How Quickly We Forget

You might be surprised to hear that the Prime Rate was at twenty percent in mid 1981. This seems amazing by todays yardstick. Oddly enough, this was not an aberration for those times. Inflation was running high and the Federal Reserve was trying to contain those forces. Mortgage rates virtually mirrored the movement of the Prime Rate. Eighteen percent mortgage rates were commonplace.

Rates Move Down

By 1989 when I became a Florida mortgage broker rates had eased into the eleven percent range. And in mid 1990 when mortgage rates first entered the single digits we celebrated.

And Rates Move Up

From that day in 1990 until July of 2004 interest rates did nothing but decline. People seemed to take it for granted. I recall that in early 2004 there was no shortage of pundits projecting that rates were going to fall until they hit zero. Maybe you think Im kidding. Im not. This is human nature. If we see something moving in one direction we often think that it will continue forever in the same direction. But when it comes to the economy, history shows otherwise.

The Shift

In July the tides finally shifted and the Federal Reserve began increasing rates. It was about this time that I met Bob and Michelle. As interest rates had fallen over the previous decade they stood by and watched other people making money with real estate. And in spite of the fact that rates were moving upward there was no shortage of gurus prognosticating that real estate values were never going to stop increasing. Maybe you recall this delusion.

Getting into the Game

After all, how can real estate prices ever go down, they are not making it anymore. That was a good one. Well, Bob and Michelle had high hopes. They decided to take everyones advice and start buying Florida real estate. Initially they seemed like many other Florida mortgage customers. They had decent credit, nice income, and a little savings. I was happy to see them buy their first home. They qualified comfortably and all was well. A couple of months after closing on their new home they were back for more. This time they picked out a duplex that they felt would make a great rental property. They qualified and I was happy for them.

The Big Play

Several months later they called me on the phone. They were buying a seven hundred thousand dollar town home. It was under construction and they hoped to flip it right after closing so that they would not have to carry the debt. They envisioned a quick profit of two hundred thousand dollars. I was a bit surprised and after checking the math I was aghast. I told them that they could not qualify and cautioned them that if the market was slow and they had to carry the property after closing they would be strapped.

The Rules Changes

I did not hear from them for nearly two years. Last week they called. They had used another Florida mortgage broker to purchase the town home and when construction was done they had closed. Now they have been carrying the property for six months and have been unable to sell it. They have taken a second mortgage on their primary home to afford to keep up and have accumulated fifty thousand dollars in credit card debt.

Making Ends Meet

They called me to explore other ways to get cash so that they could continue to carry the town home. They believe that the market has bottomed out and will soon be soaring again just the way it always does; at least thats what their real estate investor friends are telling them. Does this story sound familiar? Bob and Michelle are not alone; far from it. Millions of Americans jumped into the real estate game and are now trying to make ends meet.

Know When to Fold

I just heard back from Bob and Michelle. They decide to cut their losses and stop waiting for home values to recover. They have spoken to a realtor and given him instructions to cut the price on the big town home until it sells. This was no doubt a hard decision for them to make. It is hard to give up dreams of making a load of money. But sometimes it pays to know when to call it quits.

Copyright 2007 James W. Kemish. All Content. All Rights Reserved.