real estate
Market a real fixer-upper

The real estate industry suffered such a freefall in 2007 that even the most hopeful scenario was for the market to hit bottom by summer, or by autumn, or by Christmas. That turned out to be overly optimistic.

Three months into 2008, the bad news keeps rolling in, and most analysts agree the bottom everyone kept predicting remains elusive at best, and years away at worst.

"I think we are a ways from the bottom -- and a long way from any indicators that would even hint at an upturn," says Mike Simonsen, CEO of Altos Research, a real estate data firm based in Mountain View, Calif.

"It's a gigantic mess," agrees Lewis Goodkin, president of Miami-based real estate analysis firm Goodkin Consulting.

There's no simple answer to how the housing market got into that mess and figuring how it will come out of it is an even more torturous undertaking. But the complex process can be condensed into the following six areas:

1. What went wrong 
"Just about every measurement declined in 2007. It was a bad year. Nobody can put a good light on this," says Lawrence Yun, chief economist for the National Association of Realtors, or NAR.

The trouble started in 2006 and continued into 2007 as wave after wave of adjustable rate mortgages reset at dramatically higher interest rates, says Chris Porter, manager with John Burns Real Estate Consulting in Irvine, Calif.

In 2002 and 2003 buyers flocked to these ARMs, which offered a rock-bottom interest rate for the first five or so years before resetting to a higher variable interest rate. The record-low introductory rates allowed people to buy bigger homes than they might otherwise have afforded.

As resets came at higher rates, those mortgages carried larger monthly payments -- higher than many could bear.

Facing foreclosure, many chose to sell and as listings flooded the market, prices began to slip. That sparked another round of selling -- this time among investors who had switched from stocks to real estate with hopes of financial salvation through flipping.

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More problems began to surface.

"You had people who wouldn't have been able to qualify for a mortgage with normal underwriting rules using these introductory rates to buy more house than they could afford. You had builders selling to people who they would not have sold to under normal underwriting rules, which made their profits go up and then they plowed more money into creating more supply. You had speculators looking at housing as if it were a security, and the lenders having this attitude that they weren't going to have to deal with this because appreciation would allow people to refinance their mortgages, and the appreciation would protect everyone," Goodkin says. "But it was all B.S."

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