Someday soon we may have to turn back the clock on home lending

This is my column for this week from the Arizona Republic (permanent link).

Someday soon we may have to turn back the clock on home lending

Furniture stores are offering weekly payments. Department stores and jewelry stores are making Christmas easier with layaway plans.

Check the calendar. Did someone dial the clock back to 1968?

Not quite, but the credit crunch has got us looking backwards in time to try to remember how we used to do business, back before easy credit made things so easy.

Here’s the dirty little secret no one shared with you: For many, many years, the business of America has been credit.

Car dealerships don’t sell cars, they sell financing, selling your loan at a discount as soon as your tires hit the pavement.

Furniture stores don’t sell furniture, they use your desire for new furniture to get you to sign a promissory note.

One of the best protections of your financial interests is called Regulation Z. The Z reportedly stands for Zales, the easy credit jewelry store.

New home builders are in the same game. That’s why the incentives are so much better if you use the builders’ lender.

And that’s why there’s no interest for the first six months. Or no payments at all for the first two years. And all it takes is one quick signature…

But those days are done. Consumers — and corporations — are defaulting on debt like never before in history. The buyers of promissory notes aren’t buying any longer. Instead, they’re in Washington begging for bailouts.

And that leaves the furniture stores and the jewelry stores back in the merchandise business. They need to come up with ways to get people with no money to part with what little they have — a little at a time — in order to have any sort of cash flow at all.

And all this will come to real estate, too. We still have easy credit, but when interest rates start to climb, we’ll see our own kinds of “old fashioned” financing arrangements: Seller carrybacks, land contracts, wraps, lease purchases, etc.

We may be headed into tough times, but we still have a roadmap from 1968 to show us how to sell actual economic values and not just easy credit.


7 Comments so far

  1. Mike Stewart, Downtown Vancouver Realtor November 30th, 2008 10:04 am

    Hi Greg,

    You make a great point. Too much of the economic activity of far too many nominally non-financial firms was to make a profit from financing.

    Look at the Detroit 3.

    In 1968 they were the Big Three. They made the best cars in the world as they focused on making good cars.

    I think they lost their way too much focus making short term profits financing crappy cars. Now they’re the Detroit 3, a word synonymous with failure…

    Toyota has always focused on making good (boring) cars and not so much on the financing of them.

    Look who’s top dog now?

  2. Jodi Suguitan December 2nd, 2008 9:21 am

    I think you are right that it is going to get worse before it gets better. There is going to have to be a huge adjustment in the way people approach finances and evaluating their purchasing power. The days of borrowers getting loans and THEN figuring out how to make the payments are over.

  3. John Jameson, Isfiske December 5th, 2008 7:05 am

    Good article. It is a shame that the whole society has become so obsessed with the short perspective, that they have totally forgotten about what it was they were doing in the first place. When a car dealer no longer has car sales as it primary income, something has gone terrible wrong. I’m not saying that its wrong to have more than one leg to lean on, but you always need to have that foundation that you know you can rely on and master.

  4. Marbella property December 10th, 2008 3:21 am

    I am agree with Jodi. In Spain, at this point of the year (december) there is no way to get home financing. The bank repossessions are increasing and this % will raise during 2009. The crisis has not beign a result of a housing subprime mortgages, the main “subprime mortgages problem is the subprime land mortgages” and this is the principal factor that we all have to focus “adjust land prices”, this is my opinion. Don’t you think so?
    Greetings from Spain,

  5. JCL December 12th, 2008 2:25 pm

    Our dollar used to be backed by something (i.e. gold and silver)… now it’s backed by thin air… hopefully our economic mountain built on air will come down slowly!

  6. Mark Daniel December 16th, 2008 10:18 am

    That puts a good perspective on the credit crunch as a whole. Who would of ever thought we would go back to the days of layaway. Business are going to have to be much smarter in the future if they hope to survive these harsh economic times.

  7. Tyler January 2nd, 2009 8:03 pm

    This forces manufacturers to go back to what made their brand a name brand and that’s quality. Just because the economy is the way it is doesn’t mean that people don’t need “things” anymore it just means they will wait even longer to buy them and when they do they will be looking for quality that will last.

    At least that’s what I’m going to do!

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