Many people across the country are having trouble understanding why their home values have dropped so much.
Since i've been in the banking industry for 15 years, 10 of which are specific to mortgage lending, i'm going to explain why, and when you can expect home values to stabilize, and start to apperciate again. And, more importantly, how it's affecting your home business.
Up until the end of 2005 and beginning of 2006 (when the real estate market peaked) we were always taught, the best investment to make other than gold, is real estate. Robert Kiyosaki teaches it, Donald Trump teaches it, and I 100% agree with it.
Then why did home values drop so much?
Well the simple answer is bad lending practices. And every bank is guilty of it. Some banks were a little more conservative than others, but they all did it, and are now paying the price, with millions of dollars in losses.
I'm not going to get into all the mumbo jumbo about how the investor portfolios work, and the pool of money they have to work with etc, etc, etc. Just understand this. The rule of thumb was always, and always has been that homes apperciate in value, they don't depreciate, right? Wrong?
There was a time when banks had strict underwriting practices when someone wanted a home loan, or home equity loan. They would require bank statements, full tax returns, current paystubs, plus a clean credit history with no bankrupcy's or charge offs.
The practice over the last few years, as we've seen, was to just get the loans done, no matter what.
Over the last few years banks loosened their lending requirements. They waived income verification on people who had sub par credit. (People who had no business buying a home, because they were not good crdedit risks, never paid their bills on time, and could care less if they defaulted on a home loan) So it was very easy for people to lie about their income, just to get their application approved. (Which happened a lot)
Banks also increased their lending limits. People were allowed to take out full 100% equity in their homes. And people could literally get 1 to 2 million home equity loans, with no documentation, or no fees, whatsoever.
We also saw some banks giving people 125% mortgage loans. So people were already negative 25% equity in the home they lived in.
Another mistake was giving people 3 year adustable interest only 2nd mortgage loans. With no option, or guarantee to refinance when the 3 years were up. Even if the payment doubled at the end of the three years, the bank didn't care, and neither did the consumer. The idea was "our home value will be higher at that time, and we can refinance anywhere".
I even saw one mortgage where the 1st mortgage was a credit line attached to your checking account. And you were required to have Automatic deposit of your paycheck into your checking account. Every time you got paid, the balanced of your mortgage went down. But everytime you withdrew from it, your principal balance went back up again.
We can see how these banks were setting themselves up for failure with these rediculous products.
Honestly, none of them should have been done in the 1st place. But with constant pressure to compete with other banks, and mortgage companies, and the threat of losing business, the attitude was "just make the deal work, and push it through as fast as you can".
So why have the home values dropped so much?
We discussed before how the market peaked around the end of 2005, begininning of 2006. Well the values plateaued and kind of stagnated. Without all the gritty details, just understand the bubble had to pop sometime and the appreciation of home values, had to slow down sometime.
So it did. But what happened next is the gruesome effect of bad lending practices that affected the entire country.
Remember some of those adjustable 3 year mortgage we discussed? And 125% mortgage products. And no document requirement for people with bad credit. And 100% interest only mortgage products.
Well some of those people could get approved to refinance their home because the value did not go up, the value went down.
So here they are, stuck in a home, not worth what they bought it for a few years before, and the payment is now double.
What next?
Well as you could expect, thousands of people literally walked away from their homes. Mailed the keys back to lenders, and moved out in the middle of the night.
I was literally witness to two families that did this on my street. Why they were so secretive is a mystery to me. I guess they were just embarassed.
So now we have homes that have been foreclosed on. Sometimes vandalized because the owners are upset and trash the home before leaving. And the sale price is most of the time less than 1/2 of what the home was purchased for, just a couple of years earlier.
Now there's homes in the MLS database, selling for rediculously low amounts. So you go to list your home for sale, and the only comparables are the foreclosed homes, which drives your value down. So after your home sits on the market for a year, you sell it for far below what you should, but you have no choice, because no one is buying it, and what's worse, is you pay the buyers broker commission.
So what happens when your neighbor goes to sell his home? The same thing. Now your home is listed as sold for a rediculously low amount, in addition to all the foreclosed homes.
I think you are starting to get the picture with this domino effect on the entire real estate market throughout the country.
So what's next, when will the madness be over?
Well I have good news for you.
Right now during the madness is when people are looking for other alternatives to make money. People are open to home businesses. People are looking for alternative ways to make money.
People are never prepared for this. They sit on their laurels, blind to the possiblity that they may be out of work someday. Real estate agents and 1st and 2nd mortgage loan officers are the worst.
A couple of years ago they turned their noses up at me, and said "I made a million dollars this year, why do I need you". Well now they all have egg on their face.
I sometimes feel like I'm in the matrix and these people need the pill to wake them up from the fantasy land they live in. Yeah, my nightclub and stripclub did a million last year too, but I still have an internet business to provide a second income if that business ever fails, or I become ill and can't run it.
So now is the time to capitalize and bring in hordes of people to your home business
because NOW, they're willing to pay attention.
As far as the real estate industry is concerned, people are over reacting. Almost all of the bad mortgage companies involved in "subprime lending", have gone out of business. They closed up shop in mid 2007. In addition banks are no longer doing bad loans.
So most of the adjustable rate loans, and interest only loans, have already been foreclosed on, and are pending sales. The people with bad credit, that lied on their applications and couldn't make the payments, have also already been foreclosed on. The government is also working with lenders to stop foreclosures, and come up with refinancing solutions to save people's homes.
Realistically in the next year and 1/2 all of the foreclosures will be sold, eliminating the negative impact they are having on surrounding home values. When they are all gone, the only homes being sold will be seller to buyer, or new purchases.
I think the government realizes this as they have put a freeze on the prime interest rate, until October.
After all the seller should be the one holding all the cards (if they know what they're doing). When this shift in the market happens, and the seller calls the shots in the sale, we will once again see a stable market, with slow appreciation in home values again.
Thus my conclusion. The best investment next to gold, is real estate.
William Whitlow
http://www.williamwhitlow.com
