The Falling Knife

A couple of years ago, we went to a the mortgage bankers tradeshow in Florida, a 6000 strong conference featuring speeches from former Presidents, the Secretary of Defense, and even a famous basket ball coach. Walking around that mortgage show, I felt like a fish out of water, and not because of my age and voting tendencies. The out of place came from attending a show whose content and people I had little overlap, the same feeling I suspect many who want to know about Internet advertising but don’t work in the field feel when wasting your time at ad:Tech. Once again, I had the pleasure of being that guy, taking up booth worker’s time but falling well outside the typical client profile. Similar to the MBA show from two year’s past, this one also involved real estate, but it had sessions on Internet, using mapping software, and web 2.0, which meant, unlike the mortgage banker’s show or even the education shows, I felt like only a partial intruder. And, whereas ad networks and a few other performance players also invaded those shows, none had a booth here at Inman Real Estate Connect. Given that much of this show deals with residential real estate, I would imagine many starting too as the market for refinance has dried and these are the people that want new home purchase leads.

Content, not the exhibitors, makes the Inman show interesting. The panels include topics such as "What Went Wrong in the Housing Market and What Can We Do To Fix It?" and speakers ranging from a renowned professors to Craig Newmark of craigslist. Unfortunately, both of those take place tomorrow after we publish, but one session today really made an impression, both for showcasing how to do a panel right, and perhaps more so because it presented information that you can’t forget. Too bad that this news contained very little positive information. When scheduled, this panel meant to have a nice balanced panel between real estate bears and bulls, but with the real estate market, and the market as a whole down, how could they? These figures are rough and perhaps slightly high, but if our notes are correct (hard to do on a blackberry, that was lesson one) housing starts have decreased 40%, new home sales have fallen by 50%, and pricing has slipped 20% from their highs. Here’s what else we learned from the panel which included moderator Andrew Ross Sorkin, Assistant Editor, Business & Finance, Chief Mergers and Acquisitions Reporter, The New York Times and Panelists Dottie Herman, President & CEO, Prudential Douglas Elliman (NYC’s largest realtor), Barry Ritholtz, Chief Market Strategist, Ritholtz Research & CEO; Director of Equity Research, Fusion IQ, Noah Rosenblatt, Founder, UrbanDigs.com/Licensed RE Salesperson, Citi-Habitats, and my favorite, Professor Nouriel Roubini, Co-Founder & Chairman of RGE Monitor; Professor of Economics, New York University’s Stern School of Business.

• In the professor’s opinion, we are entering the worst housing depression in 50 yrs. It started only recently, and it will last for at least two years and as many as four. And, as Barry Ritholtz explained, you can analyze this housing market using the Kubler-Ross Five Stages of Grief, i.e. Denial, Anger, Bargaining, Depression, and Acceptance. In his opinion, we have barely made it to Stage 3. People think we’ve felt some of the impact, that it can be seen in the stocks, and all should be fine. We’ll know it’s time to buy when we hear people saying, "This stinks. I’m done with it."
• A general recession is on the horizon; it’s not a question of if, but when and how long. The last recession happened just briefly in 2001, but the job loss which resulted from it continued until 2003, and we have just now started to reach the level of employment we saw then. When this recession comes, people will lose their jobs, and as the professor commented but all to seriously, "People in this room will lose their jobs." It will be painful but it is necessary to get the economy on the right track again.
• This is a credit crisis not housing crisis; the housing crisis is simply a result of the lax lending standards. And, perhaps most important, this is not just a subprime issue. The same issues will trickle up to less risky loans and across the financial sector as a whole. The same people in bad home loans were granted loans for all sorts of other things, and as we’re seeing with homes, the same will happen to autos as well. We are simply in the beginning of feeling the effects.
• In many ways we’re experiencing an innovation issue. In the past, the banks themselves were liable for the loans. Securitization allowed loans to be packaged and the risk sold to others. It simply got out of hand with too much risk being spread across too many people. Instead of being better off my sharing the risk, we have a pandemic, as we have an incredible amount of risk with everyone holding a piece. As one panelist described, the issue is that people/companies made money off fees, and encouraged the packaging and repacking of "complex junk", that got less and less valuable but more and more people taking a slice only to have us end up with a lot of unquantifiable garbage.
• Housing prices will continue to fall. This won’t happen in all areas, and as an average it means more in some places. Unlike stocks, home prices decline over time, the death of a thousand cuts. We could end up with ten million people having negative equity in their homes, and should easily see trillions more in home values disappear. Home prices, like the stock prices during the bubble simply shot up too much, and even after the current declines, prices are still well above where the historical trend would have them. Many of the three million renters who became home owners will wind up back as renters.

• We’ve seen approximately 200 mortgage brokerages go under, but no banks yet. That will happen. Much like the Internet bubble that burst, the housing bubble will see large companies that we didn’t expect to, go out of business. Cities too will be hard pressed as their tax revenues will decline and some too their profits and invested them back into risky real estate linked offerings. It’s like the Enron employees whose retirement plans consisted mainly of Enron stock. With this mess, there’s no Sarbanes-Oxley to hold people accountable. Hedge funds, ratings companies, and more already made their billions in profits.

Walking out of the session, you ended having a new found appreciation for the potential peril that awaits the economy and the breadth of it. Outside of the stock market, and especially if you live in a major area and work in the Internet, you might not sense what looms on the horizon. But, in their minds, this is just like 2000 when the Internet bubble burst. It’s a different bubble but it’s on its way to bursting, albeit more slowly.

Ultimately, we are humans, and quick profits without long-term planning is human nature. We’ll learn our lesson and then repeat it in a parallel area.

The good news, besides that people have a little more time when buying a home, is that while painful, opportunity exists, and online advertising stands to capitalize. People used to selling homes, for example, simply by holding up a sign will need help marketing. Whoever it is, performance marketers will be there.