that Cragun guy snapped at Bubble_Up.

    Humility only tastes like humiliation if you already had filled up on pride.

  29. Patient Buyer
    I don’t have a price bias. I work in all price ranges and I do negotiate for my buyers and sellers. There are plenty of other agents like me. I don’t do open houses. i don’t beleive in them. Other agents do them for me. I have also written some posts on this blog that plainly say now may not be the best time for everyone when it comes to buying and selling real estate. Last week I wrote about people buying “rebound” homes making poor decisions based on emotion. A couple of weeks ago I wrote about the 100K houses not being much of a bargain.

    I have heard agents say that it is a great time to buy and I worked with a real estate company that gave us marketing materials that said the same thing and that same company ran an ad in the St. Paul paper on Sunday saying it is a great time to buy. For some it might be.

    I have a question. If you bought a house today in St. Paul, for 200K how much will it be worth in 2115? If you bought that very same home in 1999 how much would you have paid for it? I am asking because I don’t know how much that 200K house will be worth in 2115 . I can think of many ways to use that information to help my buyers.

  30. Patient Buyer says:

    You must have misunderstood my comment. When I said “price bias”, I was not talking about price ranges, I was talking about the bias that prices “always need to be rising”.

    My experience has been that nearly every realtor I have spoken to dislikes the idea of declining prices, even though that means first time home buyers can benefit from the increased affordability. If a person can buy a home for less, they have more money in their budget for transportation, health care, recreation, etc.

    Why is that a bad thing in the minds of so many realtors? Even the ones that acknowledge that prices will have to come down to increase affordability, they also quickly point out that prices will rebound soon after.

    Do you understand where I’m coming from? All sellers like rising prices. All realtors like rising prices. Only buyers don’t.

    Realtors should be totally neutral on prices. Why should they care?

    Answer- Because appreciation is a buyer-motivator. Now, negative appreciation is a buyer motivator the other way.

    So, while MANY realtors may want their buyer to get a good price, I don’t think many of them like decreasing prices.

    Even though they would love it if the price of anything else decreased (cars, computers, food).

  31. Patient buyer – I did misunderstand you. Lower prices are good for home buyers, especially for first time home buyers. I guess the bias as you call it toward increasing prices is becasue of the sellers and maybe some of it is becasue if prices go up home owners profit from it and investors buy real estate and some of the mortgage products are less risky. Buyers have the same advantages but if home prices have already gone beyond what buyers can afford an increase is not going to help them. But this is confusing because buyers seem to be afraid to buy becasue prices may go down further. They want the price to go up. So I see that bias among home buyers too. Would you buy today if you knew that values would go up 10% next year?

  32. Great discussion. Teresa you really know how to write about a hot topic.

    It’s so true that real estate is local. Here in Arlington, VA prices have gone up in the last year- and even that is very hyper-local because it varies by zip code. If you go over to the next county- Fairfax- the numbers are very different.

    I am working with 2 buyers now who are really interested in buying a home where they can start and raise a family. They are not worried about what’s going to happen to values over the next 3-5 years because they are going to stay in their home for more than that. Both are first time buyers. They are not quick to believe all the media reports.

    I agree with Teresa that this market isn’t for everyone. People get nervous by all the media and don’t want to buy when prices are falling. It’s so hard to predict the rock-bottom on the market because you will only know that when prices start to rise again.

    I really believe that no matter what the market trend is doing- wintertime in the areas that have winters is always the best time of the year to buy v. buying in the warmer weather. But if a buyer isn’t ready, they aren’t ready. And they will find something to justify their decision. And that’s ok- they just aren’t ready. Everyone has to work within their own timeframe- not anyone elses.

    I am not afraid to tell a client that they should wait. I’m in this business for the long term. I will be around when they are ready.

    And I don’t have an interest is selling a property at a higher price- my interest lies in getting the best value for my client. And by value I don’t mean what they pay for a home. It’s what they get for their money, where they are living now and will this purchase fit into how they want to live their life.

    Getting a home at a higher price isn’t going to make a whole lot of difference money in my pocket if my client isn’t happy about it. I’m not in the business of just selling my client a home, I want to sell his/her friend a home, and so on. You don’t thrive in this business if you are only worried about your current sale. You thrive in this business by doing what’s best for your clients.

  33. Nicely put Mary. Home prices have increased in several St. Paul neighborhoods as well. They have gone down in some too. That is why I publish prices by neighborhood each month for St. Paul.

  34. If “all real estate is local,” then why are Congress, the President, and the Fed so concerned about housing? It’s because there’s a national bubble — sure, some areas are less bubbly than others, but no area is immune, and at this point, prices are declining virtually everywhere. Even in Seattle, despite what Ms. Boardman apparently is being told: this morning’s Seattle Post-Intelligencer, under the headline “Housing Market Decline Called Likely to Continue,” reports that “The typical house that sold in King County [i.e., Seattle and suburbs] last month fetched nearly 10 percent less than the typical sale in July, according to statistics released Thursday.” Here’s the link: http://tinyurl.com/yv5et5

  35. Bubble_up – yes it is a nation wide crisis, but I stand behind my statement “real estate is local”. Didn’t see the morning paper for Seattle. When Cragun made the comment the market for Seattle was very strong

  36. Patient Buyer says:

    Teresa-

    To answer your question, yes, if I knew prices were going to go up 10% I would buy – but not for the gain, only to avoid being priced out later.

    I plan to live in the house I buy for 10 years or more. I have no plans to EVER EVER EVER borrow against it unless there is an emergency.

    The average house appreciates at the average wage growth for the region in which the house is located.

    The people in California that believed that sooner or later all starter homes would be 500K plus, even in the middle of gangland were crazy.

    Obviously, incomes could not and are not supporting those prices. Perhaps they thought that more rich people would move there, I don’t know.

    I am waiting for prices get closer to their historical relationship to incomes and rents. In may view, that means about another 10-15% in the SW metro suburbs. I just am not interested in paying prices that are just slightly off bubble peaks.

    Will the spring bring a rally in home prices? We don’t know. What I hope happens is that prices slide enough to trigger buying at normal levels, and then realtors can sell houses, buyers can buy them and we all get on with our lives. I look forward to the day when a house is CORRECTLY viewed as a PRESERVER of wealth (inflation protection) instead of a financial instrument to be played.

    It sounds like you, Teresa, DO have your clients best interests in mind, especially since you are willing to say that now might not the best time to buy for some people.

    That kind of candor and professionalism is greatly appreciated by people like me.

  37. Patient Buyer – 🙂 There is one thing you said that I just love and that is people need to stop seeing houses as financial instruments. We bought our home many years a go. We live here. We did not borrow more against it. Our mortgage payment is less than rent would be for a 1 bedroom studio apartment. I also love the idea of buying a “home” and living in it for 10 years. Yes there are also several areas that really are over priced.

    Oh . . almost forgot, I am telling sellers not to count on a spring price increase.

    I also appreciate your candor. 🙂 Thank You.

  38. Teresa,

    I know you from Active Rain and I’ve seen you around in the blog-o-sphere but I haven’t formally introduced myself…and well, nice to meet ya!

    After reading this post, the following quote came to mind:
    “As much as possible, deal only with good and honorable people. If you deal with good people, you won’t need a contract, and if you are dealing with bad people, no contract can protect you.”
    Adam M. Aron

    Sometimes in our industry, good people are hard to find. But, I firmly believe that the people reading this blog, and the person writing it, are consumer advocates hell bent on doing what’s right for the client. I tip my hat to each and everyone of you and I say, blog on!

  39. There are good and bad people in every profession. In the “boom times,” agents simply had to have a license and a heartbeat and they could sell houses. With this changing market, many of those agents will simply fade away, leaving the remaining group smaller but also more professional.

    Teresa is right… this business is always much easier when it’s built on referrals and so it is in the long-term interests of most agents to serve every client to the highest possible level… and that means honesty about everything.

    No we haven’t hit a market bottom in the Twin Cities but given the price reductions we’ve seen so far and the substantial drop in interest rates from this summer, affordability has already improved substantially and that will bring out some renewed interest from buyers who were out of reach in past years or simply want/need a home.

    If consumers were purely focused on price, everyone would buy cars when the new model comes out so they could pick up the previous year’s model at the cheapest price, everyone would only buy milk when it is on sale, and we’d go on vacations in the slow season. Just like everything else, there are many reasons that people do the things they do in regards to real estate.

    I’m personally looking for a home to move-up to right now. I haven’t found what I’m looking for yet but if I do, I wouldn’t hesitate to make a purchase in this market, when I can lock in a 30yr fixed at under 6%, if I can negotiate a fair price on it. That <6% rate will be good forever, effectively locking in most of my housing costs over the long term, so I don't see the need to time the bottom in prices if I can time the bottom in interest rates.

  40. Aaron – I think you should move to St. Paul. 🙂

  41. I’m a west-metro kind of guy. I’ll make day trips to you folks on the other side but if I were ever to buy in St. Paul I’m sure I’d turn into a pumpkin! 🙂

  42. Aaron – here’s the deal, you live in St. Paul where is is peaceful and quiet, you know the saintly city and then party in Minneapolis all night long. 🙂

  43. Are you so amazed that people are using their homes as ATMs when there are numerous credit card commercials on the TV that show a really great shopping experience with dancing and singing until (gasp) someone wants to pay cash for their purchase causing the rest of the people extreme anguish? Until it becomes “cool” to live within your means and save your money rather than trying to keep up with Jones’ we will continue to see financial problems sprouting up all over.

  44. No Tara I am not amazed. It makes sense. That was kind of my point is that we are bombarded with ads for easy credit and some stores even argue if you want to buy something inexpensive and try to pay cash.

  45. andrea robinson says:

    Try and find statistics or differences in racial differences in home ownership findout how much people pay for home ownership for african americans.

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