I am amazed at how the financial crisis has evolved from Jan 2008 when I started blogging about the mortgage scene to April 2008. I answered a number of typical questions about exotic mortgages and interest rate indexes, and addressed ways to think about whether to or when to buy one’s first or next home. Since the market value of houses has been in decline for months and months the decision about when to buy has been a tough one for young home buyers to figure out. The good news is that homes are MUCH MORE AFFPORDABLE now and will get more so for the next couple of years at least. The bad news is that you really have to do you homework on the decision to buy and where and when. You cannot just follow the “conventional wisdom” advice of realtors or mortgage lenders these days. They are parties that have a vested interest in getting you to buy. So you need to dig in and ask questions and assess answers and formulate your own “worldview” on what is going on and how you will best participate in what is going on.
Just over a couple of years ago my wife was diagnosed with “calcium deposits” in one of her breasts. Seems insignificant– little specks on an xray. But it led to a biopsy to check out the cells and another biopsy to get more of the cells out that could/would cause problems in the future. You can bet that we went into this process with a lot of anxiety and uncertainty. We did a lot of talking with friends and family and we did a lot of research on the Internet– and NOT WIkipedia. We wanted credible sources. But we found differing opinions from different credible sources! This led to more research and more dialog with more experts. We were motivated. This research was not the kind you did for a homework assignment in school. This research was not casual searching on the Web for a product or service that might be purchased on EBay or Craigslist or from an online storefront or fron a brick and mortar store. This research was going to determine how we approached a potentially life or death decision for follow on treatment and therapy to make her better. When we went to the oncologist, to get help making the decision about the need for preventative radiation or chemo therapy, his first statement was “What questions do you have for me?” By this he meant to say that he would not be telling us what to do. He would not be “the oracle”. It was up to us to do our homework and use him as a knowledgable resource who would invest the time and effort to get to know my wife’s exact situation so he could offer his best insight on likely causes and effects of various therapies. He would be a good resource for assessing the likely rewards and probable risks of alternative courses of action. We like this since we had done our homework and were willing to do whatever it took to learn more as needed so we could make a good decision. My wife made her decision with her network of support resources and she is doing great– over a year later!
So, homebuyers need to do the same thing and make a commitment to get smart about homebuying basics in this market that will favor the credit worthy person or couple who has solid income and savings. It also favors those who are smart about creative finance and partnering. This market will last for another year or two. When markets return to normal buyers will be back to clamoring over each other and bidding up properties. The advice I gave to my daughter and her fiance three months ago still holds. Keep an eye out for properties that come on the market in your preferred locations and be prepared with pre-approval letters and tuned up FICO scores to make outrageously low offers to several properties at a time.
I have been watching the drama of the $700 Billion Bailout, the demise of independent investment banks through bankruptcy or acquisition or transformation from investment bank to a bank bank. These changes have unfolded with amazing speed– daily new announcements. What’s interesting is how quickly spokespersons (CEO’s) switch from being confidence propper uppers to being fired. There is a Pollyanna mentality in which the leadership of a company asserts that things are challenging, but all will be fine with the infusion of one or two or three billion dollars of petro dollars from a Middle East investor or trade surplus dollars from a national investment fund like that of China or several billions of dollars of equity investment from Warren Buffett. The Pollyanna mentality (macho confidence) is needed to convince the investor that his new investment dollars will not just get sucked up in the bad debt whirlpool like previous capitalization. The new investor needs to think that he is getting a chance to buy into an important piece of the US financial establishment at distressed bargain basement prices and that this investment will make a killing when the market rebounds. It’s a game of the buyer being simultaneously wary and greedy and the seller being simultaneously weak and strong. The seller is seen as weak to need more capital and strong to be able to leap tall buildings in a single bound with the new capital infusion.
We went from the Pollyanna phase over the past several quarters where progressively greater losses became public, and everybody was sharing in the pain and public and marketplace flogging to the “Potemkin Village” phase where we discovered that there were fake facades to the Pollyanna companies that appeared weak and strong. They were actually weak and weaker. One would think that Sarbanes Oxley would begin to come into play since mistating financial statements is serious stuff. But, perhaps it is not purposeful mistating. Perhaps it IS just the effect of Mark to Market rule where investment banks need to mark down the value of their assets based on the likelihood of selling at market prices. When banks are weakened with battered balance sheets due to lowered values of the assets they hold, they get conservative in their willingness to lend to others. They wonder if they will be paid back. So the price points fall even further and another wave of mark downs is precipitated the next financial quarter. Lack of investor confidence to lend to the bank and lack of bank confidence to lend to each other causes there to be no market for financial assets based on cash flows from homeowners that may likely default due inability to pay or unwillingness to pay a loan that is under water, where the homeowner owes more than the house is worth.
This is scary stuff and that’s why the Government Bailout is needed. It’s like a slap in the face to the market. The government is slapping the market by letting some companies go under and letting their assets be sold at fire sale prices to healthier companies. Then the government is grabbing the market by the shoulders and shaking it and saying, “wake up I ’m here and will help you out. Just get moving again. Stop looking like a deer in the headlights.” Will it work? WIll it be sufficient? It will work because it has to work. We won’t let our system collapse. It’s not just the US system. It is the global system. And it may take more than $700 Billion. Certainly there was more than $700 Billion in valuation that was created in the market over the past 25 years of growth. The market giveth and it taketh away.
Anyway if you are a first time home buyer, and you have good credit and a good income and some savings your patriotic duty is to buy a home that is the best you can afford, and it is available finally at a reasonable price, the most reasonable in a decade.
