Haven’t We Learned Our Lesson?
- The Death of the Residential Appraiser - May 9, 2016
- Haven’t We Learned Our Lesson? - May 2, 2016
Lesson Learned or Lessons Lost?
Many have heard me say that we should expect a large market correction around 2019-2020. Some agree, some think it will be sooner, and I am sure there are some that don’t think it will happen again because we learned our lesson. There are a ton of factors that drive it so it’s not an easy thing to predict. The good news is most agree that there will be one, we just don’t know when. We have not learned our lesson and the lesson will be repeated. I’ll share my 2 cents on this and why we have not learned our lesson.
Historically the housing market has seen annual appreciation in the range of 3% to 6% but that all changed by the end of 1999. Between 2000 and the end of 2006 that annual appreciate rate moved to just over 13%. Then the bottom fell out. What we were seeing was an irrational market with irrational value increased fueled by a myriad of items. If you watch the movie Big Short, it will show you some of what happened. What’s not talked about in that movie is the overall monetary policy and how the repeal of Glass–Steagall and the administrations push for homeownership to increase, has changed the overall dynamics of housing in general. And it hasn’t been a healthy change.
The repeal of Glass-Steagall allowed the banks to get footloose and fancy with their money. Once that happened it caused mortgage backed securities to explode with everyone wanting their hands in the money and profit. Adding the push for more homeownership it set the market on a course of self destruction. Homeownership became the new investment vehicle for people to make money much like the stock market. Homeownership as we used to know it, ceased to exist. It was no longer a place to call home, it was turned to a way to make money. Not much has changed since the collapse. Yes we treat them as homes but we expect to make a killing on the sale.
Yes, we have Dodd-Frank. And yes, we have the new consumer protection bureau. But for the most part they are smoke and mirrors so people think they are “fixing the problem”. Many of the planned laws in Dodd-Frank were never put into effect and some were even re-written by the big bankers on Wall Street so they could go back to doing what they did before. The biggest were approved by our congress in late 2014 and signed by the president. So, there isn’t a big fix and Glass-Steagall was never replaced so history will repeat.
Since the market started to recover in 2012, the average annual appreciation has jumped back to just over 10% and we all see it jumping more with the lack of inventory forcing people to pay out their nose for a piece of the pie. Keep in mind the values we saw in 2006 were an aberration. And we all knew that once it collapsed. Have we learned? Not at all. We have many markets that have exceeded their pre-collapse values by 30% or more with no letup in sight. The markets being run up now are the very markets that didn’t see the huge collapse before. Compared to the markets that saw huge losses they saw a minor loss. They are being looked at as safe havens for investors and the speculative market, low inventory, and a demand to live there is driving values higher than what should be seen. And yes, many appraisers are supporting whatever they offer.
The question we all must ask is this. If income levels have remained mostly flat with nominal increases, at the same time lending is much tighter with harder standards to qualify for a loan, how are values rising at a rate of 10% a year on average since the recovery started? All this while over 5 million previous homeowners sit on the sideline and can’t qualify for a loan. Those numbers do not match up.
So why 2019-2020? We are 4 years into the recovery and values are rising at an average rate of 10% a year. We have also seen the longest stretch of job growth in nearly 50 years yet mostly flat wages. The ramp-up is already happening. Give it another 3 years. And once something changes in the economy to cause it to turn the tumble will start. Hold on because it will indeed be a bumpy ride.
P.S. And when that happens the residential real estate profession as we know it today dies. That’s another post.
“The good news is most agree that there will be one, we just don’t know when.” Why is this good news? Instead of giving data and specifics, you use a lot of generalities that give no rationale to why, other than it’s happened before and will happen again.
Did it ever occur to you that some markets are vastly under supplied due to the lack of any new construction for several years, combined with a large influx of jobs and in migration from other states? That population growth due to immigration may be fueling other markets? That baby boomers are staying put and the younger generations are seeking houses to raise a family after getting an education?
Anybody can be right when they say “and once something changes in the economy to cause it to turn the tumble will start.” A broken clock is right twice a day.
Thank you for your article. I too believe we are heading for a “correction”, but I believe we will see it sooner than later. The “low inventory” is being manipulated. Here in Brevard County we have over 5,000 properties in “pre-foreclosure” status. The banks have not taken title for one reason or another – as we all know, the REO asset has to be reported differently than the “account receivable” of a mortgage in default. In addition to banks creating this “false scarcity”, we also have Blackstone and other hedge funds holding immense amounts of single family residences as rentals. As you mentioned, one “blip” in the markets might make those new fangled RBS’s (rental backed securities) not so desirable and we could see a huge sell off – a huge dumping of SFR’s on the market to compete with the huge dumping of those pre-foreclosures – worse than what we saw before.
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wait till interest rates go up to normal levels again. it will be more than an an adjustment, more like an earthquake collapse. we all know who to blame, same people all the time. however, will anyone go to prison. maybe this time if the pain is major.
i’ve been thru so many of these. it’s a bad part of the business involving our livelihood.
low rates are fueling this boom. if the economy continue to tank then low rates will continue, and my comment above will move on down the road. at least, maybe we can protect our own children from the coming crisis.
Tom, your the first one I noted with a specific and highly probable trigger event identified. I’ve sold or appraised real estate since the 1970s and in over 40 year have never seen 30 year fixed rates so artificially low. Why are they so low instead of nearer to the “normal 7% to 7 7/8%” they traditionally are?
Because we could not afford the interest on the national debt alone if they were allowed to creep back to real market rates. The national and international economy would screech to a halt almost immediately. The Fed continues to subsidize Wall Street with ultra cheap to “free” money that it already knows cannot continue.
Talk about rate increases before November, 2016 is just that…talk. No one will tell the Emperor that his new clothes simply do not exist, until that time.
The above would be enough reason for concern by itself but all the other things the author said about Glass-Steagall and Banks rewriting the laws JUST LIKE THE INSURANCE COMPANIES DID WITH HEALTH CARE, are ALSO true!
Virtually ALL systemic checks and balances have been effectively neutered by Wall Street, The Fed, This Administration and each of the regulators for each of the GSEs. Dodd Frank is a joke.
We have nothing to fear but fear itself. Silver backed dollars is a solution. The purchasing power of consumers is tied to the rate. The fix is in. Previously in America, we had deep respect for thrift, staying out of debt, being well educated and attentive. We all did literally have a pocket full of silver. The popular consumer mistake is to trade a fed note which is a note of debt itself, for more personal consumer debt. Debt upon debt, is the cause and effect at the same time. You know what they say on the other side of this coin; go long, stay sovereign, stop borrowing. aka isolationism. There is a popular misconception that we’re all inexorably tied in. Those whom own without debt remain firm in their positions. The value of complete ownership positions is commonly disregarded as the majority fights over whom can acquire more. Constantly leveraging anything not nailed down. I’m seeing people go up-rate to pull cash out, rolling into new 30’s. Prioritizing new decks and credit card use over passing homes to their heirs. They’re passing down debt these days instead of property, and what a shame. The question overlooked is do we blame these private companies like FHA and FED, whom are chartered at the behest of We The People, for giving us what we asked for? Like a fish taking the standard bait, the American consumers are going cash out all over again. Stop being indebted to your own assets. People need to be honest with themselves about what they actually own, and all the rest which they merely are paying on or borrowing towards. Tighten the belt and refuse the debt. You can thank me later.
Section 10 – Powers prohibited of States
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
<> enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.
“It is no coincidence that the century of total war coincided with the century of central banking.”
? Ron Paul, End the Fed
Baggs, the World is not going back on a gold standard OR a silver bullion standard. Ron Pal needs to join the 21st Century, and come up with real world solutions. Lets remember this is an appraisal blog rather than a general political advocacy blog for Libertarianism, ok?
By the way, inflation existed even while we were on the gold standard.
You can look forward to unyielding inflation. Real world solutions you say? Sound monetary policy is not libertarianism. But perhaps that well conceived talking point provides just enough polarization for people whom would otherwise be appropriately concerned, to instead be dismissive. If you don’t understand what the root cause of the problem is, you’ll spin your wheels for ever. Ron Paul is the only political candidate in the 21st century to claim an absolutely perfect constitutional voting record. If you think that’s an old fashioned idea, you’re clearly insane.
Hey…it really sucks to get old my friends. As a kid we rode our bicycles thru the neighborhood looking for empty pop bottles. If you could find three that could be exchanged for a coke and a candy bar. I am talking about a BIG candy bar. With six coke bottle tops you could get into the movie on Saturday afternoon!
When I got married we moved into an efficiency apartment that was furnished and bills included. The cost was $50.00 per month! Yep…I am getting old!
Our country is Trillions of dollars in debt. You cannot buy a coke for $0.07 any more. The coke is the same size as way back then but the price is a bit different. In my opinion, this is what our government is going to continue to do to all of us. The coke will be the same size but the price will go up and up and up.
We can all study about discounted cash flow analysis, internal rate of return, financial rate of return, debt coverage ratios, mortgage constants, etc. etc. but the reality is that the price of a coke continues to go up!
I am not wealthy but as an old dude…I would suggest that you save a few bucks today so that you will be able to buy a coke tomorrow!
That’s old timer thinking to be sure. “The fed continues to promote inflationary policy. They continue to devalue our currency year after year, seeking economic prosperity through debt. That means year after year, your dollar is worth less.” Taken directly from the PTG am radio advertisement. I always get a chuckle when the supposedly knowledgeable instructors still hold to the old tag lines like a dollar saved today is worth more than a dollar tomorrow. Unfortunately with negative interest rates on the horizon, and continued inflationary policy, your dollar is worth less tomorrow than it is today. Exchange that instrument of debt (the greenback), for actual currency instead of more debt. Buy silver. An ounce of silver is still worth the same today as it was yesterday, if not more. I’m only 40, but remember when rent was 400 a month, and now it’s typically 1200. I remember when appraisals came standard 450+ and we booked out 6 weeks worth before the supply slowed down, that was 15 years ago. You don’t want to save money any more, you want to exchange that instrument of debt (the dollar), for something tangible. Put all your money into silver, house, debt repay, and tangible items. To the mattresses. We hedge purchase the …. out of everything non perishable. If people don’t see the freight train which is pending economic collapse on the horizon, they must be blind. “They’ve recently changed the rules that depositors are merely creditors to the bank. That means if the bank goes under, you get paid less, if any.” Another direct quote from PTG. So I say this instead; A dollar paid towards abolishing debt today is worth two dollars paid towards abolishing debt tomorrow. When the music stops, it’s going to stop all the way, not just slow down. BRICS is on the horizon, and nothing short of auditing the fed will provide meaningful bearing towards continued economic stability. Ron Paul: People should not reject free market systems, because the truth is we have not had that for a long time, but we should return to that. / http://patriotarchives.blogspot.com/ It’s complicated but low level consumers can still insulate themselves by bucking the system of debt, and living debt free life styles. Stop paying for services. Stop paying for use. Own it completely or don’t spend on it. I’m already making headway on the 15 yr note. I feel bad for people whom roll new 30’s and go cash out. If they love debt more than ownership positions, that’s they’re business. You don’t own it, until you’ve paid it. Plain and simple. Home ownership in America is a misnomer. Hardly anyone owns their homes these days. Why people would roll debt into a 30 year term with a 1.8 or so multiplier over term, continues to amaze. They could grab 5 and 10 yr signatory loans and wipe all that out in a heartbeat. They don’t operate that way though, since their motivation is to maintain the available purchasing power ratio, so they can seek more debt based spending allotments in the near future. Sad, but true.
Baggins, we most certainly agree on a lot. You have called it right as some of my thinking really is old time thinking. My home is not a McMansion but there is no debt. As an old timer, I suggest that the working class such as I not attempt to keep up with the Jones.