Respectfully, I must disagree. Adjustment alone will not get us through this time. I think that the crash that is about to hit the real estate market will be absolutely unprecedented — simply because the bubble is equally as unprecedented. As an owner of 3 properties (one of which I am desperately trying to unload), it pains me to say this.
I remember the slump in the 90s — when I bought my first condo and waited nearly 7 years to regain my equity. I recall owners simply walking away from their homes. But as bad as that was, there are many fundamental reasons why the coming downturn will be far, far worse and last far, far longer:
*** ARMs were virtually non-existent prior to 2000, as were interest-only loans and other creative financing. During the 90s, the worst thing that happened was that owners lost their equity; this time, they’ll get the double-punch of falling equity AND higher mortgage payments.
*** In CA, only purchase money loans (the initial loan you take out to buy your home) are non-recourse loans. That means that if you fall behind in your payments, you can simply walk away and drop the keys off at the lender’s office.
Not so when you re-finance or get a home equity line of credit. The lender can and will come after you, your savings, your stocks, your other property, your salary. And don’t think you will be able to seek the shelter of bankruptcy. Thanks to Bush, the most recent round of changes to the bankruptcy laws mean that your only real alternative will be debt re-organization, not liquidation. And since 1 out of every 3 homeowners in CA (perhaps lower in other states) has an ARM, this is a disaster waiting to happen because people will simply never be able to recover from their bad property investments and move on with their lives. Desperate creditors will stalk them relentlessly. Their financial futures will be obliterated for years to come, perhaps forever — and with scarred credit and judgments against them, they will not likely invest in real estate again any time soon. This was simply not the case in the 90s; most had purchase money loans because rates were so high it didn’t make sense to re-fi.
*** The so-called “bubble” of the early 90s pales in comparison to what we have witnessed over the past 7 years. It’s like comparing a condom to a hot weather balloon.
*** When the cracks really start appearing, Fannie Mae is going to bust. It holds only a fraction in actual dollars of the outstanding debt it has loaned. It is fractional reserve banking at its worst. And when Fannie Mae tanks, all hell will break loose.
*** The rest of the economy — and in fact, the global economy — is slowing suddenly and dramatically. In the 90s, the other sectors of the economy were relatively strong. Now we are being hit by skyrocketing fuel prices that simply won’t subside, a potential world war, the ongoing spectre of terrorist attacks and the effects of global warming that are finally manifesting themselves (in the form of more violent and more frequent destructive hurricanes that disrupt oil supply).
All of the above are unprecedented and earth-shaking factors that simply have not existed during any other real estate downturn.
Make no mistake, what is coming is no ordinary downturn; it will change our live’s forever. Many people who lose their homes will simply slip from the middle class and will never return. Sadly, I fear most will not realize what is upon them until it is too late. My advice: get out while you can and get as liquid as you can. Now.
