Memorandum

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Jan 9, 2024

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Memorandum To: Professor From: K Le Date: May 14, 2011 Subject: Legal Issues Arising in Real Estate during a Time of Recession Since the beginning of the recent recession, which more than likely began negatively affecting Americans in early 2008, many issues involving real estate have occurred. Primarily because of over-lending and over-spending, Americans have felt the fullest brunt of the effects of this recession, and as a result, several legal issues also have presented themselves. This memorandum will discuss the contributing factors that have negatively affected the real estate industry in the past four years as well as the legal implications and outcomes of each. The first cause for concern related to real estate is the steadily decreasing price of homes across the United States. The reason why this calls for concern is that the effect of decreased home prices may spill over into other industries and respective markets. Clark Howard (2006) states, “As home prices continue their downward spiral across most of the country, economists are increasingly concerned that other sectors will follow in the wake, Time magazine reported in September. The American real estate market is hurting after the past few years of over inflated prices and overly loose lending practices.” Although Clark Howard spoke about the decrease in housing prices over six years ago, he more than accurately predicted the subsequent recession in 2008. “The Labor Department reported that job creation has snapped into reverse, after several years of growth. Analysts are reacting with fear and pessimism that the country may be headed for a recession, a prolonged period of economic downturn in which many lose their jobs” (Clark Howard, 2006). Shortly after the recession began in 2008, it was evident that the residential housing market was going to suffer a mighty blow on all levels of the real estate process; stakeholders from every aspect of the real estate industry experienced negative effects. Major stakeholders involved in residential real estate include homebuyers, land developers, property owners, real estate agents and brokers, housing finance institutions and lending companies. Considering the stakeholders in this circumstance, one wonders how each of these entities were implicated during the recession. Furthermore, a question of whether not one or more of these factors could have contributed toward the demise of the residential real estate industry remains.

Mulligan (2009) asserts that the reason residential housing took such a hit as a result of this recession is because of a housing surplus. However, Smith disagrees. “Yet, even more important for understanding the current state of the economy is appreciating that while the increase in home building during the boom was not historic, the collapse in homebuilding has been. For several years now the United States has been building fewer homes than any single month in the 40 years proceeding (Smith, 2011). He insinuates that a failure to capitalize on homebuilding during the early 2000s is the precise reason why the recession occurred in the real estate industry. According to Smith (2011), a lack of homebuilding prompts the Federal Reserve to begin cutting interest rates. Once the interest rates become to a point where they are low enough, people who were not likely to purchase homes before the interest rates decreased will then be able to purchase homes at a reduced cost and interest rate. Subsequently – and unfortunately – the interest rates climb back up and new homeowners have trouble making payments. Coupled with a crippling job market and the prevalence of job loss, homes begin to foreclose, and thousands of families across the United States were forced to vacate their homes. This overwhelming increase in vacated homes in conjunction with society’s reluctance to purchase homes and the industries continued failure to build struck the residential real estate industry in full force. Smith (2011) reports, “Estimates of the number of vacant houses are hard to get a handle on. The census bureau tracks that number. However, its month-by-month estimate was well out of whack with the preliminary data coming in from the formal 10-year Census. Still a credible guess is that there might be in the range of 1.5 million "excess" vacant homes. That number includes empty rentals as well as homes for sale. Even in the best of times some homes are vacant, but there are roughly 1.5 million more than there were in 1990, adjusted for population changes.” Another cause of the recent recession in relation to the real estate industry’s stakeholders is over- lending and breaches in lending standards and practices. Rather than adhering to the successful lending standards of years past, mortgage companies and lending institutions began granting home loans to families regardless of credit histories, proof of income, etc. Based on Montana’s (2010) findings, “Countrywide and a host of other mortgage companies started lending money for homes to anyone and everyone, regardless of their income or credit rating. Throughout the mid 2000s, we all heard the ads on the radio; get a mortgage for no money down. Lending standards were lowered and lowered until people with no jobs, no income, no assets and no credit rating were able to get huge mortgages for no money down and no proof of income.” Thus, mortgages inevitably defaulted and individuals spiraled into debt beyond control. As a result of this lending crisis, recession, and breach of standards, many new, stricter regimens were established to deter or prevent a residential or real estate crisis from happening once again. The United States government has officially stepped in and instated rigorous lending practices and set prerequisites unattainable by many Americans (Economic Collapse, 2011).

Though the housing crisis was certainly evident by 2009, commercial real estate remained relatively unharmed at that time. However, many analysts predicted the fall of commercial real estate as well, dubbing it “the other shoe to drop” (Mulligan, 2009). Mulligan (2009) explains, “Business conditions have deteriorated recently, so it might seem that even a normal amount of commercial real estate would be too much these days. However, we probably ended the housing boom with enough of a commercial real estate shortage that economic activity could “back up” a bit toward the amount of commercial real estate.” The Economic Collapse reported in 2011, “New home sales in the United States are on pace to set a brand new all-time record low in 2011. This will be the third year in a row that new home sales have set a new record low.” Thus, the real estate industry has not yet fully recovered from the blow of the recession that occurred nearly five years ago. The possibility of the real estate industry recovering from the recent recession relies on the lending practices among financial lending institutions. According to Hill (2011), “Federal Reserve Chairman Ben Bernanke commented on housing and the economy, noting that ‘tight credit conditions for buyers and builders, the impact of possible future housing price declines on macroeconomic growth and a vicious cycle of lower household net worth, [are] leading to more cautious lending to households, which in turn reduces housing demand, lowers prices and reduces household net worth.’”

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References Clark Howard, B. (2006). Real estate slump could spur recession. The Daily Green. Retrieved from http://www.thedailygreen.com/green-homes/latest/6758 Hill, C. (2011). Real estate outlook: Is a recession looming? Realty Times. Retrieved from http://realtytimes.com/rtpages/20110912_realestateoutlook.htm Montana, S. (2010). What caused the great recession of 2008-2009. Knoji. Retrieved from http://economics-the-economy.knoji.com/what-caused-the-great-recession-of-20082009/ Mulligan, C. (2009). A commercial real estate crisis? Probably not. The New York Times. Retrieved from http://economix.blogs.nytimes.com/2009/02/04/a-commercial-real-estate- crisis-probably-not/ RECORD LOW NEW HOME SALES IN 2011. (2011). The Economic Collapse. Retrieved from http://theeconomiccollapseblog.com/archives/tag/lending-standards Smith, K. (2011). Are there too many homes in America? The Atlantic. Retrieved from http://www.theatlantic.com/business/archive/2011/06/are-there-too-many-homes-in- america/240786/

Memorandum

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