The Benefit of this Real Estate Cycle

As an active real estate broker in South Florida the changes I have seen in the market for real estate are both upsetting and beneficial.

The upsetting part began in 2005 and 2006 when money was so plentiful that almost any borrower could qualify for a loan.  These borrowers realized that if they could purchase property with 100% financing and the value of the property went up they made an infinite return on their “investment.”  In fact, this looked so good that many buyers-speculators purchased multiple properties solely with the intent of reselling them at a profit.  This led to groups of individuals buying and selling to themselves at ever increasing prices.  Using these systems condominiums appeared to be doubling in value in less than a month.  As the prices increased this drew more and more speculators into the market.

How was all this possible?   Easy money based on loans without income verifications, credit reports or proof of ability to repay.  Some of these loans were called “NINJA” loans (No Income No Job or Assets).  Who provided these loans?  Mortgage brokers wrote these loans, they were sold to a wholesaler, who sold them to an investment bank.  The investment bank packaged them and resold them to investors.  Everyone made a profit and hoped that they could resell the loan before the borrower missed a payment.  The problems started when the “NINJA” borrower stopped making the payment because he could not flip or resell and did not have the income to make the payment.

Jump to mid-2006, the impact of this speculation and false demand was residential construction and speculative building not seen since the early 1970’s.  All of this buying and selling at ever increasing prices created an apparent wealth from real estate ownership.

Housing became so expensive most of the residents in South Florida did not have an income to cover the cost of housing. Of course this also led to higher taxes and insurance premiums because of the apparent increase in values.  The chain started to break in mid-2007 when foreclosures increased, construction spending declined and unemployment started to rise.

The beneficial part of this cycle is that the cost of housing has declined and more families should qualify to obtain home loans, real estate tax assessments will decline and insurance premiums should decline because of lower insurable values.  As the real estate market stabilizes and the existing inventory is occupied the market will recover.  If history is a guide we have had similar real estate booms and busts every 10 years.  The first real estate bust I experienced was in the early 1970’s and they repeated on a ten-year cycle.

When all of the new proposed financial stimulus packages are funded I predict a new round of inflation. It may take two to three years but the trillions of dollars being funded by the government will bailout the economy and bring on a new round of inflation. This in turn will help the banks with increases in the safety and the value of real estate loans. This inflation will raise the price of everything including fixed assets such as real estate.  My recommendation is that if we have a new round of inflation then the best investment you can make is to buy fixed assets such as real estate with a long-term, low interest rate loan which can be repaid with inflated dollars.

Call us we have been through the Cycles

By Tom Dixon