Radmilovich.com

By Michael Radmilovich

Part 1: How We Got Here

“ May you live in interesting times” is a subtle but trenchant Chinese curse. These are , to say the least, interesting times for the real estate industry as home foreclosures are at record levels, the highest in a generation. Then again, prior to the great swoon of aught six, for generations housing was the best long term investment going.

And there is a school of thought which espouses that real estate remains an excellent long term investment. The question is, will the market turn around any time soon? To be sure, it’s anybody’s guess at this point; but there is cause for optimism. There better be: without it the economy is in an ineluctable downward spiral that could reverberate for decades, rivaling the Great Depression which many argue could never be repeated.

The bubble was incipient in 2001 but that was the year, roughly, when it began. Not coincidentally, it was just about the time that the dot.com bubble burst. As with all monumental economic debacles, the real estate crash was a function of irrationality -– banks making unsafe loans, borrowers acquiring mortgages with very little money down, adjustable rate mortgages and interest only loans. In more parts of the country than not, speculation was rampant, with people buying second homes as investments. Then too, of course, Bear Stearns, among others, was bundling home loans into so-called mortgage backed securities. With the same lack of regulation which gave us the savings and loan implosion, the Countrywides of the lending world were allowed to make “stated income” loans -– loans based on no verification of a borrower’s financial state whatsoever.

Mortgage brokers who played fast and loose in arranging loans between borrowers and lenders are now fiercely opposing the push for new regulation, which of course is peculiarly disingenuous: The same people who brought us the crisis are now contending that any new regulation would hinder their ability to continue making loans – and commissions -- which they urge will help the market recover.

While the result was almost unthinkable, the causes were commonsensical: With the technology stocks crash people who still had money to invest -– a lot; the dot.commers who had amassed illusory fortunes were a relatively limited group -– were looking for some place to put it. And there were few places: two or three percent returns on CDs were unsatisfactory, the stock market in general was frightening and bonds weren’t appealing, which didn’t leave much choice.

Real estate seemed like a safe harbor -– which it was in the first instance -– until everybody got on board the boat.