Saturday, November 29, 2008

Old and New Crises

I've been thinking a lot lately about how we got into the mess we're in financially. Basically I know how, but not why it wasn't seen earlier enough for prevention. It was like we woke up one day and "Surprise! Make way for the Depression!"

Paul Krugman's editorial talks about this today from a financial point of view. People did predict it, we heard long and loud about there being a real estate bubble, mortgages couldn't be handled the way they were, and who said we had unlimited natural resources for energy...? Dr. Krugman explained it quite elegantly: "...nobody likes a party pooper."

So if looking back on history didn't help us to stay out of this mess, maybe we shouldn't do it again. Or maybe this time the nay-sayers need to shout it from the rooftops. I just want this slowdown/meltdown to not happen again.

To this end I think we need to look at what we are doing right now and change things for the future. In real estate, houses climbed too rapidly to high prices. Builders built too rapidly and tried to get in under the radar gun of supply and demand. (Go to Vegas - it doesn't work!) The mortgage companies gave out loans left and right. Yes, we got a "no doc" loan to buy this house because we were a retiree (my mother) and two independently employed workers. And we knew we could pay it back once our homes sold - so did Commonfund and we did pay it off.

Solutions as I see it:
1 - Homes need to come down in price, perhaps as much as 10 per cent right now unless they were priced correctly as opposed to optimistically. In Skaneateles there were always the stories of the guy from New Jersey who needed a house and overpaid by $100,000. It had happened and it won't any more. His casual money expenditures went out with Lehman and his kids' college fund.

2 - The builders need to get rid of inventory before they advertise new homes for construction. I would not want to be a builder today.

3 - Mortgages need to return to the 20% down that used to be required. Yes, that means not everyone can buy a house - but our family could have if we had to, and I'll bet many others could, too. It's not as easy to walk away when you have 20% invested.

4a - Homes on the market today need to do everything they can to simply sell. Pricing has to be realistic, and if you can't get $300,000 to "do what you need to do," then you can't do it. Simple. If you said, "I need to get $2,000 for this '85 Escort or I can't buy a new car..." everyone would say "Duh! Then you can't get a new car!" Why pretend?
4b - Fix the homes up. People do not have money for major repairs. They might now, but they don't want to gamble on that rolled roof lasting another two years. They know that something's bound to happen and they'll take their chances on the unknown, but the known problems have to be fixed.
4c - Make it look good. I know lives are busy and it's hard to keep a perfect home (another reason to price to sell) but they must look like the decorator just swept through there. I used to think it wasn't necessary, and frankly it wasn't. Now it is - the competition is too fierce. I remember coming through the village and looking at five homes one weekend with a relocating family. That was it - there were only five! In these times most agents reserve several days for showings if the buyer has to buy. There's so much to see!

So I guess I'm the party pooper. But I don't want a large inventory of unsold homes because I don't know what the next level of this crisis could turn out to be. I want my sellers to move on, to buy or build the house of their dreams, or invest in their children's future.