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Douglas Trudeau , Assoc. Broker
Prudential Foothills Real Estate
64 N. Harrison Road, Suite 160
Tucson , AZ 85748
Mobile: 520-954-2209
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The Herd Mentality Gone Wild

Zorro An Interesting post from Inman News, Who Was That Masked Analyst, lends to the credibility of the herd mentality creating panic. I admit, the mortgage industry is going through a rough time. Never said it wasn’t. More blood will be shed before the war is over. The strong will survive, the weak will fall, and there will be some collateral damage in the interim. Some markets will be harder hit than others. Responsible reporting and commenting will help to curtail unnecessary loss of bystanders who get trampled by the herd.

Sinking Ship This story is a good example of the old adage, “Lose lips sink ships.” Not so much that secrets are being revealed as much as thoughtless comment without consideration of repercussion. To keep the market going, buyers need to buy, the secondary market needs to proceed, and the wheel needs to continue to turn. Lessons should be learned, and history not repeated.

In their memo to Countrywide employees CEO Angelo Mozilo and COO David Sambol tell their employees to not fall to the herd mentality. They stated that Countrywide migrating mortgages into their bank. Countrywide is making effort to remain afloat during this hurricane of doubt, a lacking secondary market, and diminishing consumer opinion.

The Arizona Daily Star this morning reported in their article First Magnus: Boom to bust in three weeks:

…Spot audits done in 2005 and 2006 by the U.S. Department of Housing and Urban Development and the Arizona Department of Financial Institutions revealed several problems with First Magnus loans…”Insufficient justifications” were used in some loan approvals, including one case in which the borrower was listed as a “minimal user of credit.” He had six accounts, and four had gone into collection.

Not all the loans of First Magnus were this type, but, there were enough to do severe harm. There were numerous loans nationwide from a variety of lenders that were questionable at best where loan offers were assuming responsibility for buyers to get a loan. Its hard when you see a young couple who just don’t qualify. Your heart goes out to them. The simple truth is, if a buyer does not qualify, they just don’t qualify. Work with them, help them improve their credit and set up a savings account. Once they meet the criteria, then they can get a loan. Don’t bend the rules to make it happen. All it does is set up the buyer for more problems, worse credit, and a harder recovery.

Couple the mortgage market with greed of suppliers. As demand increased, so did the price building materials and supplies. Making home more expensive. The herd was lose and a lot of companies joined in for more profit.

During the start of the Iraq War the cost of plywood needed by the military to rebuild sky rocketed. When housing costs increase the end consumer (buyer) ultimately pays for it. Ripple effect from material increase are that home prices go up so high that many buyers just cannot afford them.

Many builders increased their prices to unrealistic levels during the frenzy (herd mentality), now selling at discount prices. Why were the prices raised so high? One potential seller came to me in June 2007 wanting to sell the home he bought for $297,000 in December 2006. I didn’t take the listing because like homes were selling for $268,000. Another seller bought their home in 2005 for $206,000, we tried and failed to compete with the builder selling their floor plan for $185,000. Realistic pricing today will help the market to return to normal. Let homes begin to appreciate again, and let the home buyers of 2005 and 2006 see some equity build.

What will bring the market back to stability (in my opinion)?

Rejuvenation of the secondary market. Get the money flowing again.
Renegotiation of existing loans to salvage what can be salvaged with minimal loss. Especially ARM’s; never did like them.
Responsible lending for current and future mortgage loans. If they don’t qualify simply say no.
Maintaining a low interest rate in the 6-7% range. Higher rates will eliminate more buyers.
Responsible media reporting. Doom and gloom the sky is falling does not help.
Reasonable reduction in material costs for builders. A little profit is better than no profit.
Lower margins of profit for builders to make homes more affordable. Keep it real.
Responsible and reasonable pricing of homes in the resale market. Be realistic.

We are going to pull out of this mess. Its just a matter of time. A positive approach will help much more than a negative approach. Rational thinking rather than herd mentality is the key. Comments that can hurt recovery should not be publicized. For those who yield informal power because of their respected opinion should be cautious about what they say. The herd is easily spooked.

This entry was posted on Sunday, August 19th, 2007 at 8:16 am and is filed under Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Doug,

Great post. I totally agree it is the herd mentality among so called “investors” again which are actually speculators playing investor.

Sounds like the Tucson RE Market in 05.

I liken it to a school of fish, all suddenly moving to the left. Why, no one seems to know just the guy to his right suddenly moved left so he did too.

When it is all tracked back, one nearsighted fish thought a rock was a shark and moved quickly to his left. Starting the whole school panic for which only one small nearsighted fish was responsible.

May sanity return to the school and herd soon.

August 20th, 2007 // Dave Smith
Dave - Thanks, a fantastic response as can be expected.

August 20th, 2007 // Doug
Hi Doug… Dave!

Its not about doubt. Its not about comments. Its about dumb decisions made by those with power to influence markets. Its about dumb decisions made by Wall St. trickling down to individual home buyers.

August 20th, 2007 // Bobby joe
Doug- great post. Mind if I trackback to it?

One thing that also happened was the incredibly low interest rates. Because its the easiest thing for people to understand- they all ran to buy property. Forcing prices up (true and raw supply & demand)

In some markets it was investors inflating prices, in others, it was the combination of low interest rates and even lower lending practices.

I believe that people can only afford so much- and we found out what the tipping point was this year. In the beginning of the last seller’s market we had lower interest rates and still low property prices-recovering from the 90s real estate slump. It all ended when the interest rates got high and the property prices got high. I’m sure there is some economic term for it- but it’s for me it’s the tipping point.

Now people are maxed out and have nowhere to go. Instead of worrying about the mortgage companies, powers that be should start worrying about the people that are failing to meet their mortgage payments. Because it is these people that will hurt the economy more in the long run.

The truth of the matter is- homeownership is a privilege, not a right. It was too easy in the past few years and think it’s as easy as going out and buying a stereo on your credit card.

I turned away a couple earlier this year because they wanted to buy their first home. They were still carrying high student loans. I sat them down with my loan officer and we told them what they needed to do to afford a home. We gave them a choice- either buy at a higher interest rate- or work on your credit history and come back in 6 months or more. They were smart enough to wait.

In the instant society we’ve created-most people don’t want to wait and want everything now and worry about paying later- well that time has come.

August 20th, 2007 // Mary De Luca
Bobby Joe - Your reputation precedes you. What can I Say.

Mary - Thanks. You’re not alone. I talked a lot buyers out of buying more than they could afford and got some to wait until their credit was better. If more of did that, maybe there would be less foreclosures.

I can proudly say I had only two out of dozens of buyers who lost their homes. Not from the original price, but, from refinancing against my advise for more than they could afford.

There are some out there just destined to get into financial trouble. One couple I am proud of did refinance, listened, kept it low, and still have $60,000 in equity in their home. I wish all buyers were like them.

Brad - It was an honor to have Inman visit my site, even without making a comment.

August 20th, 2007 // Doug
Great post Doug! There is definitely a herd mentality out there, fueled in a large part by the mainstream media and the “chicken little sky is falling” crowds.

However, as you mention but a LOT don’t seem to accept, is that it’s not all the fault of lenders, the media, and Wall Street. Some of it boils down to personal responsibility.

Despite the view some have that all Realtors are greedy and evil, I too have convinced some that they were not in a good position to buy. Likewise I’ve helped some see that now is not the time to sell in *their* situation. For some others, now is a great time to buy.

August 20th, 2007 // Jay Thompson
Jay - Thanks for your support. Loved your blog on “The Phoenix Real Estate Market: 3 Locals Opine on the Tube” Getting prices back to reality all over is a key.

August 21st, 2007 // Doug

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