I am amazed how many times in my lifetime I have seen the past repeat itself. Beginning in the 1970’s, I have witnessed one form of financial meltdown after another, each occurring almost precisely 10 years after the last. I once had a wonderful professor who explained that the seemingly inevitable repetition of the past was based on numerous, very different factors, but with two factors appearing in virtually every case. The two “alpha” factors are (1) basic greed and (2) institutional memory. Basic greed is when one group of people is willing to compromise common sense, principles, and ethics to achieve the goal of simply having more than everyone else. Institutional memory is the length of time it takes for a corporation or public agency to forget the lessons it learned from the last economic fiasco that its own bad decisions helped cause.
Today, as I look around I see signs that make me fear we are about to fall down another rabbit hole in spite of the economic devastation we suffered during the last plunge we took into the unknown. Here are the signs I which lead me to that conclusion:
· Typically institutional memory lasts ten (10) years so if you take 2007 and add 10 years you can see how close we are getting to the next loss of memory.
· Interest rates remain artificially low and this is the fuel feeding the fire of demand exceeding supply in many markets. If interest rates are allowed to move up, both demand and prices will likely drop in many areas and in some the drop may be significant.
· Although the banks and agencies no longer use the term “subprime lending”, I see down payment requirements dropping to 3% or less, credit restrictions easing, refinancing of current debt increasing, and a disconnect between contract prices and appraised values in many markets. All of these factors contributed to the last serious downturn in the economy and the precipitous drop in real estate values.
· Banks and mortgage companies are starting to push 100% LTC financing options out to low and moderate income borrowers seeking to acquire homes in targeted census tracts and if the borrower’s credit score is below 640 or the borrower does not use traditional credit, the lender will use non-traditional credit (whatever that means) to evaluate the borrower’s credit history.
· Banks, mortgage companies, and investment banks are actively lobbying for reduced regulations on lending and required consumer disclosures, relief from higher capital and reserve requirements, the ability to avoid obtaining full appraisals on many new home loans, and even an end to the Consumer Financial Protection Bureau (CFPB), a new agency born out of the last downturn.
· Real estate brokers and agents are facing increased competition from both new for sale by owner (FSBO) options and new reduced fee for service platforms. Coupled with the loss of control of their own MLS data, this has created a sense of urgency which shortens the time between accepted offer and close and resembles the same kind of frenzy last seen in 2006 and 2007 just before the last downturn.
· In many areas a significant source of both buyers who own and occupy and buyers of second/vacation homes comes out of the new sharing economy whereby a buyer counts on being able to generate income from short term rentals to offset the higher overall debt incurred. If short term rentals prove to be a fad or get regulated out of existence in certain areas, many will find themselves over-leveraged owners of homes worth less than what they paid.
I hope I am wrong and that we all learned some very valuable lessons from the collapse of our economy in 2007-08, but if greed takes over and the memories of the downturn fade sufficiently we could find ourselves re-living those years all over again. If I am right in my reading of the tea leaves, the real question then becomes “how soon might this happen”? The answer to the question of “when” depends on a number of critical variables including, but not limited to, the following:
· Who gets elected President (the new President could be “none of the above”)
· If North Korea ever does anything other than promising to do something
· What happens to the Euro and the EU once the terms of the Brexit get negotiated
· How much longer the Fed can hold interest rates down before foreign investors go elsewhere to find yield
· What happens at the Olympics given the disaster formerly known as Brazil
· Whether ISIS brings its random acts of violence onto US soil before the Saudis and the Turks get motivated and angry enough to help squash this threat
· Last, but not least, if any of my email containing classified information gets deleted
Have a great summer vacation and get some well-deserved rest. You may need all of your wits about you come November when the US voters emerge from their respective polling places. To close, I’d like to quote Lewis Carroll from Alice in Wonderland:
“Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to."
"I don't much care where."
"Then it doesn't matter which way you go.”
Author: Brian L. Trotier, JD, is the Executive Vice President and Chief Operating Officer of FREA and a former practicing attorney with more than 30 years experience in real estate and risk management.