I Didn’t Live Through the S&L Crisis
Well, I was alive but I’m pretty sure my interests included My Little Pony and making mud pies, not real estate. I haven’t seen this movie play out before where real estate offices shut down across the nation. Although lending has tightened which froze up even our vibrant Austin real estate market for a brief 60 days, offices aren’t shutting down here. Many cities aren’t so lucky, though.
So, for those of you who lived through the S&L crisis- what happens when times are back to being good? What does recovery look like? I wrote last fall about a “relaunch”of the website YourStreet.com. I laughed that a website that was failing retooled and made some minor changes and tried to attach buzz to their name by calling it a “relaunch.” But was that really laugh worthy? Isn’t this what we will call it when the offices that have their lights out today rebuild in two years? What will our dialogue be when we’re back on a national upswing?
January 18th, 2008 at 2:39 pm
“What happens when times are back to being good?”
They gotta get bad first. I was in Houston in the 80’s after oil went from $45 to $6. I saw 500 people get laid off the same day at one oil company office tower. Each had their own little box of personal belongings from their desk and their own personal security escort.
Bad times are look like this: the foreclosures on any street out number the occupied homes. You can tell the foreclosures because they are the ones with real estate signs in the yards. Nobody has the equity to be able to sell privately. The rest of the houses have owners that take the mortgage obligation they signed seriously and will hang on to their dream.
That is why even though I drive thousands of miles every year, I never complain about gas prices. My clients, my city and I depend on the energy business. I do not care to see those bad times again.
January 18th, 2008 at 4:00 pm
The key phrase here is, ’so far’. So far this is correction, in relative terms, is your six year old’s birthday party at Chuck E. Cheese.
Try 15-25% vacancy rates combined with 10-15% drops in rents. Or interest rates much higher than today.
Predicting recovery is more than tricky, and in fact can come back to bite hard. The reason is, comparing one correction to another assumes some false common ground.
The S & L crisis was preceded by roughly 4+ years of rising prices instead of a decade. Nor was it nearly as wild as we’ve most recently experienced. The S & L-generated correction was caused by lenders doing things ‘inside’ and involved outright fraud in many cases.
Once the foreclosed properties were sold, and the blood washed from the streets, recovery began.
That’s not what we’re looking at here and now.
Housing is involved here, which wasn’t, at least to any huge extent in the 90’s. This is a monstrous oversimplification, but you get the drift.
NOTE: When I say housing wasn’t involved, I mean it wasn’t a part of the problem. Housing was certainly pulled into the quicksand once the you know what hit the fan.
That said, a recovery today might look like how a dam looks when the valves are opened very, very slowly. First the ’scouts’ show up, dripping through the various markets. They’re the investors who realize nobody ever knows when the bottom actually occurred except via hindsight. They show the way, maybe for 6-12 months or so. When they come back to the ‘village’ alive and well, more and more of the rank and file begin showing up, as the capital begins flowing more visibly out from behind the dam..
Pretty soon there’s a headline saying the real estate market appears to be perking up — about six months after the fact. The dam has broken. The time between the scouts (dripping) and the rank and file (pouring water) could be as short as 6-8 months on up to a year or two.
Keep asking agents around the country what they’re seeing locally. I’ve been doing that. From San Diego to Las Vegas to Minnesota, Kansas City, and you get the picture — report a definite spike in traffic + those ‘doing’ as well as talking. In other words, folks are closing transactions at a measurably increased pace the last 90 days or so.
Is this the first inklings of a light at the end of the tunnel? You tell me. I’m still watching, and counting the scouts heading around the country, buying in quality markets.
Builder inventories are disappearing, slowly but surely. As your husband will surely attest, developers are selling their product to end users at an encouraging rate these days. (not encouraging for guys like me)
The S & L generated crisis, at least in my experience, was far more devastating than what we’ve seen SO FAR’ in this correction.
January 18th, 2008 at 5:05 pm
Tom- I especially like your point about gas prices. Do you predict that we haven’t seen the bottom yet or is your sense that we’re beginning the upswing since no one was personally escorted out of the building?
Jeff- thank you for your thoughtful response. I agree that many people have picked up the pace recently, but prior to that pick up was a nervous breakdown in the lending industry that froze everything. April and I just got off the phone and talked about the fact that people are tired of being scared. The doom and gloom eventually turns into white noise and people go back to business (even if it’s not “as usual”).
Are your spidey senses telling you that the 90 day pace increase is an indicator that we’re getting back on track? How are we on pace- fast enough, or do we have a long road ahead of us?
January 18th, 2008 at 5:20 pm
Lani — it could be, as Brian Brady has suggested before, what’s known as a ‘dead cat bounce’. Drop something from a high enough place, and even a dead cat will bounce a little.
It makes no sense in a ‘terrible’ economy that the job-centric migration to places like Idaho, Arizona, Texas and other states continues. Apparently they haven’t received the ‘we’re all gonna die’ memo.
It’s my firm belief we’ll know by my birthday — the middle of August.
I’m behaving personally as if investing now will reap benefits sooner rather than later. Sooner in my thinking is less than two years from today.
January 18th, 2008 at 6:01 pm
Lani: For any local market that has seen massive residential valuation increases, anything like flat or negative movement is going to feel like a depression. On the other hand, in Texas we have the same situation we have had for a long time: it’s cheaper to buy a house than it is to rent one. If you can get a loan, you can own more cheaply than renting. This may change with the exploding ARMs in nice neighborhoods creating foreclosure price down drafts that will bring Brian Brady’s vultures out of the woodwork to scoop up great deals.
This could also shift the rent/own math here in Texas. If that happens we will see all kinds of dislocations in our property tax swamp as well, since every school district, county and town anticipates and budgets a 10% raise in the property tax base. I can hear the wails about how the children are going to suffer if the schools don’t get more money. The big losers would be the $150,000/yr school district administrators who might lose the car allowance that pays the Lexus lease.
The elephant in the room is the credit markets. Now that we, the U.S. have screwed every potential lender in the world with goofy funny money mortgage securities, who is going to lend to us? Americans don’t save, so we need to find somebody who might trust us again. I just don’t see the Communist Chinese coming back to the Bear Stearns Merrill Lynch CMO/CDO/SIV sort of, kind of, AAA S&P rated bond bazaar anytime soon. Would you like an extra big helping of CDO on top of that pile of dog doo subprime paper, Mr. Mao? We’ll even get S&P and Moody’s to call it AAA for you.
Now that the mortgage securities have no bids (that means that nobody will buy them because there is no value), the Fed has poured gas on these burning portfolios by injecting liquidity that has totally devalued all dollar denominated portfolios worldwide. Even the foreigners who avoided the goofy mortgage securities have had their U.S. government dollar denominated portfolios decimated. No wonder the Arabs want to be paid in Euros for their oil. At least they will have an idea what they are going to get deposited in Switzerland when the supertanker docks in Rotterdam.
I guess the bottom line is: our outlook is cloudy-but high energy prices can keep us and our customers in the game as the rest of the economy tanks.
I am kind of new to this- was that comment too long?
January 18th, 2008 at 6:51 pm
Jeff- there’s such wild speculation that range from mild to insane but I think I’m still with you guys on the bouncing dead cat theory. BUT, at what point do we bury the cat and get a new one? What will that take?
January 18th, 2008 at 6:51 pm
Um, Lani? This post goes against everything your blog stands for. You have stated in the past that your blog is here to support the industry. You shouldn’t imply that real estate prices ever decline or that it isn’t a great time to buy.
January 18th, 2008 at 6:53 pm
Tom- first, if Jeff is a part of the conversation, there’s no such thing as “too wordy!” I’m being silly, but please never worry about length of comment- if you are called to add to the conversation and it takes more than a few lines, do it!
I love your highlight of the American dollar (and especially “Would you like an extra big helping of CDO on top of that pile of dog doo subprime paper, Mr. Mao?”)! Great material, Tom!!!
Do you feel that the high energy prices are predominant in Houston or does your forecast encompass the entire nation?
January 18th, 2008 at 6:58 pm
Mike, I think you’ve misunderstood my article. The point is that we have to hit bottom sometime, so let’s quit yarping about the doom and gloom and talk about how the inevitability of a positive future- what can we do to help get the ball rolling toward a more stable environment? When do readers foresee the recovery- is it soon or do we have some more tough times ahead?
My personal feeling (not that I was asked) is that with interest rates dropping and the credit choke easing, lending is picking back up and making it possible for our recovery. Like Jeff, our friends across the nation are experiencing a sudden surge in business. People are annoyed at being scared to buy and many are moving forward. As their friends and family see that they’re not in a life-or-death situation, they’re coming back to the closing table also. I think we’re looking at better times in the near future and I’d love to start talkind about that instead of the boo hoo times.
That clear things up, Mike?
January 18th, 2008 at 10:11 pm
Lani — As usual in times like these, the extremes come out of the woodwork. Most of them are just nuts, but many of them bring superb reasoning to the table. It’s plausible we’re heading downward farther than nearly everyone would admit.
It’s plausible there’s gonna be snow in downtown San Diego tomorrow too, but I’m not goin’ to the bank on it.
It’s unwise to discount, out of hand, the potential downside to our predicament. A new cat? Watch the lenders. So far, every time the mainstream media harps on something negative, lenders rise up and lend more. There are now stated loans for leverage buyers of investment property. Go figure.
I truly believe the next 3-5 weeks might give us a small hint on the economic tea leaves. ironically it won’t come from real estate, but instead Wall Street. The Bulls vs Bears street fight is coming to a head, and there are virtually no rules. If the Bears win, and they could, you’ll see massive pressure aimed at Bernanke to kiss the booboo and make it all better.
Bernanke couldn’t care less about Wall Streeters, relative to Greenspan. This explains the mud being thrown his way the last few weeks or so.
Watch lenders and their ACTIONS, and what the stock markets do by say, Valentine’s Day.
January 19th, 2008 at 12:44 pm
Lani: Thanks for the kind words.High energy prices are Houston! The last time we had an energy boom around here, before the S&L/Oil bust, the magnificent skyline that is Houston was built. Since that time, we have diversified away from energy. In those days, energy was 75% of the Houston economy. It’s only 50% now.;-) Energy costs permeate the global economy, but most of the exploration and production brain power goes to work in Houston. We also have a 50 mile channel of water that is wall to wall refineries. The more energy that is used, the more robust our economy. In the Carter years, (remember the gas lines?) Houston was the only place in the country hiring. There was actually a U-Haul chart posted in the business section every week that tracked where all the U-Haul rentals originated. U-Haul had a real problem getting all the one-way rentals back to the rust belt. There had long caravans of trucks and trailers going north.
I agree with Jeff that the way out is to free up loans so that mortgages are available. My question is who is going to lend if there is no one to buy the loan?
As a result of the S&L crisis, the banks and the regulators learned their lesson-borrowing short term and lending long term to capture the spread is very risky. Wall Street and their clients have just learned the same lesson, in addition to ignoring credit risk and collateral risk.
My fear is that the Fed counting on loose money to stimulate the consumer won’t work. I don’t see credit card rates coming down, it is harder than ever to get a mortgage, so where is all this low cost money going? It seems to me that the banks are borrowing everything they can get from the Fed, and they are not even lending it to each other much less consumers.
Our clients are those consumers. If they are confident, we can do our thing.
Mike: Houses are no different than anything else in a capitalistic economy. The value is a result of supply and demand. Who promised you that real estate can’t decline in value? I would submit that unlike a stock or a bond, real estate very rarely will go to zero, and will almost always have some value to some buyer. It jsut may not be a value that will get you out of your debt and closing costs without bringing cash to closing.
That does not mean that a property owner who gets over leveraged will not get wiped out. If you borrow 97% to buy a house, and the value goes down 4%, you are wiped out if you try to sell at that value. If you hold through the price fluctuations, you can sell at a more favorable time and profit.