OfflineThis article can be found at: http://www.kansascity.com/2010/06/24/2040706/real-estate-qa-could-the-ho...
By CHARLES CARTER
McClatchy-Tribune News Service
QUESTION: Do you believe the housing crash could have been predicted or was it something that occurred "out of the blue"? How would you have predicted this event?
-Peter Breedlove, Pittsburgh, Pa.
ANSWER: I have read nine books about the subprime crisis and its aftermath. Three of these were the subjects of my book reviews written for the American Real Estate Society. (A couple of these books on the subject weren't worth reading.) Better still, I participated in several annual finance and real estate conferences over the past several years, and had the chance to personally speak with such noted experts as Frank E. Nothaft, chief economist for Freddie Mac. My curiosity was also aroused by events happening all around me, living in South Florida and seeing first-hand the effects of the housing crisis. Only Las Vegas and Phoenix have had worse problems with housing.
At this juncture I am of the opinion that the housing crisis could have been predicted, or more precisely, should have been predicted.
First, there were just too many instances that cropped up of people going out their way to signal that they expected this crisis to occur.
In Gellian Tett's book "Fool's Gold," the author cites an example of an investor, Andrew Feldstein, who made a small fortune betting that home mortgages would default. At an academic conference in Monterey, Calif., three professors gave a paper on why mortgage-backed securities were mispriced. They gave an explanation in some detail how pension funds and other guardians of public funds were misled into believing their investments were safe. Feeling it was their civic duty, the professors passed their findings on to the federal government, to no avail. There are other examples I could cite.
Second, there was a clear measure of the housing bubble that formed which should have been obvious if people paid attention. A measure that stocks are overpriced is an abnormal price-to-earnings ratio. A stock's price-to-earnings ratio in normal times might be 15 - that is, the price per share is 15 times the company's earnings per share. In times when it's overvalued, say during the dot-com bubble of 1995-2000, that ratio may reach 30.
Houses don't have earnings. Economists have developed the concept of owners' equivalent rent and the Bureau of Labor Statistics uses the measure of owners' equivalent rent as part of their Consumer Price Index to figure consumer inflation. The reason for using their measure of equivalent rent is to differentiate that part of the Consumer Price Index representing housing consumption from more volatile housing price measures, some part of which represents personal investment (not consumption). The Bureau of Labor Statistics has understood this fact and made accommodation for it since 1980. From 1987 to 2005, the price-to-rent ratio averaged 15, while during the housing bubble, 2005 to 2007, the ratio jumped to roughly 20.
You could predict by looking at government stats, that in the California and Florida markets a few years ago, the appreciation rate for the previous five year period was over 120%. You can only imagine that with wages going up on average 3% - 4% a year, that people would never be able to afford those prices. I recommended at that time that the appreciation was unsustainable, and to get out of those markets.
However, I never could have predicted that it fell apart the way that it did. The extent of the fall surprised everyone I know.
I knew that things were going to end when banks were giving our people more loans than was practical. All you needed was a heartbeat...REALLY! But, I was surprised on the quick shift in the market; it just fell off into the abyss overnight.... well more like 3 months, but you couldn't position yourself quick enough to get out of the way.
Always Looking to Acquire Houses | Always Looking to Amaze Investors
The market is constantly changing. That means there are investments that work sometimes but not everytime. The investor must assess each deal on its own merit and be willing to adjust their approach as the market changes. The buy, fix and sell investor has likely had to use lease/options or owner financing to move their properties quickly when the standard mortgage market restricted their lending to owner-occupants. All investments are risk versus reward and the prudent investor will have at least a couple of exit strategies on any investment.
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125