Is the Real Estate Market Dead?

A review of the Tulsa Real Estate Market. The Boom. The Crash and Now What?

By Clay Clark – U.S. SBA Entrepreneur of the Year & Marketing Director and Cofounder of Fears & Clark Tulsa Commercial Real Estate Group.

“The market stinks.” “The sky is falling.” “The U.S. is going too far in debt.” Trust me, I’ve heard it all. In fact, I am very aware of what most people and most experts are saying. However, I am not a writer, I am a real estate expert and I am not a pundit. I am a serial entrepreneur who has been successful in numerous businesses for the same reason. I give people what they want with the services my companies provide, and I position myself to benefit regardless of what they economy is doing, unless we are dealing with hyper-inflation, or an all-out depression. If either one of those 2 scenarios occurs, I don’t think any marketing strategy has a chance to work. So with that in mind and that mental framework in place, I am going to quickly explain to you the boom, the crash and now what.

The boom. Where did this magical boom come from? Was it President Bush? Clinton? Was it Reagan? The answer is yes. The boom came from three of these guys. Each one did what they believed they had to do to make our American economy grow at an unsustainable pace. President Reagan was all about cutting taxes, while increasing spending. Think about that for a second. If you or I reduced our income dramatically increased our expenses, “what would happen?” We woud not have any money. In fact we could go into debt. And did we as a country go into debt under Reagan? Yes. We grew a mountain of debt. But worse than that, we allowed the American government to borrow money without any strongly negative side effects. In fact many conservatives today, continue to deny that Reagan pushed into huge amounts of debt. They focus on the growth ahd the prosperity. However, I’m conservative, and I have a question that I would like to ask? “If you knew of someone who was driving in a new Porsche that they borrowed the money to buy, are they living in prosperity?”

The Porsche looks nice and I’m sure it feels good to drive, but if it’s not paid for then it is financed. And if it is financed then the financing company has to make money somehow. And if they are going to make money somehow, they are going to make money buy charging someone interest. And because interest does not go towards the principal, then in effect America’s tax dollars are going to finance the “Prosperity” and the “Porsches” of a previous generation. But as a registered Republican, I can’t say these kinds of common sense things, that would upset the status quo and the legend of President Reagan.

So Reagan borrowed money while cutting taxes, so what did Bush Sr. do? What did Clinton do? What did Bush Jr. do? Clinton raised taxes a little here help reduced the deficit. Not to pay down the debt. No, no. President Clinton did not pay down the debt. Clinton merely reduced the deficit. So President Clinton worked hard to reduced the amount of money that America was borrowing to finance our collective “New Porsche” economy. President Clinton also did somethign that really freaked me out, but luckily I recovered. President Clinton allowed people that were less than credit worthy to borrow money.

The research was in. America was dumb. Studies showed that Americans that “bought their house” (a.k.a. rented it from the bank for 5 years while paying interest payments as rent payments until they sold it again) were more likely to take care of their home. And because President Clinton wanted to help out America and to reduce crime, he decided to make “the dream of home ownership” more attainable for millions of Americans by lowering the amount of the down payment required to buy your first home. This would really “stimulate” the economy. And so people went out there and borrowed money. People who previously could not have afforded to put down a 20% down payment on a home went out there and bought homes. Oh they loved buying homes. In fact so many people bought homes that home builders could not keep up. They started building more and more homes. And because home builders could not build homes as fast as Americans could borrow money to buy them, the “value of homes went up.” The value kep going up and up and up and then President Bush Jr. got elected.

Oh, President Bush Jr. was going to change things. He was going to hold government accountable and he was going to reduce taxes. Never mind that America was now trillions in debt at this point. Never mind the fact that your hard earned tax dollars were now going to China to pay them back for their purchase of our American bonds. President Bush Jr. was going to be a different kind of President, he was going to be a “Compassionate Conservative.” Thus, he compassionately gave away your tax dollars to any human on both sides of the aisle that had a pulse. And where did he get this money from? Oh, he printed it.

In fact President Bush was a smart man and he realized that the only way he could bring in even more tax dollars more quickly was to lend money to even more people that could previously not afford it because those mean descriminatory bankers were requiring things like a “job verification” and an “income verification” before they could decide to lend you money or not. President Bush Jr. allowed bankers and lenders to start lending money to people without jobs they could prove they had. President Bush Jr. allowed banks to lend money to people who could not afford to put even a dime down. President Bush Jr. and our Federal Reserve Chairman then did the unthinkable. They lowered interest rates to even further entice America’s to borrow money to achieve their “American Dream.”

Once the loans were funded, they were sold as bundles called tranches on Walstreet. Your mutual funds gobbled them up, because American mortgages had always been a consistent winner in the money markets. Americans would rarely default on their loans, because “they had a skin in the game” and “they had 20% down.” But not these buyers. These home buyers were a new breed. Theses home buyers had no money down and they were ready to buy now. These people would buy houses without comparing prices. These people would buy a house for them and a lakehouse for themselves as well. These people would buy anything. Meanwhile, Americans started to received letters in the mail from the local government that we trust so much. These letters said, “congratulations your homes appraised value has gone up. Your home is now worht x + 5%!” Oh that felt good.

In fact it felt so good and many people actually ran to the bank to refinance and to pull this new found money (equity) out of their homes while they still could. Everyone was a real estate genius. Everyone could make money in real estate. Forget buy low and sell high. Just buy and sell higher! This was the new mantra. Buy and sell high! Buy anything. Just buy now while the boom is still going!”

And then boom! The one home buyer somewhere missed a payment. Then a second home owner missed a payment. And to this new breed of “No Money Down Buyers” missing a payment was no big deal. They did not have any money into the home. And who cares if you go into foreclosure or bankruptcy if you just found yourself luck enough to be given a house using someone else’s money and all you had to do is just show up at the bank to sign the papers. If you had never earned alot of money, and you had never saved a dime in your life, who cares if you really lost the house or not? It’s not like you had 20% of your hard earned money paid down as a deposit or anything.

As the people began to default on their loans, these tranches began to explode. One by one these loans started to go bad. Investors started to realize that their “super consistent” and “low risk” mutual funds were actually losing money. They pulled their money out of the mutual funds. Entire banks started to lose their funding. Foriegn investors started to realize that American mortgages were no longer a good investment when the mortgages were owned by people who had not put any money down to begin with.

As foreclosures increased, home values began to shrink. Home owners started to realize that they were not going to be able to get an equity loan this year to buy the new family car or renovate the house again. They did not renovate the house this year. They did not buy a new family car this year. The car industry tanked immediately. The economy was falling apart.

The government that had created these problems was now going to save us. President Obama had the answer. He was going to borrow even more money to give to people that were not doing well. He decided that America needed a stimulus. And then he decided we needed another stimulus, and the he decided we needed new roads and schools. And then he decided we needed to print more money. The Chinese Prime Minister warned up.

The Chinese Prime Minister warned us about printing more money. This time the Chinese government would not be lining up to lend American money. This time China believed that American bonds were not a good investment. Why would they be good investments? Every investors knows that happy a personal guarantee does not mean anything if you get it from somebody who has no ability to pay you back. China knows we cannot pay them back.

And so here we are. In debt and unable to borrow any more money. The government has already spent our money for the next 30 years because they financed money today and in the past. Our national debt is now so high that it is mathematically impossible for us to ever pay back. So what do we do? We’re probably going to have to do that same thing that everyone has to do when they owe money to someone that they can’t pay back. We’re going to have to sit down with China to work out a payment plan. They will have they leverage and we will have to listen. We are in debt to them. They are our master.

So do banks want to lend money now? No. Does China wan to lend money right now? No. Has America actually experienced prosperity during the past 30 years? No. We borrowed money for the new Porsche. But that was 30 years ago and the Porsche does not look so new now. In fact the Porsche is falling apart, just like our economy.

So what is my encouragement for you. Position yourself to benefit from those that are cash poor, and in debt up to their eyeballs. Position yourself to benefit from this recession. Buy a house if you can pay cash to somebody who is desperate need to sell. Buy the equipment needed to start your own business buy paying cash to someone who is in a real bind. Lease a house or lease a mansion from someone who is behind on their payments. Pay cash. Cash is king. Remember what Warren Buffet has famously preached for years to anyone that will listen, “Be greedy when the market is fearful.”

Sincerely,

Clay Clark

U.S. SBA Entrepreneur of the Year & Marketing Director and Cofounder of Fears & Clark Tulsa Commercial Real Estate Group.