A Bad Real Estate Market is Good for Real Estate Investors and the Country


The real estate industry in this country is in for a rude awakening!

The realtors, mortgage brokers, "investors" (really speculators) and Alan Greenspan are whistling past the grave yard, living on borrowed time.

Few people realize how bad the real estate market can become. I remember in the late 70's when interest rates were above 12%, eventually topping out at over 14% in the 80's. Prices in many areas fell by 20% or more.

How bad was it? I had a bank in Newport, RI, Give me two houses along with a 115% first mortgage, just to get them off their books. They were choking on their inventory of REO's (Real Estate Owned), properties they had taken back through foreclosure and could not sell.

The government (read taxpayers!) eventually had to step in a dig out the banks that were buried by bad loans and foreclosed properties brought about by bad government fiscal policy; via the Resolution Trust Corporation, a quasi-government entity.

The fantastic real estate market of today created by bad government fiscal policy; too much easy money; has distorted not only the real estate market but the American economy in general.

Jobs, spending, growth, up to 70% of the GDP, the Gross Domestic Product of the US, were all supported by the reckless, artificial inflation of real estate values. This can't go on indefinitely and the correction is right around the corner, and it is going to hurt.

The rising inventory of unsold homes, softening, even declining home prices, rising interest rates and record mortgage delinquencies, will destroy this bloated, decadent real estate market created by the Federal Reserve Bank over the last 5 or so years.

Billions of dollars of grotesquely overpriced assets will be taken off the books of lenders and out of the hands of those who were foolish enough to think that their gains were real and "re-priced" to reality.

I feel that private investors, as opposed to government agencies, should be key players in taking control of these real estate assets," re-pricing" them to provide for the housing needs of regular people on a more realistic, economic basis. In effect, I see the investor as a "re-cycler" of overpriced real estate.

Unfortunately, some innocent people will get hurt in this process. Investors can be of assistance, here too, helping those trapped by their property's unsustainable financial requirements to escape from their burdens

Let's take a look at rising interest rates through the Bad=Good prism. After all, it was Mr. Greenspan's record low interest rates that precipitated the Mega-Boom in real estate and his reversal of that policy, belatedly realizing that it is unsustainable, is bringing it to a screeching halt.

Rising interest rates will also be accompanied by tightened lending rules as bankers slam the doors to the vault shut, long after they have indiscriminately shoveled the money out to anyone with a pulse, of course.

As rates go up and lending rules tighten, fewer people will be able to qualify for bank loans. That means:

· Less demand (mortgage money) for homes, means falling prices

· The return of seller financing; safe, secure private investor loans secured by real estate.

· Payment shock. Many borrowers with exotic adjustable rate mortgages, which can increase monthly payments by 25-100%, will lose their homes, allowing the market to set a more realistic price on them.

· Fewer buyers mean more renters which is good news for investors, who will be able to accommodate them at more reasonable rates.

Falling home prices, rising inventory of unsold houses?

· Means downward price pressure on all unsold houses meaning investors will be able to accumulate more properties more reasonably.

· Greater losses to banks that foreclose on properties forcing them to practically give them away, which in a way is their just deserts for their part in creating this mess.

· Homeowners who counted on the growing equity in their homes to allow them to continue living above their means will have to face financial reality.