Posted by: Travis | August 18, 2009

Why the housing market is so messed up…

Rachel and i have been looking at and bidding on houses since December of last year with little success. Last night we submitted what i count was our 12th offer on a house, though i may be off on that number by 1 or 2. It’s been unbelievably frustrating getting emotionally attached to a house, submitting an offer well above the asking price, and then finding out that there were 10 other offers, and the seller has selected an all cash offer from an investor that will turn it into a rental property.

I’ve lost count, but i’d guess that we’ve gone to look at close to 200 properties, all but two of which have been foreclosed homes that are either an REO (repossessed and bank owned after a foreclosure) or shortsale (the bank agrees to cut their losses, sell the house for whatever they can get, and forgive the debt of the owner so their credit stays intact). We’ve talked to a ton of people who are getting kicked out of their house as well as real estate agents selling homes, so we’ve gotten an idea of what happened during the sub prime mortgage crisis. I figured it would be worth sitting down and writing down my interpretation of what happened for those of you that get your information on this topic from newspapers and articles on the web. Like i said, this is my interpretation of what happened and i’m just some guy trying to buy a house. I am not an expert on the sub prime mortgage crisis. With that out of the way, let’s get started:

From what i gather, things started in the early 2000’s after the dot-com bubble burst. Silicon Valley, where we live, was basically ground zero for the dot-com bubble and subsequent burst. Following the bubble burst people began looking for other ways to invest their money. At the same time banks began giving mortgage loans to people who couldn’t afford them and with virtually no pre-screening. As i’m sure you’ve heard, most of these loans had adjustable interest rates, with ‘interest only’ payments (for the first few years you only pay interest, with nothing going toward the principal), and no down payment (the down payment was usually borrowed from another bank, called a ‘piggy back’ loan). People were getting loans with no pre-screening, no proof of ID, no proof of income, nothing.

Since so many more people could now buy a house, demand shot up, causing prices to sky rocket. Here in Silicon Valley, were already some of the highest in the country, and they almost doubled. Even to live in East Palo Alto, (the murder capital of the US from a few years ago, a predominantly black and hispanic, low income town across 101 from its homogeneous and better known counter part) to get into a 2 bedroom, 1 bath falling down house that needed tons of work was going to set you back $600,000. Things quickly got out of control. You had families where both parents were making just over minimum wage working as construction workers, waiters, house cleaners, landscapers, welders, machinists, etc. moving into homes that cost $800,000 and beyond. These people should have realized that no hand waving would result in them being able to afford such a house, but they were blinded by being told that they could achieve their dream of home ownership, so they didn’t bother to carefully  read the complicated contract they were signing. Greedy bankers were okay with it because they were trying to get that bonus/promotion and were hoping to be gone by the time the stuff hit the fan, or they patted themselves on the back for helping a low income family fulfill their dream of home ownership. Little did they know it was going to become a ball and chain. This hole thing was predicated on the idea that home values always go up, as does people’s income, and by the time that their interest rate went up in a few years, they would surely be earning more money and be able to make their mortgage payments. While that may prove true for college educated people who are climbing the corporate ladder, it is much less likely to be the case for people in blue collar jobs.

This is where people looking for a new place to invest their money comes in. Because no one is going to buy the mortgage of an hourly wage construction worker who bought a $800,000 home, all of these mortgages were chopped up into tiny pieces, regrouped, somehow given a AAA investment rating, and sold as ‘mortgage backed securities’ to people who had no idea what they were buying.

Meanwhile, the family who bought the $800,000 house realizes that making these payments is going to be much more difficult than they expected, so they move all of their immediate family into one bedroom and ask another family to move into the second bedroom and help contribute money for the payments. A little bit later they convert the garage into multiple bedrooms and ask another family or two to move in. A few months later another family moves into the living room. A walk in closet might even get turned into a bedroom, with a blow up mattress barely fitting on the floor. With no more room in the house they buy a storage shed from home depot, put it in the back yard, lay carpet, hook up electricity and another family moves in. There might end up being 2 or 3 makeshift structures in the back yard for even more people. After a while you have 10-15 people living in a 1200 square foot house, putting all their money together and barely able to make payments. After a while it comes time to adjust the interest rate on their loan, and since they are making interest only payments, their monthly payment doubles, there’s nothing they can do, and they eventually get kicked out of their house. If the bank is able to sell their home in a short sale, and they get out with their credit in tact they are one of the lucky ones.

So this is where we are now. In some places, prices are half what they were at the height of the bubbles. Banks are so backed up foreclosing on people that they are months behind. People who quit making payments 8 months ago are barely beginning the foreclosure process. Repossessed houses hitting the market now are from people who quit making payments last fall before the economy went from bad to horrific. That, and the fact that foreclosures haven’t slowed down, leads me to believe that the housing market isn’t getting better any time soon. Though prices have stopped dropping as quickly, i think there’s going to be another down turn before things get significantly better.

Rachel and i began looking for a house last November. As i mentioned before 2 of the close to 200 properties that we’ve looked at have not been foreclosed homes, for those who aren’t good at math, that’s exactly 1%. I would say that 95% have a converted garage or storage shacks in the back that were used as living space. In almost all of these places renovations and additions have been haphazardly and cheaply done with the singular intent of being able to house more people. Even houses that were once nice have been so meesed up by cheaply done renovations that they would require $20,000-30,000 just to make them look normal again. It’s also common for people who have been kicked out of their homes to tear the place up as they leave and even return to vandalize the place after they leave. Since the sale is being completed by someone who works for a bank on the other side of the country, there isn’t really anything they can do.

We thought we had a place in the spring, but WaMu, the lender that loaned the owner the money for the down payment wanted her to put $14,000 to them on a credit card in order to close the deal. We decided we didn’t want any part of that so we walked away. Of the other 10-12 offers we’ve made, none have been accepted. Though we usually bid well above asking price, sometimes by as much as $50,000, it’s pretty normal to hear that that there were upwards of 10-15 other offers. Since we will be getting a loan from the government through the FHA program for first time home buyers, our loan is seen by sellers as complicated and messy. As a result, investors who swoop in with all cash offers almost always come up as the winners, in one case, even when we bid more than $30,000 higher than their offer. At this point we’re feeling pretty lost, as it’s clear there’s nothing we can do to make our offers more appealing than an all cash offer. Luckily, this article does a great job of describing the situation and at least lets us know that we aren’t alone in this.

The really frustrating thing is that when investors buy these homes with all cash, they are almost guaranteed to become rental properties. There’s no doubt that a home where the owners live in the house is more likely to be taken care of, and is much better for the neighborhood. Unfortunately, at this point there just isn’t much we can do but keep going through the motions, keep looking at houses as soon as they hit the market, keep making offers the day after they go on, and just hope that we catch a break.

Everyone we’ve run into is really slimy too. It seems like any time there’s an opportunity to take advantage of someone else’s problems, greed, slimy people come out of the wood work. The realtors selling properties for the banks are the worst. They never return phone calls or emails, and when you do actually talk to them they tend to be arrogant jackasses that think you owe them something. Many of these people have this nasty habit of listing a home for well below what it is actually worth with the intention of stoking up demand, getting a ton of people interested, and then manufacturing a bidding war. Then they invariably become overwhelmed with the phone calls and freak out like it’s the fault of the people interested in the property and not a problem that they purposely created. One realtor required that a ‘worksheet’ be completed with the offer and then that the offer be hand delivered by our realtor instead of the traditional fax or email. When our realtor went to deliver the deal, she cracked the door to her office, snatched the offer out of Ted’s hand, and slammed the door in his face without saying a word. It’s just crazy. The whole system is overloaded and there’s no one to enforce the rules, so no one follows them. It’s like the old wild west or something. It’s just insane.

Luckily, as i’ve said before, if we end up not landing a place, it’s not the end of the world. We aren’t planning on staying here for the rest of our lives, and we’ll certainly be able to afford a house when we move back to Texas. If we don’t find a place we’ll have a nice little chunk of money that we can use to get married, go on some sweet trips, or save for when we buy a place in Texas. So it’s not the end of the world, but it’s really frustrating. Going to look at a place, getting emotionally attached to it, and envisioning living there, only to see it go to someone that’s going to turn it into a rental property is tough. Sure it’s easy to say that you shouldn’t get emotionally attached, but i would argue that you shouldn’t spend hundreds of thousands of dollars on something that you don’t find yourself emotionally attached to.

Life moves on, things progress, and we keep telling ourselves that we’re lucky to even be in a position to buy a house right now. We’ll keep going through the motions and hope something breaks our way, and if it doesn’t, we’ll have some extra money laying around. C’est la vie.

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Responses

  1. Fitting that many people in one house is crazy! – but I know it is happening all around the country with the real estate market as it is.


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