Keep in mind that this is factoring the previous real estate run-up of the late 80s and early 90s. What we are witnessing is an unbelievable credit extravaganza anchored to one asset class, that of housing. As we all know diversification is the key to a healthy economy and each day that passes we are realizing how influenced we are by real estate. When any economy is rooted in one industry and that industry goes sour, what do you think happens? You can look at
February 2007: 526,308
February 2006: 486,395
February 2005: 427,389
February 2004: 374,546
February 2003: 340,548
February 2002: 316,898
February 2001: 310,109
February 2000: 304,477*
*California Department of Real Estate Statistics
As you can see from the growth numbers above, real estate attracted thousands of new recruits into an industry that is extremely cyclical. At this point, the Vilfredo 80/20 rule comes to mind. In many industries including real estate the market is dominated by 20 percent of the employees while the other 80 percent scrimp to get by. If you look at the national median salary of real estate agents you will see that it is not a lucrative career option. But like the California Gold Rush, money is made selling the sizzle not the steak.
1 - The Dwindling Down Payment
The down payment used to be a barometer of a buyer's credit worthiness. It demonstrated your ability to baton down the hatches and save for a few years. Since American’s have a negative savings rate there had to be an alternative to this. As those in the mortgage industry sat up at night eating Ben and Jerry’s ice cream pondering their future, they witnessed a sign. Carleton Sheets with his no money down solution and Hawaiian Technicolor dream shirt gave the mortgage industry the solution to their stagnation, the no money down mainstream mortgage. No money down, once a thing left to experienced real estate investors became a standard practice throughout the industry. Now having a down payment is so passé.
2 - No Savings
As previously mentioned American’s are horrible savers. As witnessed by the above the beast needed to be fed and what better way than to collateralize your home as a massive stucco American Express card. Instead of signing on the dotted black line for a new line of credit, why not withdraw money from your most revered asset, your home. It became almost too easy and played into the cultural pathology of consumption perfectly. Spend today what you'll earn tomorrow. If your car shows your place in the
4 – Risky Loan Business
While someone has opened up a can on the subprime industry we are still assessing the impacts this will have on the overall economy. 20% of all mortgage loan originations in the past three years have fallen in the subprime category. Resets of $1 trillion dollars are scheduled for 2007 and 2008 each consecutive year. As these loans default via the domino effect, slowly we are realizing the ramifications this debt service is having on the overall economy. As the housing syndicate tries to call the bottom, we realize that the game has just begun. Each month seems to usher a record breaking performance on the downside and demonstrates how wrong the housing syndicate is. Record 18 year drop in sales. Foreclosures up 800% in
5 – Stagnant Wages
Now that housing is trending down what impact will this have on the overall economy? We’ve heard countless times from housing pundits that a diverse economy like ours can withstand a real estate down turn. I point to the first graph above showing 29% of added jobs directly related to real estate. So let us do some math:
Housing down = loss of jobs in real estate (big portion of current economy) = BIG impact on economy
And besides this, 70% of Americans own their home. The wealth effect will be multiplied because losing a large portion of your equity does not bode well for spending. This may have gone on longer but the credit spigot is being turned off and we are witnessing early withdrawal symptoms in the public.
6 - Housing Led Recession
In the past job losses have led to recessions in real estate. This made sense because if you lost your job you weren’t mister sunshine ready to commit to a 30 year mortgage. However this time we are swimming in a different sewer system because jobs connected to real estate dominate a large portion of society; these jobs depended highly on real estate continuing to go up into perpetuity. As witnessed by the major decline in remittances to