When it comes to the housing market, history isn’t repeating itself
Growing worries about a potential recession have many people concerned about the state of the US economy. Warnings of a housing crash are abuzz, sparking fear and trepidation, as the country cools off its hot housing market fueled by the pandemic. The headlines have people asking: is today’s housing market in the same crisis as the 2008-2009 crash that caused the Great Recession?
The short answer is: no. History isn’t repeating itself. Even though America’s housing market is in far better health today than it was 15 years ago, many people continue to scrutinize housing because of the 2008-2009 recession. The truth is today’s volatile economy has little to do with housing. To truly grasp how different the situation is now, it’s important to understand the nature of the real estate industry back then. The unscrupulous practice of lenders, realtors, appraisers and escrows led to the Great Recession as they took advantage of the salient lack of oversight and bureaucratic measures that could have prevented what occurred.
Flashback
For me, the recession of 2008-2009 really started in the fall of 2004. I was 21 and working for a small real estate brokerage in the San Fernando Valley. The brokerage had ten people – agents and staff – and was housed inside a 500 square foot office, but it generated an incredible amount of money. I was an intern, managing transactions after hand-off to take them to close, while getting on-the-job training from my mentor Majid Maoyer.
Majid did it all – he was a real estate broker, a mortgage broker, and owned an escrow company. He was a social butterfly, well-loved in his community, and well-connected with local businesses. At that time, I was still timid, nervous to speak to other people, and afraid of rejection. I hadn’t hit my stride, but I was eager to learn and ready to launch my career. Majid really took me under his wing, got me out of my shell, and put me in a position where I could be most effective and helpful to our clients.
I recall a time when Majid introduced me to one of his clients. “This is my junior loan officer Herb, and he’s going to take over at this point to take you to close.” I’ll never forget how the client took one look at me, all of 21 years old – barely able to grow a scattered mustache – laughed and said, “This kid is going to take me to close? Get out of here, Majid.”
But Majid had a deep faith in my abilities and a deep belief that I would succeed.
We started on an upward trajectory where I learned to work as both a realtor and a loan officer, assisting Majid where I could so that I could gain more knowledge about the industry. We started to have a lot of success, selling and closing properties consistently. At one point, I began to wonder how is it that everyone is doing this at such a high volume?
Staring into the belly of the beast
I wanted to look deeper into the systems at play to understand the burgeoning wealth of the real estate industry. I spoke with other colleagues to ask about what and how they were doing to compare. I distinctly remember having lunch with an incredibly successful colleague and asking how she was accomplishing her sales. She told me that they were doing a lot of 0 down loans. When I asked her what that entailed, she went on to tell me they had an appraiser on payroll and a mortgage company on-site.
Then she says, “Basically, the appraiser gives us the value that we tell him.”
I was baffled. I never saw this practice play out in my day-to-day.
“That doesn’t sound right,” I told her. “What do you mean, you tell the appraiser the value you want?”
“Yes. We give him a certain amount of dollars, he signs off on the report, and the bank will issue a loan at 0 down.”
This took me aback, and so I dove a little deeper and asked her to walk me through a client she was working with. Her client was self-employed and they allowed him to do a stated income, instead of going “full doc.” A stated income loan is a mortgage where the lender does not verify the borrower’s income by looking at their pay stubs, W-2 (employee income) forms, income tax returns, or other records. Instead, borrowers are simply asked to state their income, and taken at their word. Going full doc literally means requiring full documentation of all income and assets, and then verified based on the standards of the lending institution. Full doc loans typically require multiple official documents to prove that the borrower earns enough money to qualify for the loan. For my colleague’s client, the loan was issued.
On the real estate side of the transaction, the property’s price was inflated. She asked the seller for the price they wanted to sell, then she sold the property at $50,000 over, and offered the buyer a $50,000 cash back incentive.
The buyer then had $50,000 on top of the property he bought. The agent convinced the buyer to use the $50,000 to purchase another property with a 0 down loan and $50,000 cash incentive. And another, and another. This one client came to own 27 properties and completed 72 transactions in a 36 month period.
This is just one example of how some agencies built wealth. My colleague’s agency, and agencies throughout the San Fernando Valley and across the US, was doing this at a high level and they had a system to it. Banks were issuing mortgages that shouldn’t have been issued. Without oversight or regulations, the bubble was ready to burst.
What goes up, must come down
If you were house hunting before the crash, you could choose between an array of loan products to keep your payments low such as an interest-only loan, a “choose-your-own-payment” loan, an adjustable-rate mortgage (ARM) with an extremely high cap. If your credit score was low, you didn’t have money for a down payment or your income was erratic, you could get around all those obstacles like my colleague’s client did with a no-documentation loan, sometimes for as much as 125 percent of the home value. But the lenders quickly learned it was not sustainable to issue the exorbitant amount of loans that they did.
Majid was also selling at a high volume, but not in an unscrupulous manner. He was issuing 0 down mortgages, all in accordance with what was being provided by subprime lenders, offering them as a product to families who didn’t want to make a big down payment.
I will never forget January 2008. We had a pipeline of about 20 transactions, with an expected commission of about $300K that month for the whole office. We were getting ready to start funding loans, but the banks were no longer issuing those mortgages. We had clear-to-close loans, where all you have to do is sign and fund, and the banks would not honor them. I was literally watching the recession happen in real time.
One by one, the banks started to close and file chapter 11 bankruptcies because they couldn’t support the number of transactions that were done illegally. Borrowers realized they had bought into unaffordable mortgages. Property values fell and millions of Americans lost their jobs. A foreclosure crisis among homeowners and a credit crisis among the investors who owned bonds backed by defaulted mortgages defined this catastrophic recession.
The effects on the real estate industry were devastating – both professionally and personally. We saw people go from extreme wealth to poverty in a matter of weeks. The trauma of literally losing it all drove many into deep depression, broke up families, and in some cases, led to some agents/brokers taking their own lives. It didn’t matter if you were an honest broker or not, the consequences of the crash hurt everyone. For Majid, his health quickly deteriorated as we could no longer fund the business. Sadly, he passed from cancer before he could see any economic recovery or government intervention.
Don’t call it a comeback
Today’s housing market has cooled after a hot stretch during the pandemic, but it doesn’t mean the 2008-2009 crisis is coming back. The Great Recession was caused by the housing market collapse. In contrast, our current volatile economy is affecting the housing market. The country is wrestling with rising inflation, a grueling war, and stock market turmoil.
America’s housing market is in far better health today. This is in part due to new lending regulations and oversight that resulted from that meltdown and puts borrowers in a less precarious situation. Agencies like the US Consumer Financial Protection Bureau (CFPB) make sure banks, lenders, and other financial companies treat you fairly. The Department of Real Estate monitors any real estate licensing. The Department of Business Oversight and NMLS improves supervision and transparency in the residential mortgage markets by providing regulators, the industry and the public with a tool that tracks companies and individuals across state lines and over time. In turn, lenders have become more strict, the borrower FICO score averages 750, and the credit quality improved. There also aren’t as many risky loans or mortgage delinquencies.
The biggest problem in the housing market now is home affordability and availability. Even though inventory is starting to rise, it is still about half of pre-pandemic levels. While there is no guarantee the economy will crash or maintain its relatively smooth sailing, savvy business owners and entrepreneurs can take advantage the opportunities that are never there when we have a growing economy. The prices of houses has stabilized, the big metropolitan areas that produce high income jobs continue to see moderate growth, and mortgage rates are still relatively low from a historical standpoint.
If you are thinking about buying or selling your property, get in touch with us so we can talk about what your options are – because there are still plenty of opportunities!
