It’s been 10 years and I still cannot bring myself to watch the film The Big Short. Some things are just too close to home. They say history is written by the survivors, so I am grateful to have made it to the other side of the mortgage and real estate crisis. I also believe history is important to keep us from making the same mistakes.
photo courtesy of Realtor.com
So what exactly happened? According to Kimberly Amedeo, in The Balance:
“Hedge funds, banks, and insurance companies caused the subprime mortgage crisis. Hedge funds and banks created mortgage-backed securities. The insurance companies covered them with credit default swaps. Demand for mortgages led to an asset bubble in housing.
When the Federal Reserve raised the federal funds rate, it sent adjustable mortgage interest rates skyrocketing. As a result, home prices plummeted, and borrowers defaulted. Derivatives spread the risk into every corner of the globe. That caused the 2007 banking crisis, the 2008 financial crisis, and the Great Recession. It created the worst recession since the Great Depression. “
The effects of this began in 2006. It started in the historically more volatile housing markets of California and Florida. 2007 was a banner year in Atlanta. For a moment it looked like our booming economy may be immune. Then in late 2007 we saw a slowing in the outer suburbs. By 2008, interest rates began to rise and a general panic was being felt in the public. It hit the city hard by mid 2008. From personal experience, the phone actually stopped ringing. Homes that were listed stopped selling. We didn’t know if it was just a blip or a true shift. It was actually a crash that for the next several years became the new normal.
It is said that housing has the greatest effect on the US economy. I believe this is because security actually comes from where you call home. If your home is threatened, then your life is threatened. So what was a housing crisis, soon became an economic crisis. It is easy to point fingers and say people spent above their means. Some did and some did not. In parts of Atlanta, first time home buyers purchased homes around $120,000. This was well within their means. Then they lost their job, prices plummeted and the $120,000 home was now selling for $70,000. What they did not have was $50,000 laying around to make up the difference. So a few different things happened. This is where we began to see Foreclosures, Deed in Lieu, and Short Sales.
photo courtesy of Atlanta Jobs with Justice
Georgia is Non-judicial Foreclosure State. What this means is, if a mortgage goes into default it may be foreclosed on by being sold on the courthouse steps without any type of hearing. It is like the wild west and it is still done this way today. It is on the first Tuesday of the month and is done by county. It is not the what most would think of as an auction. It is not an auctioneer standing in front with organized people bidding with numbered pallets. It is the wild west. Several county officials are peppered around the courthouse steps, each with a different list. If you are a bidder, you have to wander around and see if the house you are interested in is on that official’s list. Then the official stands there and quietly names the property. Then there may be bidding between individuals. Whoever wins, goes to a table and pays for it in cash (more likely a cashier’s check). There are no loons. There are no inspections. It is another level of speculation. If no bidder took the home on the courthouse steps, it would then pass to a real estate company for sale. The former homeowner would often refuse to leave the home or would tear out everything, including wiring in anger. It was not odd to see homes with giant holes in the walls. Soon banks realized they were spending so much money getting the property back in to saleable shape, they decided to incentivize the homeowner to leave the home intact by giving them money to move.
A Deed in Lieu is similar to a foreclosure in that the homeowner loses the property, but this time by choice. Many homeowners could not deal with the stress of imminent foreclosure and decided to cut their losses and go. This would most often include an incentive to leave the home intact and allow the homeowner some funds to move.
A Short Sale is where a home is being sold on the market but for less than is owed. It is a process where the seller and buyer agree on a price and the then the true negotiation begins to see if the lender will accept the loss. This process would still effect the seller’s credit score, but had less of an effect than a foreclosure. I myself helped many homeowners with short sales. Some worked and many did not. The banks were so overwhelmed and disorganized it was a horrible process. More than once a lender foreclosed on a property while we had ready, willing and able buyers under contract to purchase it. Buyers would wait for YEARS to hear back from the bank. It was not odd to send a contract and not even get confirmation of receipt for 30 days. Most often the bank would get less money on the courthouse steps than the buyers were under contract for. It was a frustrating time in real estate. I had one property under contract for over two years when we got the foreclosure notice. The buyers were heartbroken and called me (the listing agent) to ask if anything could be done. My advice was to start calling people close to them with money and try to buy it on the courthouse steps. They did. The bank got less money and the buyer paid more. So how did that happen? The buyers found a renovator who was willing to front the cash for the purchase with a “fee” and a guarantee for the renovation. It was not a dark time for all. Some millionaires were also made during the crisis.
Home prices continued to fall and leveled out in 2012/2013. Those that did have cash reserves began to purchase property for pennies on the dollar. Hedge funds, which caused much of the crisis to begin with, jumped in and began purchasing property. Whole city blocks were boarded up and many homes still sit vacant today. As prices began to recover in 2014, those who purchased a property for $30,000 may sell it for $50,000 making a quick $20,000. Some were vacant, some rented. By 2015 the renovators had reentered the market and neighborhoods began to see true recovery. Not all neighborhoods saw a decline. Some very established neighborhoods saw a slight drop and then flat appreciation. It would be mid 2018 before economists stated we had recovered to 2007 levels.
photo courtesy of Realtor.com
Some neighborhoods, particularly in Southwest Atlanta saw an extreme crash and then an extreme recovery. Many of these homes are way above 2007 levels. In upcoming blogs, I will be breaking down some of these factors as well as looking at the history of individual neighborhoods and the architecture within them.