It’s getting harder to find a short sale or foreclosure listing these days. Equity sellers now make up 91 percent of listings in our county. Fortunately, increasing property values leaves fewer homeowners under water. According to a recent report issued by CoreLogic, about half the homes in our Sacramento Region were under water in 2009 and as of last week less than 18 percent of homeowners owed more on their mortgage that their home’s current market value.
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Our county’s median selling price has increased 30 percent from where we were a year ago, listings are selling at a brisk clip near their listed price and from all accounts the real estate market is balancing itself between supply and demand. The great real estate recession that began in 2007 and continued through most of 2011 seems like an unpleasant distant memory. But before we close that chapter in our real estate history book, perhaps we should reflect on the lessons we learned from the experience. After all, “If we don’t learn from history we are doomed to repeat it.”
Looking back, nearly 40 years, I have experienced four major real estate recessions. They all were the result of geopolitical or economic factors outside our local market but severely impacted neighborhood property values. During those recessions, the value of our homes had little to do with quality public schools, community parks and bike trails. Property values were shaped by an Arab oil embargo, monetary policy by the Federal Reserve, defense spending cutbacks and Wall Street speculators. Understanding that unexpected national and international events have a direct influence on local values should be a consideration for anyone buying real estate as a short-term investment vehicle.
There are those who will argue that historically homes make great investments through their appreciation and favorable tax treatment. However, true that may be, they still should be viewed as shelter first. Far too many folks purchased homes, back in the day, based upon making a quick buck. The popular belief was that it really didn’t matter what price was paid for a home, since it would be more valuable in the future. Lesson learned was property values don’t always go up.
Another lesson from our past experience was not everyone should be homeowners. Homeownership had been a national priority for 60 years. Both political parties have included increasing homeownership in their party platforms and legislation and favorable tax treatment is slanted to encourage more homebuyers. Congress was partially responsible for the collapse of Fannie Mae and Freddie Mac by insisting both housing agency securitize sub-prime loans for credit-challenged borrowers. After all, shouldn’t everyone be entitled to own a home? Eventually, homeownership reached the limits of commonly accepted boundaries. Sub-prime loans were the first to spin out of control, eventually taking Fannie Mae and Freddie Mac into receivership.
“You can always refinance” was the big lie told to millions of homebuyers who were financing their purchases with low interest, highly leveraged, adjustable rate mortgages. Borrowers were told they could always refinance if rates came down or when the price of the home increased. Rates did come down but so did property values, making refinancing impossible.
Our homes are not ATM machines. Between 2004 and 2007 half of all refinances were borrower’s cashing out their home’s equity. Sitting on equity when there were so many necessities to buy and things to do was considered obsolete thinking. Consumer spending between 2004 and 2006 wasn’t due to increased wages and disposable income; it was the result of equity extraction. Falling property values erased whatever equity was remaining and millions of homeowners ended up under water.
We all ended up in the same boat. The Great Recession treated all property owners equal. We wanted to believe the problem would be concentrated somewhere else and not in our county or our neighborhood. It was understandable that property values in Sacramento and Placer counties were falling. They were foolish for overbuilding. Our “slow growth” “keep us rural” planning and political philosophy would surely insulate us from the foreclosures and bankruptcies experienced elsewhere. But of course it didn’t. By the end of 2010, no neighborhood was exempt from the plague of falling property values that plummeted to half of their peak in 2006.
In the event of a man-made or natural catastrophe, it’s best not to wait around on the government to solve the immediate problem. The housing bubble began losing air in 2006. The Great Recession began in 2007. Since that time, the Feds have implemented numerous policies and spent more than a $1 trillion attempting to prop up the housing market and to what effect? Four and a half million homeowners lost a home to foreclosure, property values dropped 50 percent from their peak, 40 percent of homeowners with mortgages ended up underwater, $18.9 trillion of household’s wealth was wiped out and the housing agencies Fannie Mae and Freddie Mac are in receivership.
Some programs like the tax credits to buyers of new homes back in 2007 or the HAFA and HAMP refinances helped individuals but the collective magnitude of the problem exceeded all expectations.
The most important lessons taken from this real estate recession was: Stuff happens, expect the unexpected and prepare for a rainy day. Good advice when you consider that statistically, if you are younger than 60, you will likely live through three more recessions in your lifetime. Are you prepared?
Ken Calhoon is a real estate broker in El Dorado County. He can be reached at kencalhoon.com.