Friday, July 25, 2014
PLACERVILLE, CALIFORNIA
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Coming to terms with the housing recession

By
September 27, 2011 |

Ken Calhoon

It often takes time to put things into their proper perspective. A certain amount of objectivity is gained over the years when looking back on significant events in our lives.

On occasion, I have pressed too hard to gain things I should have passed up and I missed opportunities that I should have pursued  An irony in life is that despite all the research and logic that may go into making a major decision, unexpected events beyond our control may influence the success or failure of the decision. Looking back, we have all probably made good decisions at the time that turned out bad and poor decisions that did pretty well. Sometimes it’s better to be lucky than good.

As an example, many years ago I formed a partnership to purchase 40 acres of vacant land for a residential development. I retained a qualified appraiser who calculated the current value of the property and value of future individual lots, a reputable engineering firm provided us with development cost analysis and the county Planning Commission approved our project. Two years later all the lots were sold and my financial partners had doubled their money.

Then an adjacent 40 acre parcel became available. My partners, anxious to double their money again, urged me to buy and develop the second parcel. I did and retained the same cadre of professionals to assist me. Everything proceeded as planned until one month shy of our grand opening the stock market crashed, loosing 16 percent of its value. That would be like the Dow dropping nearly 2,000 points today. It was a major economic calamity and the beginning of a recession. In response, the Federal Reserve, under Paul Volcker, began lowering the Fed Funds rate. The stock market and economy recovered but over-heated into runaway inflation. Mortgage interest rates climbed to more than 17 percent. Few people were buying homes or finished lots.

The two property parcels were nearly identical, the development costs were similar and there were no unforeseen development delays. With one parcel I was celebrated for my keen insight and financial acumen and with the other I was chastised for wasting my partners’ money and nearly bankrupting myself in the process. The financial defeat was emotionally difficult. I spent two years blaming myself. Eventually, everyone was made whole and today Heritage Park is a beautiful neighborhood of custom homes.

We all know someone who has faced similar financial defeats over the last few years. Many have lost homes through foreclosure or have been forced into a short sale. Others have struggled with the moral decision of walking away from their underwater property or staying the course. A few with equity remaining in their homes are selling at 2002 prices.

Few housing economists predicted the depth or duration of declining property values. In fact, every leading economist in 2007 was talking a “soft landing” for real estate. Buying decisions were made based upon historical performance. If there was a brief dip in sales or property values, the market would surely bounce back quickly as it had in the past. No one, including the smartest people on Wall Street, federal regulators and everyone in banking, understood the extent of the problem. So if the smartest people in the country couldn’t see the light at the end of the tunnel was a freight train, how could Main Street Americans?

Looking back, now that the game is over, it’s easy to critique the players and coaching staff for such poor performance. However, everyone who purchased a home prior to 2007 was following the previous wining game plan. We all knew the successful axioms for successful real estate investing: “Buy today because homes will be more expensive tomorrow.” “Using OPM (other people’s money) is better than using your own.” “Don’t worry about the initial interest rate, you can always refinance.” “Always buy the largest home that you can afford.” “Buy land, they’re not making any more of it.” “The market always bounces back.” These were the game rules that everyone had played by for years. Then everything changed. Someone stole the ball.

Wall Street, including its insurance companies and bankers, nearly collapsed — saved only by a $700 billion federal bailout. Then Fannie Mae and Freddie Mac were placed into receivership. Then the official recession began. In October 2008 the Dow fell 1,800 points, in its worst weekly decline ever. In 2007 economists were predicting a “soft landing” and in 2008 the same economists told us we were in the worst recession since the Great Depression and it could get worse. Job loss was unprecedented. The rest as they say is history.

With time, we eventually come to terms with our lot in life. We’re not responsible for all the circumstances, good or bad, that befall us but we are for how we react to them.  There are worse things that happen to families than to have their equity disappear or to lose a home in foreclosure.

Five years from now, some real estate columnist will likely be musing about the lack of affordable inventory and high interest rates. County planning staff will be working on the new proposed housing developments south of Highway 50 and nail guns will be hammering away again in El Dorado Hills. The homebuyers today will likely tell their children and their grandchildren of the good old days of 4 percent interest rates and $200,000 homes. I just hope I’m around to see it.

Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his Website, kencalhoon.com, or via e-mail at ken@kencalhoon.com.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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