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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.

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  • 13 comments

    13 Comments so far

    1. real estate November 29th, 2008 1:05 pm

      How do you find easy credit? No such thing. Who has perfect credit these days? It is very easy to max out your credit cards and then have a hard time paying them back. Is easy credit like perfect credit?

    2. Greg Swann November 29th, 2008 1:47 pm

      > Is easy credit like perfect credit?

      Easy credit is when there is more money to be lent than borrowers to borrow it. Right now, most credit is very tight. Because of Federal loan guarantees, for now real estate credit is still very easy to obtain. This will change if interest rates go up (they’re very low right now). Qualification may still be relatively easy, but the amount you can borrow will go down as the interest portion of your monthly payment goes up. When that happens, we should start to see more creativity from sellers in getting homes sold.

    3. J Boyer South Orange NJ November 29th, 2008 7:47 pm

      Interesting, but we are going to have to see some regulation changes as well in order for that to happen. With the current rules such deals are hard to make happen.

    4. Kevin Sandridge November 29th, 2008 9:42 pm

      Greg – would you say that if we do in fact head back to the “spirit of the late 60s,” then this might drive a resurgence in real estate investing?

    5. Greg Swann November 30th, 2008 7:56 am

      > would you say that if we do in fact head back to the “spirit of the late 60s,” then this might drive a resurgence in real estate investing?

      Keep ‘em coming. They’re paying for Christmas.

      Seriously, Phoenix is about half investors by now. Ignore units sales numbers from 2003 – 2006 and 2008 will turn out to have been a banner year.

    6. MARK Z November 30th, 2008 9:01 am

      Greg,
      Very true and great post. I think this new generation has seen their parents use their house as their piggy bank for years and can’t used to the fact that they have to actually save money on their own. For the last 20 years, every five years a homeowner could pull enough equity out of their house to float them for the next few years, so nobody ever worried about spending everything they made. As we all know that’s not working today. The piggy bank has dried up and people don’t know what to do. But just like you said, history has a funny way of repeating itself doesn’t it?

    7. Greg Swann November 30th, 2008 9:11 am

      > But just like you said, history has a funny way of repeating itself doesn’t it?

      Brian and I were talking on the phone about flip strategies that could include not just a lease purchase but also weekly credit counseling to get tenants/buyers up to speed. This is one of the long-time functions of the merchant community, long since forgotten: Recruiting people into the middle class.

    8. MARK Z November 30th, 2008 9:20 am

      Greg,
      Credit counseling and credit repair companies are really taking off out here in Metro Detroit. Most of the mortgage brokers have shut down and have gotten into credit repair. I think that will be the latest trend as more people go into foreclosure.

    9. MN Properties November 30th, 2008 2:04 pm

      I still think something needs to enter the market to keep 1st time home buyers active. Here in Minnesota we had a slew of buyers in September just prior to the DPA programs going away on Oct 1. Bring these programs back and put a time limit on them to create some urgency in the market.

    10. Kevin Sandridge November 30th, 2008 3:33 pm

      >>Here in Minnesota we had a slew of buyers in September just prior to the DPA programs going away on Oct 1.<<

      Here, here! There are more folks than you’d imagine who think the death of DPAs was a good thing. Not me. I worked my tail off here in Florida to get the word out to save them.

      I absolutely think that they’d increase activity if brought back. With the right guidelines, they could once again be a strong catalyst in our market!

    11. [...] Back to the Future:  As the economy continues to suck so badly we can no longer pretend it’s not already a recession, if not worse, some companies are reaching for the way-back machine to see if tried-and-true methods from the past might…. [...]

    12. Stelal Frize December 2nd, 2008 10:31 pm

      Great posting. I’m actually looking forward to some of these old fashion loans. It worked then. It can work now. We can get real creative and stimulate our market.

    13. Lilyputts December 11th, 2008 2:23 pm

      I know from experience how the housing market was using ‘creative financing’ In the early eighties we purchased a home at 16% int. Yep you read it right!!! and It was graduated payments. We were only convinced that it was a great deal because as so many were told ..your salaries will increase. NOT TRUE.. Most people were laid off and losing homes, just as it is now.

      Everyone should take a good look at the past… Maybe ones can learn from mistakes!