Did Banking Create the Real Estate Crisis?

In my last post, I mentioned that Al Gore cited individual home loan foreclosures as the cause of the 2007 Real Estate Crisis.  That piqued my interest: what really happened, now that the dust has settled?

There were more foreclosures in 2006 than in 2005, and more in 2007 than in 2006. However, the general real estate market at that time was reasonably solid; there were buyers for homes and the economy was still growing.

I noticed that articles of that time seem to suggest that the lenders were the first symptom of the crisis. In particular, Countrywide Finance had made a lot of loans that created a problem for them. They were later taken over by Bank of America, and issues such as "robo-signing" of documents emerged.

The government then sued the both of them for fraud.

http://www.reuters.com/article/2013/10/15/us-bankofamerica-hustle-idUSBRE99E12C20131015
http://realestate.aol.com/blog/2012/10/25/bank-of-america-lawsuit-countrywides-unethical-lending-was-br/#!slide=865671
http://www.huffingtonpost.com/2012/10/24/bank-of-america-mortgage-fraud_n_2009791.html

So, I've completely changed my own understanding of the real estate crisis: private lenders made stupid loans, committed fraud and broke the laws, and stuck the U.S. economy with the bill. So much for the business cycle excuse.

Al Gore on the Real Estate Crisis

People occasionally say, 'hindsight is twenty-twenty', meaning that once something's happened, it's clear to be seen. That's not my observation; we rarely understand what happened to us. We certainly don't agree on what's happened.

I stumbled across Al Gore speaking about the "next" economic bubble (carbon asset valuations). In doing so, he casually mentioned that the Real Estate Bubble happened because so many people defaulted on their no-down-payment loans.
 http://finance.yahoo.com/blogs/daily-ticker/al-gore-carbon-bubble-going-burst-avoid-oil-121707563.html

That's not what I remembered; so I looked it up. It turns out that there was not a spike in non-performing home loans before August 2007; so the "bad" homeowner doesn't actually look like the culprit. There were dozens of opinion pieces in financial and economic journals, blaming either government or the private sector for stupidity, greed, and blindness. However, opinions were much more prevalent than facts.

So, why did the U.S. go into a real estate recession in August 2007? To be continued...

Will Obamacare help apartment owners?

It seems like a stretch to me, but the following article seems to suggest that Obamacare will help commercial real estate in general.

federal-reserve-sees-clearer-skies-ahead-commercial-real-estate

The writer's logic is this: job growth has been okay so far (we're almost back to where we were in 2007) and offering a general solution to health care in the U.S. will help business. The dispute over Obamacare has retarded job growth, but getting past the arguing will help business, and employment.

By the way, in the spirit of full disclosure, and I like to talk, I was originally against universal health care in the U.S., because if we take such bad care of ourselves when we have to pay for it, how badly will people treat themselves when someone else has to pay?

Now, though, I have changed my mind. The medical system has become distorted through so many patients who rely on the chaos and don't pay, anyway. I'm willing to give Obamacare a chance. Congress voted for it already; what's the argument now?

Does legalizing marijuana make neighborhoods less safe?

Recently, my little home town of Cathedral City, California (next to Palm Springs) discussed an application from a marijuana dispensary to open a location in the city.

The City waited for a decision from the California Supreme Court regarding the legality of a local prohibition on marijuana dispensaries. Later, the Court decided that cities may turn down applications if they've passed an ordinance. So, Cathedral City will not permit dispensaries, although surrounding cities have them.

I participated in the discussion of the planning committee regarding a recommendation. Since I keep up with real estate issues, I realized that I had not read a single article discussing the benefits, or the disadvantages, of the impact on communities of marijuana dispensaries. Later, I Google'd the issue, and found that there was a small study (for sale for $35) and a large study just started by UCLA to run for a few years.

In an apartment building I owned in San Diego, one tenant had a prescription (he said) and smoked marijuana openly. It bugged the other tenants, a lot. It wasn't illegal, but it caused problems. And his friends who came over to smoke with him, weren't the people I wanted to hang around my property.

Not everyone agrees the Apartment Sector is healthy....

This article comes to a conclusion that apartment tenants cannot pay more rent, so rents will not increase (much). Rents are already pushing limits of affordability.

Forbes Magazine: are-investors-paying-too-much-for-apartments

The writer also suggests that capitalization rates for apartment properties will increase from their current, historically low levels. (By the cap rate going up, with a steady "NOI", the value of the property goes down).

The article says that "apartment loans are not completely self-amortizing", which is not my experience. A twenty year loan on an apartment property is paid off in twenty years, period. Most apartment buildings are sold, financed with a "debt coverage" cushion, and produce net cash flow. I haven't seen any with a balloon payment.

While he acknowledges that capital is cheap, and rents have gone up, he appears to really believe that apartment owners will be forced to refinance in a future of higher cap rates (and lower property values).  He sees "maturity defaults" for owners of apartment buildings.

If anyone believes that, raise your hand. (I don't see anyone).