Sub-Prime housing debacle is over-hyped, stock market media influenced, press sensationalism

Wall Street is always looking to pry real estate equity into unreliable stock investments. Make lenders more responsible and housing markets will remain stable. (original post from August 2007).

In case anyone hasn’t noticed, there are many real estate markets across the US that continue to fire on all cylinders. Some are again out of balance to the SELLERS side of things, Yes, that’s right. In the San Francisco area for example, we currently have referred clients that have just placed an offer on a condominium listed at $799,000. They offered $840,000 for the home. They didn’t get it. They missed out to another buyer who offered $899,000. No, this is not a post from spring 2004. It’s, August 11, 2007.

Please inform the sub-prime chicken littles who claim the real estate market sky is falling to wake up and smell the Starbucks coffee wafting from the mugs of young, doing-quite-well-thank-you, tech execs in the Bay Area driving area real estate listings off the charts … again! What’s a bubble disciple to do? I guess ignore this well unpublicized fact. There are many real estate markets around the country still chugging along quite well, which quietly go unnoticed and unreported. Whose bubble has burst now?
 
Along with the San Francisco example above, the Santa Barbara area real estate market is another pocket of outstanding performance. The markets of Montectito real estate and Hope Ranch properties lead that market with outstanding appreciation of 13.7% within the Santa Barbara California real estate marketplace.
 
But forget that. Instead let’s focus on the “devastating” increase in foreclosure filings, up to a whopping 1 household in 879 across the US. So, let’s see, if that one house goes to bank auction let’s say, (which usually sell for close to market value) how much of an effect will that actually have on the other 878 that didn’t? I wonder. How many of the other 878 would even notice. It’s certainly no fun for the one who faces such a situation, but 1 in 879? Please! That’s .001% of the total marketplace.
 
Does anyone remember in the late 1980’s when these foreclosure numbers were painful. Remember the Savings and Loan debacle, and the junk bond scandals. The millions of square feet of office space left unfilled. The Resolutions Trust take over and sell off of massive inventories of over developed commercial and residential properties. All triggered by a 1986 Ronald Reagan sparked tax law change for investment real estate. With interest rates 1/2 what they were then and no restrictive tax law change to insight it, we are nowhere close to “smelling” that brand of coffee this time around, with only one bean in 879 being “ground up”. (BTW, that did turn out to be a great buying opportunities in real estate history. Just ask Robert Kiyosaki)  
 
After 23 years in this business I’ve come to know my share or real estate sharks. You know, the kind that circle around and wait for the bottom to fall out, the kind that move in when they smell blood in the water. Most talk a good game but never seem to be able to pull the trigger. I’m here to tell you that they are all starving to death. Many have been waiting for 6 and 7 years now and in the mean time have missed some excellent appreciation opportunities, particularly in the high end markets where this type seems to hover, thinking that is where the greatest fall will be. Many properties they passed on as being “too high” have since doubled in value. And still these “geniuses” wait. Far to embarrassed to admit they missed a very nice ride in the last 7 years, and to proud to confess that it will most likely continue albeit not at the pace of the 2001 to 2004 run. A nice average sustainable, reliable, comfortable 7% per year looks good from here on out. Think of that. At 7.2% appreciation per year, your home value doubles in just 10 years. Will all markets see this type of appreciation, probably not. But “blue chip” areas, where the baby boomers are looking to end up will. Sun belt areas of temperate climes and desirable lifestyles.  That ‘s where the boomer spending of trillions annually is focusing. That’s where to bet the farm, or buy a farm, or start an organic farm where health conscious boomers can buy some produce. But rest assured real estate holdings will continue to increase in value in these areas because as the venerable Will Rogers once said. “They ain’t making anymore of this stuff.” And for Boomers, demand for real estate in areas offering particular lifestyle choices will continue to rise.
 
The over-hyped sub-prime situation is a bit comical. Sub-prime mortgages are high risk instruments. The lenders know it and so do the buyers of that type of paper debt. Those mortgages are actually where a bank finds a person who has demonstrated a lack of ability to pay debt as well as “A” borrowers do, and makes it even more difficult for them to pay back borrowed money by charging them even higher rates than conventional loans. The logic of this escapes me, but there it is. So when these borrowers default, it’s like some kind of unforeseen happenstance, when in fact they are set up to create a greater likelihood of default. So increases in sub-prime defaults are a surprise because…..?
 
It’s funny how public opinion is swayed by sensational press coverage. This latest sub-prime overblown focus and effects are the latest in a long line. 100% financing of anything has never been a prudent idea and never will be. It’s a high risk to the lender. The marketplace will always find itself, if left to do so. High risk lending adds unwanted voilitility.

The fact is that more burdens should be placed on the lenders making such high loan to value loans, not the borrower. Appraisals should be required to be at least 105% or more of the contracted purchase price on LTV’s above 95%. That way a built in equity buffer would exist for borrower and lender to allow for market corrections. To charge higher interest on 100% financing is just begging for trouble. Force these borrowers to work harder to find better deals instead of penalizing them with higher rates and mortgage insurance, which only exacerbate the situation. Make the lenders, through this appraisal process be more responsible in originating such loans. This would also serve to stabilize real estate markets from being overleveraged as all purchases would contain equity, either in the form of a conventional 10% to 20% downpayment, or a sub-prime loan value of less than 100% of appraised market value. It this way, all could pursue their home ownership dreams. Also more allowance for seller financing participation could spread some risk for lenders if the seller is willing. There is no more universal desire in this country than that of home ownership. We do not see that changing any time in the foreseeable future. Again, I defer to the esteemed Mr. Will Rogers who said “Don’t wait to buy real estate, buy real estate and wait.” By putting more reasonable constraints and responsibilities on lender origination of less than “A” credit, the sub-prime bumps in the road would all but disappear.

The Santa Barbara real estate and unique signature property market requires well informed and invloved local expertise that is essential for the finding, successful acquisition, sale, and value analysis of rare estate properties. Custom searches of Santa Barbara beach properties, estates, Montecito homes for sale or Hope Ranch real estate information are available at http://www.RareEstates.com, a fine home sale transaction network, having specialized local resources and knowledge of unadvertised luxury properties and qualified estate property investors searching for properties. For exclusive information about privately offered estate properties in the Montecito, Santa Barbara or Hope Ranch Marketplace please direct your inquiries here.

 

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