In most parts of the country things are pretty good in the real estate market, but many of us know that the biz is very susceptible to dramatic cycles and shifts in conditions. Since we’re not unusually stressed-out, this may be a good time to take a look back and be prepared to handle the next Big Party-Pooper.
Most of you won’t remember 1980 when the prime rate hit its all-time high of 20.5% and stayed close to that for over a year. Paul Volcker was the Chairman of the Federal Reserve Board and would not budge even though thousands of influential business people, including President Carter, were begging him to lower the rate and forget about inflation.
Sorry, We’re Out to Stem Inflation
During that era interest rates for real estate mortgages hovered around 18%. That’s right, 18%! How many houses do you think you could sell when the monthly payment for an 80% loan-to-value, 30 year, $300,000 home would be $3,600/mo for just principal and interest! How many folks who needed a home in that price range could qualify? The real estate market, obviously, suffered long and hard.
I remember meeting my Dad at Rax Roast Beef in Oberlin right around then. He had lived through the Great Depression of the ‘30s and had lots of battle scars from growing a manufacturing business and raising eleven children with Eastern European appetites. I needed some sage advice and Stress Relief from a member of The Greatest Generation at that moment, when real estate was slower than a snail crossing a peanut butter patch.
“How did you get through it, Dad, with 35% unemployment, bread lines, soup kitchens, boarded-up foreclosures – how did you get contracts, keep the business going?”
He smiled and slowly nodded, and I was pretty sure that he was rather proud of himself and others like him. He took one of his famous dramatic pauses and had a couple curly fries, then said, “The secret is simple: Life does not stop. Wheels keep turning. People still bought Buicks, they just didn’t buy as many of them. The business is still there, you just need to be a lot more clever and work a lot harder than the next guy.” If you look at the picture above, it’s of an ad for a brand new Buick model… in 1932, the depth of the Great Depression.
Just as my Dad predicted, the world did not stop spinning, some people were very clever and did work harder, and the lending industry came up with a thing of beauty: the Adjustable Rate Mortgage aka Variable Rate Mortgage. At first, the specter of ginormous payments down the road scared a lot of people. It was hard to live with the threat of an unaffordable payment when the rates adjusted incrementally upward, usually after 1, 3, and 5 years. But cool heads prevail: we explained that, theoretically, there was no need for these instruments to lead to panic and foreclosure because, if we really had faith that the US economy would correct itself, our buyers could refinance a few years later and have normal, level payments that were truly affordable. And that’s just the way it played out, a proverbial win-win for the borrower and the lender.
You may be wondering if I didn’t know about what happened in the real estate market during the Crash of the 2007 to think that ARMs were actually good things. No, it’s just that ARMs only work if the borrowers are actually financially qualified, unlike the foolishness of government-backed loans to folks who were not.
So enjoy the good real estate climate but be open to innovation in these times of shifting sands – we’ll have to be clever and work hard to adjust to changing lifestyles, demographics, global economic conditions, and a host of other influences on our industry.