Admittedly 2010 was a tough year, with new waves of problems coming at us from all sides. Most people I talk with say they will be glad when this year is over. And yet is was a tremendous learning experience for each of us. We have a firm grasp on some descriptive terms now that were a little hard to recognize a year ago. Underwater is the go to phrase for a home that is worth less than its mortgage debt. As the number of homes in this condition has risen, the word has touched many more than we might have guessed in our recent past. Robo-signers, while not really a word, came to illustrate the way many of the larger lenders handled the paperwork on their foreclosure proceedings, resulting in court ordered stops and the lack of respect for their treatment of their customers. Buyer’s market, while not new in any definition, continued to define the imbalance in residential home sales in most markets. Sellers mostly have to bow down to buyers who can now dictate terms to sellers on transactions.
Rather than try to recite those phrases that have become everyday talk in the real estate industry, lets focus on expectations for next year. I have not tried to come up with a consensus of opinion among the real estate experts willing to put something into print. And it runs the gamut from predictions of prices going even lower yet to a strong and measurable rebound for home sales with prices firming up and inventory coming down. Almost none of the predictions calls for a banner year in 2011; we look realistically at a flat year for sales possibly ranging upwards to increases of five percent above this year. And as this year is in the range of three to four percent above 2009, a five percent increase would be an accelerating recovery. And that against very strong headwinds.
One point I have not made clear in previous posts I would like to revisit at this time. Many can lament the down cycle (recession or worse) that we have found ourselves in over the last several years. But comparisons to the peak of real estate sales activity (generally 2005 into 2006) include a large number of sales that should never have happened. I say that because of the many transactions that were only made to happen because of the lax and guileless mortgage lending standards in place then, combined with the aggressive attempts by people to get their piece of the American Dream by becoming homeowners at any cost. This is not written in judgment of lenders or home buyers from that prior period of “anything goes”. It is written to state the case that a healthy percentage of sales should never have happened if certain basic rules were in place and being enforced. Show me a lender today that can successfully argue that a couple should be able to buy a home with three percent down with a payment beginning at less than half of where it would adjust to in 3 to 5 years; all without any written verification of either steady employment or income. What sort of underwriting standards would include that scenario? Buyer/borrowers were all too anxious to take advantage also, so we ended up with a glut of homes that are underwater and buyers that today cannot qualify for a purchase money mortgage.
The conclusion I draw from the above is that we have to make adjustments to the number of sales in the peak years when we compare where we are now. No, we will not see those days again soon where Santa Fe city and county residential sales were in excess of 2800 per year. In 2010, we are on track to come in around 1280 to 1310. As that is less than half the sales volume of 2005, what is your guess on how long it will take us to regain that volume if we are gaining at 5% a year? Let’s stick our necks out and say 10% a year increases. If 1300 this year, 2011 might be at 1430 (10% increase), then 2012 would be at 1573, and 2013 would come in at 1730 total sales. Three full years of 10 % increases (1730 in 2013 in this example) would still bring us only to 62% of that glory year of 2800 sales in 2005. Eight years would have passed and we still would be below two-thirds of that amazing year of 2005. This matters because continued comparisons to those high-flying years give us a nearly impossible goal to reach. Why not compare our current trends with what those years would have been like without the mistakes that buyer/borrowers and lenders made together? Just how do we arrive at that guess of what number we should use for 2005? It was not as if that was the first year that some sales came along that maybe should never have happened. That was true in 2004 and before that also. It’s just that it all peaked in 2005.
A logical approach is to say that for all of the sales that were fabricated, put together with missing or incorrect information about borrowers ability to pay, those same sales happened sooner than they would have otherwise, given a steady market and a manageable trend upwards every year. If the 2800 unit sales in 2005 included say 600 sales that happened prematurely (or should not have happened at all), then we took those sales away from the future. I believe that is a way to chart what this decade should have looked like. And if thousands of sales took place early in the decade,and earlier than they should have, then the latter part of the decade will see a smaller fraction in terms of sales volume. Sales that happened three to five to seven years before the borrowers were really ready to buy homes then actually take away from today, when they might have finally saved enough to purchase a home and kept a steady income and employment long enough to impress an underwriter.
No wonder sales are down. We stole those statistics from the future back then. We robbed today’s results by taking those sales years too soon, before they should have been counted. No wonder we are so below those peak years. And what does this mean? It means we can come up with an educated guess about how many sales “should have happened” earlier this decade and then compare to more realistic numbers. If we today are running at 46% of units sold from the peak year of 2005 (2800 v. 1300), then no wonder we are kicking ourselves and feeling as if the world has crashed around us. Should we be pretending that the bubble bursting in real estate never happened? No, not be a good idea. But I think we can and should come up with a new chart for the 10 years of this decade and find a sustainable growth line that we could predict would have taken place had the sky not fallen in on borrowers and lenders (and the Wall Street boys that designed the credit default swaps and split mortgages into trances that lost their connection to reality). I am going to ask here and now if anyone wants to see what the decade might have looked like had we not fallen prey to our own greed and sanctioned a bunch of transactions that were not properly structured for the involved parties. Do you care? Would you like to know where we might be today if this bubble thing had not happened? I would love to know the answer to that also. But only to try to measure where we are now compared to where we might have been. I am not interested in finding more places to affix blame. I am trying to say that maybe the volume of homes selling these days is not all that bad, considering so many factors that are working against us.
There is a strong case for something going wrong with our economy even without the real estate bubble bursting. The little piece of the pie represented by residential homes being built or being resold is nothing compared to the trillions of debt we have found ourselves saddled with as the world’s leading democracy. Wherefore the value of the dollar and the addiction to China’s money to purchase our debt? While the real estate problems of today are small when viewed within the big picture of the world’s and America’s economic difficulties, it still could be real estate that could be a strong contributor to the economic health we all wish for and are working toward. Given the opportunity, the American consumer would love to contribute to rebuilding our financial strength by purchasing homes and spending money on flat screen TVs and e-Readers. But until the imbalance in our market (too many homes and too few willing buyers) is corrected, real estate will not be the solution but will continue to be a part of the problem.
So what should we do now? I await your comments and ideas. May your 2010 holiday season be full of celebration and joy with family and friends close by.