Cork On the Ocean said:
Good morning, Cork.
Rest easy. It's not. You can also rest easy on the pressure issue. It may be overstated somewhat, but I don't want to get into that now. I think anyone in attendance Saturday will vouch for us on the pressure issue, or the lack thereof.
Let's talk about "WHY" we believe much of the nation's real estate, especially residential, is about to experience a serious readjustment in value. It's really quite simple.
The US economy has experienced significant economic growth since 1982 thanks to Ronnie & Bill (Reagan & Gates). After the S&L/RTC fiasco in the late 80s most people invested heavily in the stock market.
"Put your money in business! Support your nation's economic growth!"
Thru the 90s we had solid growth in the stock market, moderated by several adjustments, both large & small, and capped by the dot.com bust. In spite of the adjustments most people improved their financial condition thru that time period. Investors started putting significant amounts of money into land and improved real estate.
"Buy Land! They're not making it anymore!"
Due to the availability of wealth generated by Ronnie & Bill, many people "invested" in vacation homes and recreational lands. This was a good thing at first, but hype and speculation set in following the inital phase of investing. The impending rapid and unsustainable growth was fueled by low interest rates, interest only loans, IRS incentives, and the hype of everyone even remotely related to the business of real estate marketing and mortgage/money marketing.
Our nation's media fueled the fire by reporting on the stability, growth, and profit potential in the real estate market. "Flippers" started buying and selling land (often without ever having closed) at prices supported primarily by the previous transaction values and the anticipation that land values do not go down, but only go up. How soon we forget. Remember the day-trading frenzy in the dot-com scenario? The flippers are different only in the particular commodity that they are trading. The demand for these properties was created by people wanting to make a profit (artificial demand), not by people wanting to take up permanent residence (real demand). Hot Potato. Who's holding it?
Cheap money also became easy money. People buying on credit often weren't concerned about the cost of the asset, but the amount of the payment. They anticipated an unabated appreciation in value as justification for the additional expense. As interest rates increase, many buyers who anticipated a better personal financial condition five years down the road are finding that they have no more cash than before, and the note payments are rapidly increasing. The interest only loans are starting to mature or transition into P&I.
With an increase in interest rates you have an inverse reaction in property values. How often have we qualified a buyer based on what he/she can "afford"? (I don't care what it cost, just tell me how much the payments are.)
The two types of owners indicated above will be our (the real estate licensee's) sellers. They bought wrong, or at the wrong time. Unfortunately there are far too many of them to be able to reallocate the assets without significant adjustments in R/E values.
You don't make money when you sell, you only make money when you buy.