Washington's Role in the Real Estate Crisis
By Candice Black
Since 2007, the country has seen a devastating fall in the housing market. Home values are dropping dramatically, and while it may seem like a buyer's dream, the housing crisis has been a leading cause for the recession.
“In the past,” said Richard Staley, mortgage broker, “people were financing homes with zero down payment and weak credit. And when values started declining people walked away from their homes. It was a spiral effect, like a house of cards.”
Atlanta is considered a declining market, with house prices down 70 to 90 percent. Last year, around 360,000 notices were given for foreclosures. Twenty-five percent of those resulted in foreclosures.
But what caused the real estate crash?
“The government,” Steve Palm says frankly. Palm is CEO and president of SmartNumbers, an Atlanta-based company that provides residential real estate information and forecasting to real estate agents, appraisers, brokers, major builders, and banks.
“The government pushed people into the red zone,” he said. “They overbuilt and over appraised. In the early 2000s, we really pushed people who couldn’t afford homes. Most people didn’t have to put down a down payment. It drove prices up for new construction. ”
Fannie Mae and Freddie Mac, the government-backed programs that allowed loans to be granted to people with poor credit, largely contributed to the crisis.
“We could easily get rid of [Fannie and Freddie], and no one would miss them,” said Palm. “It would help to get rid of them, because we don't need to spend money on them.”
People buying homes out of their income range in turn caused the rise in foreclosures. Because of the problems caused by over-lending, lending rules have tightened.
“Before, you could tell the loan officer, 'I have a job and I make this much money',” said Bob Kilinski, co-owner and operator of Keller Williams Realty's southeast region. “But they didn't check it. People were buying way above their pay.”
Now, to qualify for a loan, buyers must have good credit and must make down payments. But because of the new strict guidelines, things have pushed in the opposite direction so that home-owning is nearly impossible for potential buyers, specifically self-employed buyers.
“Self-employed borrowers have the hardest time getting money now because banks don't want to give them loans,” said Jeff Adams, senior loan officer at WR Starkey Mortgage. “Houses aren't selling.”
Before August 2007, buyers qualified for loans based on their income. “Now,” said Adams, “you can't qualify them on what they make. You can only qualify them on taxable income. If you're only paying taxable income for 25,000, that's all I can use.”
In Washington, there is also talk of repealing the mortgage interest tax deduction, which allows home-owning taxpayers to claim mortgage interest as a tax deductible expense, in an attempt to balance the federal budget. If appealed, incentive to buy homes will plummet.
“It would be the nail on the coffin,” said Palm. “The effect would be demoralizing.”
Brad Nix, managing broker and co-owner of Maxsell Real Estate, said, “[The repeal] would be the same as applying a new tax. Some are considering creative fees and regulations that apply to real estate transactions, which would be a new tax on real estate. But we have a voice, we can voice these concerns to our politicians.”
The perfect storm seems to have been created for the crisis to happen. When people were buying out of their budget and homes were being foreclosed, job losses began to rise for those in the real estate sector.
Richard Staley was recently forced to sell his brokerage firm, Covenant Mortgage, due to the financial reform bill, a bill that put regulations over lending institutions.
“It was designed to avoid the clash of what we experienced,” said Staley. “The regulation they put in place required reporting policies and procedures that small to mid-sized mortgage companies were unable to meet.
“The financial reform bill squeezed the mortgage broker out of business. It forced small brokers to switch to the banking model.”
Many agents have lost their jobs as well. In 2000, the number of agents in the country was 25,000. Between 2007 and 2010, that number has dropped 45.8 percent.
In a presentation on April 13, “Through the Looking Glass: The Current State of the Real Estate Economy,” Steve Palm was joined by Scott Murphy, appraiser and president of D.S. Murphy & Associates, and Dan Forsman, president and CEO of Prudential Georgia Realty, to present trends and and overview of Atlanta's market.
In his overview of 2010, Palm cited Paulding, Spaulding, and Rockdale counties as the ones with the lowest home values.
Lot prices in a Paulding neighborhood were between 45,000 and 65,000 dollars. When homes were listed for 349,000, they expired, foreclosed, and re-listed at 110,000 to 120,000. They were eventually sold in a short sale for 85,000.
Another home, listed at a million and a half, sold for just 50,000.
Stagflation, the potential for inflation, is a large part of the problem. Food costs and gas prices are higher than they were a year ago. The increased prices on goods causes a decline in new homeowners.
“Inflation does not include food and energy,” said Palm. “It’s durable goods like cars and homes. Inflation would be over 10 percent if those things were added in.”
The peak in the real estate market before the crash was in 2006. “In 2007,” said Dan Foresman, “we were in denial. We got very despondent and angry in 2008. We went into survivor mode in 2009, and things got a little worse in 2010.”
“We think this year is critical,” said Palm. “We have to see an improvement in the economy to see the real estate market come back. Real estate's not going to lead us out of this like in the past. It's going to tailgate off of the economy.”
Scott Murphy said for the market to recover, “good, honest, arms-length transactions” need to start going through. Murphy spoke at the presentation from an appraiser's standpoint and addressed the issue of the overpricing of houses.
“One issue was lender pressure,” he said. “Appraisers were always pressured to get a higher number. Loan officers had a lot of power and control and a lot of appraisers yielded to that. As the market starts to change and values go down, homes are appraised for more than they're worth.
“It compounds the issue. Not only does the economy dropping cause them to be upside down, but overpricing caused them to be further upside down.”
By Candice Black
Since 2007, the country has seen a devastating fall in the housing market. Home values are dropping dramatically, and while it may seem like a buyer's dream, the housing crisis has been a leading cause for the recession.
“In the past,” said Richard Staley, mortgage broker, “people were financing homes with zero down payment and weak credit. And when values started declining people walked away from their homes. It was a spiral effect, like a house of cards.”
Atlanta is considered a declining market, with house prices down 70 to 90 percent. Last year, around 360,000 notices were given for foreclosures. Twenty-five percent of those resulted in foreclosures.
But what caused the real estate crash?
“The government,” Steve Palm says frankly. Palm is CEO and president of SmartNumbers, an Atlanta-based company that provides residential real estate information and forecasting to real estate agents, appraisers, brokers, major builders, and banks.
“The government pushed people into the red zone,” he said. “They overbuilt and over appraised. In the early 2000s, we really pushed people who couldn’t afford homes. Most people didn’t have to put down a down payment. It drove prices up for new construction. ”
Fannie Mae and Freddie Mac, the government-backed programs that allowed loans to be granted to people with poor credit, largely contributed to the crisis.
“We could easily get rid of [Fannie and Freddie], and no one would miss them,” said Palm. “It would help to get rid of them, because we don't need to spend money on them.”
People buying homes out of their income range in turn caused the rise in foreclosures. Because of the problems caused by over-lending, lending rules have tightened.
“Before, you could tell the loan officer, 'I have a job and I make this much money',” said Bob Kilinski, co-owner and operator of Keller Williams Realty's southeast region. “But they didn't check it. People were buying way above their pay.”
Now, to qualify for a loan, buyers must have good credit and must make down payments. But because of the new strict guidelines, things have pushed in the opposite direction so that home-owning is nearly impossible for potential buyers, specifically self-employed buyers.
“Self-employed borrowers have the hardest time getting money now because banks don't want to give them loans,” said Jeff Adams, senior loan officer at WR Starkey Mortgage. “Houses aren't selling.”
Before August 2007, buyers qualified for loans based on their income. “Now,” said Adams, “you can't qualify them on what they make. You can only qualify them on taxable income. If you're only paying taxable income for 25,000, that's all I can use.”
In Washington, there is also talk of repealing the mortgage interest tax deduction, which allows home-owning taxpayers to claim mortgage interest as a tax deductible expense, in an attempt to balance the federal budget. If appealed, incentive to buy homes will plummet.
“It would be the nail on the coffin,” said Palm. “The effect would be demoralizing.”
Brad Nix, managing broker and co-owner of Maxsell Real Estate, said, “[The repeal] would be the same as applying a new tax. Some are considering creative fees and regulations that apply to real estate transactions, which would be a new tax on real estate. But we have a voice, we can voice these concerns to our politicians.”
The perfect storm seems to have been created for the crisis to happen. When people were buying out of their budget and homes were being foreclosed, job losses began to rise for those in the real estate sector.
Richard Staley was recently forced to sell his brokerage firm, Covenant Mortgage, due to the financial reform bill, a bill that put regulations over lending institutions.
“It was designed to avoid the clash of what we experienced,” said Staley. “The regulation they put in place required reporting policies and procedures that small to mid-sized mortgage companies were unable to meet.
“The financial reform bill squeezed the mortgage broker out of business. It forced small brokers to switch to the banking model.”
Many agents have lost their jobs as well. In 2000, the number of agents in the country was 25,000. Between 2007 and 2010, that number has dropped 45.8 percent.
In a presentation on April 13, “Through the Looking Glass: The Current State of the Real Estate Economy,” Steve Palm was joined by Scott Murphy, appraiser and president of D.S. Murphy & Associates, and Dan Forsman, president and CEO of Prudential Georgia Realty, to present trends and and overview of Atlanta's market.
In his overview of 2010, Palm cited Paulding, Spaulding, and Rockdale counties as the ones with the lowest home values.
Lot prices in a Paulding neighborhood were between 45,000 and 65,000 dollars. When homes were listed for 349,000, they expired, foreclosed, and re-listed at 110,000 to 120,000. They were eventually sold in a short sale for 85,000.
Another home, listed at a million and a half, sold for just 50,000.
Stagflation, the potential for inflation, is a large part of the problem. Food costs and gas prices are higher than they were a year ago. The increased prices on goods causes a decline in new homeowners.
“Inflation does not include food and energy,” said Palm. “It’s durable goods like cars and homes. Inflation would be over 10 percent if those things were added in.”
The peak in the real estate market before the crash was in 2006. “In 2007,” said Dan Foresman, “we were in denial. We got very despondent and angry in 2008. We went into survivor mode in 2009, and things got a little worse in 2010.”
“We think this year is critical,” said Palm. “We have to see an improvement in the economy to see the real estate market come back. Real estate's not going to lead us out of this like in the past. It's going to tailgate off of the economy.”
Scott Murphy said for the market to recover, “good, honest, arms-length transactions” need to start going through. Murphy spoke at the presentation from an appraiser's standpoint and addressed the issue of the overpricing of houses.
“One issue was lender pressure,” he said. “Appraisers were always pressured to get a higher number. Loan officers had a lot of power and control and a lot of appraisers yielded to that. As the market starts to change and values go down, homes are appraised for more than they're worth.
“It compounds the issue. Not only does the economy dropping cause them to be upside down, but overpricing caused them to be further upside down.”
“It's finally starting to stabilize,” said Jeff Adams. “But the question is, is it going to continue to stabilize or go down more?”
No one is certain about what will happen, but there is a mix of optimism and pessimism for the future.
“I'm a doom-and-gloomer,” Palm said. “Nothing out of Washington stimulates the economy. Oil prices will cause a double-dip in the recession. Unemployment is much higher than what is being reported. Ratios and statistics say that more start-up businesses are happening now, and assuming those businesses are hiring. It's an arbitrary number.”
“But,” he added, “I think we're going to have gradual improvement in 2011 and 2012, in good in-town areas. Cobb, Cherokee, Forsyth, Dekalb, Fulton, Gwinnett. Rural stuff is not happening for a long time.”
In his presentation at “Through the Looking Glass,” Dan Forsman expressed hope for the future.
“Atlanta has always been one of the ten best cities to move to,” he said. “We're still a very popular destination. I think there's going to be a handsome return on investments.
“It's not the price, it's the payment an individual makes when they acquire a home. I think we're going to see some pretty good appreciation in 2013.”
Though the future of the real state market remains uncertain and unpredictable, professionals see ways to pave the road to a solution.
“Cut the budget, balance the budget,” said Palm. “Promote capitalism, reduce the size of government, expand companies, and hire people.”
While speaking at “Through the Looking Glass,” Scott Murphy said in order for the market to turn around, transactions need to go through.
“We need to stay with it, stay firm, be diligent about those sales,” he said. “What I see too often and frequently, are true, good, arms-length transactions that are appraising low.”
Cheryl Sadoti, regional director for Keller Williams' Southeast region, said, “People need to realize that we can't base our ability to sell a home on what we paid 5 or 10 years ago. We need to price it on the market that we are in. When we are willing to accept that’s where we are, that's when we will see a spark in home sales.”
Staley said less unemployment would be the first step to correcting the housing crisis.
“What they could do,” said Staley, “is allow people to refinance. They can't because they owe more than what the home is worth. If people are making clean mortgage payments in 12 months, let them refinance without any value restrictions. And that will create job growth among the real estate sector.”
Bob Kilinski is clear on what he believes the government needs to do for the housing market to get back on track.
“Stay the hell out of it,” he said. “And you can quote me on that.”
Photo credit: http://www.stus.com
“I'm a doom-and-gloomer,” Palm said. “Nothing out of Washington stimulates the economy. Oil prices will cause a double-dip in the recession. Unemployment is much higher than what is being reported. Ratios and statistics say that more start-up businesses are happening now, and assuming those businesses are hiring. It's an arbitrary number.”
“But,” he added, “I think we're going to have gradual improvement in 2011 and 2012, in good in-town areas. Cobb, Cherokee, Forsyth, Dekalb, Fulton, Gwinnett. Rural stuff is not happening for a long time.”
In his presentation at “Through the Looking Glass,” Dan Forsman expressed hope for the future.
“Atlanta has always been one of the ten best cities to move to,” he said. “We're still a very popular destination. I think there's going to be a handsome return on investments.
“It's not the price, it's the payment an individual makes when they acquire a home. I think we're going to see some pretty good appreciation in 2013.”
Though the future of the real state market remains uncertain and unpredictable, professionals see ways to pave the road to a solution.
“Cut the budget, balance the budget,” said Palm. “Promote capitalism, reduce the size of government, expand companies, and hire people.”
While speaking at “Through the Looking Glass,” Scott Murphy said in order for the market to turn around, transactions need to go through.
“We need to stay with it, stay firm, be diligent about those sales,” he said. “What I see too often and frequently, are true, good, arms-length transactions that are appraising low.”
Cheryl Sadoti, regional director for Keller Williams' Southeast region, said, “People need to realize that we can't base our ability to sell a home on what we paid 5 or 10 years ago. We need to price it on the market that we are in. When we are willing to accept that’s where we are, that's when we will see a spark in home sales.”
Staley said less unemployment would be the first step to correcting the housing crisis.
“What they could do,” said Staley, “is allow people to refinance. They can't because they owe more than what the home is worth. If people are making clean mortgage payments in 12 months, let them refinance without any value restrictions. And that will create job growth among the real estate sector.”
Bob Kilinski is clear on what he believes the government needs to do for the housing market to get back on track.
“Stay the hell out of it,” he said. “And you can quote me on that.”
Keller Williams Enjoys Success in a Declining Market
By Candice Black
Even in the midst of the housing crisis, Keller Williams Realty is one agency that has managed to stay debt-free.
There were no Keller offices in the southeast region – Alabama, Georgia, and Tennessee – until 2000. Keller was able to grow its offices by carefully planning expenses and devoting itself to training its employees.
Keller was ranked number 47 in Training Magazine's top 125 list of companies with the best employee training for 2010.
“What we do is we teach our people the concept of lead with revenue,” said Bob Kilinski, co-owner and operating partner of Keller Williams' Southeast region. “Bring revenue first, as opposed to 'build it and let's see what happens'.”
“We run our company for the agent,” Kilinski said. “The others say it, but they really run their company for their office.”
“We believe real estate is a local business driven by local professionals, so we have to provide great training to be able to succeed in a declining market,” said Cheryl Sadoti, regional director for Keller Wiliams' Southeast region.
Sadoti attributes Keller's success to their business model. “Our business model is one that allows us to work from a budget,” she said. “We don't spend money that we don't have available to spend.
“That has always been our business model and always the way Keller has run their business. It's all about having a model that operates on the capitol that you have available.”
Keller runs on a unique cap system where each office determines a set dollar amount based on what is reasonable in their market. Once an agent pays back a certain amount and satisfies the cap, they are able to keep 100 percent of the commission they make.
“Gary Keller worked hard to develop this for the agents,” said Sadoti. “He realized that it's about the agents, not about the company.”
Attributing to the biggest expenses of an agency are square footage of office buildings and staff salaries.
“A competitor will build a 7,000 square foot office where we build a 3,500 square foot office,” said Kilinski. “They'll hire seven or eight office employees while we hire three or four.”
Keller's Woodstock office was able to reduce rental costs of their office building by downsizing rental space, moving from two floors to just one.
Kilinski lists staying abreast of the market, being truthful with buyers and sellers, and keeping up with research as the best ways for agencies to plan for the future.
“You can't change the market, you have to react to the market,” said Kilinski. “You react to the market by giving honest advice and doing your research so you know what you're talking about.”
“We have an incredible culture that helps our people inside and in our community,” said Kilinski. “We want an environment where people have careers worth having, businesses worth owning, and lives worth living.”
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