share stories on the 90s bust

[PerryChase]

I was very young and bought my first house in 1987 (thanks to generous family). I sold it for profit and bought a nicer house in 1989. In 1990, I watched the market go down, down, down.

I was young and cocky back then and thought I could keep on upgrading my way up to the ultimate house without doing much work. I understand well the psychology of the recent buyers.

Well, I lived the 1990s downturn, and learned my lesson. I’m glad I learned early in life. I feel sorry for the people who are learning at age 50.

[davelj]

Here’s a little vignette that ties together the ’90s bust with the coming bust.

Along with a friend of mine I recently toured a large downtown condo project with one of the developers. It will be completed and ready for move-in by the end of this month. It’s a top-of-the-line, Class A development. They spared no expense on the details. Well, four percent of the units are pre-sold; you read that right, 4%. The other units have no deposit, no nothing – they’re for sale.

The builder, who shall remain nameless, is an acquaintance of my friend and told him that he was not optimistic about the current state of affairs (downtown inventory, tightening credit standards, etc.). This building’s all-in costs, including land and the whole shabang, were $370/sq.ft. That’s a big number.

Well, to tie this in the with the ’90s bust, this developer went BK back in the mid-90s only to resurface a few years later with more projects. In his defense, I know of one project he did that was completed in 2004 that did extremely well.

But, it’s hard to get builders to stop building when they’re mostly playing with the house’s (bank’s) and other investors’ money.

[Bugs]

I appraised all through the 1990s and I saw it all. Early in the cycle I appraised half-completed spec homes where the contractors had pocketed the draws and split. I appraised apartment properties where 7 out of 8 comparable sales were being sold by a bank. I appraised commercial properties at $40/SqFt – inclusive of land and improvements. I appraised SFR lots for $25,000; and on occasion less than that. I appraised properties that the banks declined to foreclose on because they didn’t think they could discount them enough to unload them and they didn’t want to carry the asset for more than a year. I appraised a lot of properties for divorce attorneys because couples were splitting up over their RE losses.

By the time it was all over I just KNEW the carnage was so obvious that these people would learn a lesson they would never forget. How wrong was I about that?

Now it’s 2007 and I have already appraised a couple half completed spec homes (and appraising houses isn’t even my thing) and condo conversions; I’m already running into market segments where there are enough must-sell listings to influence the pricing. I’m already appraising properties where the borrower is attempting to work their way out. Even the commercial properties are peaking and starting to trend down. And yes, the commercial markets are just as gassed now as the residential markets were at their peak.

I’d claim deja vu but it’s happening so much more quickly that I think it really is going to be different this time. Different-bad, not different-good.

[gn]

Bugs,

Since you have a lot of experience:

Why would a bank decline to foreclose ? They can sell it dirt cheap & get something out of it. What happens to a property when a bank declines to foreclose?

On a different thread, you said:

>> This basically means that on a percentage basis the
>> expensive homes lost even more than the cheaper homes

Does this apply to:

1. The expensive homes in middle class neighborhoods like Rancho Bernardo
2. Or, the expensive homes in places like La Jolla & Rancho Santa Fe …

Is it true that, on a percentage basis, La Jolla & RSF fare better than places like Rancho Bernardo in a downturn ?

[Bugs]

In answer to your first question, there are a few situations that come up that can cost a lender more to foreclose than simply writing off the entire loan.

A lender that owns a property is legally responsible for that property. If it has legal or physical conditions onsite that must be mitigated or cured and the costs of cure exceed their loan balance they are sometimes better off to just walk away. Junior lien holders can easily find themselves in the position of having no equity to recover if the value of the property is less than what they need to sell it for in order to net a return.

On a $600k property financed with an 80% 1st and a 20% second, the junior lienholder has nothing to gain if the value of the property declines (or was never worth) at least $550k, because by the time they foreclose on their 2nd and satisfy the 1st, and sell the property off their costs will exceed the difference between the 1st and what they net from the resale. They’re better off just writing the loan off and walking away.

As for the second question, the short answer is: both types of markets will compress. Once you get past basic shelter requirements (buy vs. rent), the different sales prices are relational to each other, not based on any kind of intrinsic value. Even cost doesn’t represent a floor for value; there are areas where houses can and do sell for less than the sum of their costs or their salvage value.

[Irish]

I bought a 3br/2ba house in Serra Mesa (San Diego) at the height of a hot market back in September 1989 for $130k. I felt lucky because I’d just pulled all my savings out of the stock market for the down payment, just weeks before the big October crash. That house did not increase in value until early 1997 and I sold it for $180k. Now it might sell for $450k.
In 1994 there were major layoffs in the aerospace industry here in San Diego. I was on the list to be fired so I took a big risk and bought a 3 unit apartment building in Hillcrest for $146k. Back in those days the rents more than paid for the mortgage. The plan was to rent my house out, move into one of the apartments, start fixing it up with the lay-off money. Sound plan, except I didn’t get laid off! So, I very slowly fixed up the apartments and just last year sold them for $895k.
In the doldrums of the mid 90’s when NOBODY was interested in real estate I bought a couple more properties and recently sold them for x4 what I paid.
My advice is to sit tight, save up your bucks and wait until we see those dark days of the mid-90’s again (and it will be soon…around 2010). Then BUY when prices are down and nobody is interested in real-estate. You will be amazed how wealthy you will be in 2015 !
Patience, people ! Good things come to those who wait !

[gn]

Bugs,

Is it true that it’s difficult (even at the bottom of the market) to get a great bargain, relative to the comps, because lenders will suspect that the buyer is borrowing “on the side/under the table” from the seller ?

In case my question is not clear, here is a hypothetical situation:

Let’s say that the comps for a house is $1M. Even if the seller agrees to sell for $850k (b/c the market is very slow & he needs money quickly), the lender may suspect that the actual sale is for $950k & the seller is lending the buyer $100k on the side.

Is this true ? How likely can one get a great bargain in an “extreme buyer market” ?

[Bugs]

Good deals do happen and on occasion I do appraise properties in excess of their sale prices. Obviously, those appraisals don’t turn out that way without there being a preponderance of data to support it, but it does happen.

How a lender treats that loan application is their decision. Some lenders will base their loan on the sale price regardless of the higher appraised value; others will adjust their loan based on the appraisal. Their money, their rules. Our job is to observe and report, not to participate in the lending decision.

Having said that some appraisals do come in higher I should probably point out the obvious fact that it’s far more common for me to appraise a property for less than it’s sale price. That happens about 30% of the time. Again, a lender will not treat a “low” appraisal as credible unless it clearly shows that preponderance of data. It takes a lot to overcome the natural bias in favor of a sales contract involving a willing seller / willing buyer.

[Anonymous]

Bought a condo in Sabre Spgs on New Years 1990 for 111K. Reached a low of about 85K in 1996 and converted it to rental property at that time. Still own the place with a loan balance of maybe 60K. Don’t know the current value but it’s probably above 300K and the place is cash flow positive maybe $200 a month so the “crash” was pretty transparent to me.

In retrospect we were lucky to be liquid enough to buy the new house in 1996 when the condo was upside down or we would have probably sold it and used it for a down payment.

[sdcellar]

Bought a 2/1 750 square foot craftsman in late 1986 for $76K. Sold that in mid 1990 for $120K and bought a bigger (for us at least) 3/2 for $185K. Looking back, I’d say this was roughly at the peak, although I had no clue at the time. I was just stoked to get that much for my little house.

I keep this in mind when I see people buying today and think to myself, how can they buy right now, when it seems very likely that properties will depreciate for a number of years to come. I remember how. You’ve got a growing family (heck one’s maybe even on the way), your career is moving along nicely, and you just have no idea the train’s about to stop.

Anyway, the poor folks that bought our little place were stuck with it for years and were finally able to sell it for $400 less than they paid us 7 1/2 years prior.

For the new place, I realized a year or so in, that it was worth less than what we paid for it, but we weren’t moving, so it didn’t bother me all that much. In 1992, I researched the comps and filed an appeal with the assessor and got the tax basis reduced to $159K. It might have sold for that, but who knows, and at least we were saving $250 bucks a year or so on taxes (okay, so it seemed like a shrewd move at the time!) I’d guess we could have sold it for what we paid around 1998, but actually ended up selling it for $300K in 2002 (12 years later).

[hipmatt]

There are a lot of really great and powerful stories on this thread that proves that RE actually does go down in value. This is possibly one of the most powerful threads I’ve seen here.

[AK]

I hope you don’t mind if I throw in an ’80s story …

When I was a kid back in 1978 several families up and down the street, including my parents, bought “investment” units in a condo conversion. These were 2 BD, 1.5 BA townhouses in a so-so part of Marin County. Even then they went for about $89K. Somehow everyone managed to get “owner occupancy” financing with a wink and a nod from the S&L.

Things went wrong almost from the start. The first two tenants lasted a grand total of three months. Then came an El Nino year, which is when everyone found out that the developers had forgotten to disclose a little thing about flood maps … By then credit contraction and recession had left everyone underwater in another sense of the word. The units that didn’t go into foreclosure filled up with less desirable tenants. Comps bottomed out around $60K, when units could be sold at all.

Ten years later the condos were cash-flow positive, but my parents decided to get out of the landlording business after another bad set of tenants trashed the place. They sold for a small paper profit around 1989. Zillow shows that the place was sold several times between 1995 and 2001 for $130K – $140K. So in 23 years it appreciated a grand total of 57 percent.

Since then it sold for $300K in 2003, then apparently got the full hardwood and granite treatment. I saw it on the market for about $400K a year ago, but looks like the flip turned into a flop. Comps are down around $300K again. And the cycle continues.

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