A downturn that will not be measured simply in months

Posted on July 15, 2008 by Bill Faiferlick

For the better part of this past year, I’ve been advocating that individuals with significant real estate assets and investments may want to start to divest themselves of those assets as I believe sometime within the next 6-8 month we will experience a sudden market downturn both in the investment and real estate markets. A downturn that will not be measured simply in months but in years!

I have a very good, well, educated friend whose views are in stark contrast to mine. He doesn’t believe anything near a 20% decline is possible because during the depression we did not experience anything greater than this. The fallacy in this logic stems from the fact that before the depression lenders adhered to lending policies and nobody sold the paper they issued. They were responsible for their lending practices and knew their profits rested on making good loans which would be repaid. Today, the banks have become simply middlemen taking profits and fees and then passing along the debt instruments totally ignoring the basic principles of lending – lending to those who are credit worthy and have the capacity to pay the loans. The mortgage industry seems to be able to make up their rules and I cannot help but believe we are in for an abrupt and sudden change.

In view of the massive run-ups in the real estate market due to unbridled lending, it almost appears that to qualify for a mortgage you only have to be breathing. In the Phoenix area, people have been buying multiple homes with the expectation of flipping them and few have any real equity. The commercial paper created and packaged by mortgage backed securities and resold around the world will have devastating consequences when (not if) our real estate markets experience a rapid decline of 20-33% in values or more.