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   Who knows the narrative?  I certainly do not. But one cannot deny the facts.  The notional value of SCV real estate fell over the last 24 months (and, indeed, nearly the entire country) after enjoying a steady rise since 1998 with a particularly steepened growth curve from 2002 to January of 2006.

I can reveal one thing.  I do know the reason nominal values fell.  The number of potential buyers dwindled while the number of potential sellers increased dramatically.  No one can deny this economic fact.

But one can definitely argue about the narrative.  Many mistake the narrative for the reason.  The narrative always stands one and sometimes more steps removed from the reason.  The narrative attempts to explain the simple reason:  A change in the balance between buyers and sellers.  The narrative also attempts to do more than just explain the primary reason; it also attempts to allocate blame.

Currently, many narratives compete for eminence in the print media and blogosphere surrounding Santa Clarita.  The Signal drafts an editorial that smacks of Little Orphan Annie:  Dark clouds surround us now but the sun will come out tomorrow.  Linda Baldwin, a frequent letter to the editor writer, fixates on this single topic, adopting the roll of finger wagger at all the evil and irresponsible folks who either took out or placed subprime mortgages.  Linda Slocum, a real estate agent and blogger, placed the fault firmly on the shoulders of the media for accepting advertisements for subprime mortgage lenders during the boom years.  I guess she might think about refunding some of the commission checks funded by those subprime loans during the frothy times.  Local Republicans float messages regarding personal responsibility while the liberals among us scream for the blood of the lenders, at least for the ones barely remaining in business.

But stripping away the emotion I believe we can construct a reasonable narrative that can describe the boom and subsequent bust, and provide an object lesson for the future.

First, on the demand side:  Several factors contributed to increased demand for housing during 2002 to 2005 that brought more buyers into the market against a static and then shrinking group of sellers.  Historically low interest rates driven even lower by Federal Reserve interest rate cuts made housing extremely affordable.  A large segment of aging baby boomers, hitting their peak earning years, bought second homes for eventual retirement.  Further contributing to the froth, increased and increasing prices brought in “investor” buyers, or those with no intention of ever occupying a home personally.  Finally, a new factor:  Unprecedented global liquidity provided money looking for an investment vehicle, and clever investment bankers in New York and London provided investment vehicles to capture and disburse this money.  Subprime and Alt-A mortgages emerged at astounding levels, bringing people into the market for home purchases that never purchased homes before, and could probably not really afford the payments once loans reset after low introductory periods.  Unending liquidity masked the ticking time bombs because homeowners could roll resetting mortgages into new subprimes with low introductory rates and higher balances to pay off steep interest prepayment penalties and perhaps even take cash out to support new consumer spending.  All of these conspired to create outsized and now artificial demand on a short-term basis.

Remember three dates that impacted the demand and supply side negatively and led to the downturn.  In mid-2005 the cumulative effect of interest rate increases by the Federal Reserve began to slow the rate of demand growth, though it did not yet recede.  However, these increases produced the desired effect of reducing the froth in pricing since it increased the cash price of servicing a mortgage.

The second date:  In the second quarter of 2006, investors, reacting to the flattening of price increases, substantially cut back on purchases, taking out a major portion of the increased demand, seemingly overnight.  Some new homebuilders reported traffic at models literally collapsing over the course of one or two weekends.  Legitimate buyers, fearful of making purchases at the peak of the market, suddenly backed off.  A normal, cyclical turn, which even showed some signs of recovery in the first quarter of 2007.

The third date:  Three days in July, 2007 when the world financial markets suddenly woke up to the problems of subprime mortgages and nearly completely shut down the liquidity that funded mortgages of any kind.  This not only took out the frothy buyers, but also shut down legitimate buyers in the jumbo market who could not fund mortgages at an affordable rate.  Real estate agents remarked how folks with no discernible income could get huge mortgages one year earlier and now mortgage lenders took those with high credit scores and incomes over high hurdles to qualify.  Further, defaulting subprime homeowners, no longer able to roll their mortgages, allowed their homes to go into foreclosure and increase supply in an unwelcome way.

Where does the market turn?  The black swan event of the second hit from subprimes makes it impossible to predict, and some doctoral candidate in economics five years from now will provide that narrative.

Tim Myers                                                                                                                                               Commentary

Tim Myers is Executive Vice President and Chief Financial Officer of Landscape Development, Inc.  He has been writing on a wide variety of local topics for more than 11 years. His commentaries represent his own opinions and not necessarily the views of any organization he may be affiliated with or those of the West Ranch Beacon.