EASY MONEY and the American Real Estate Ponzi Scheme: From your pocket to theirs, the insiders' view of the Great Housing Recession, and how it's happening again.

Praise for

Easy Money and the

American Real Estate Ponzi Scheme

"With Easy Money, Agostinelli and Michaud upheave the interpretive status quo to raise the bar on boldness and integrity in truth telling. Comprised of one meticulously analyzed and articulated point after another, these 300-plus eye-opening pages will fascinate the intellectually curious, re-educate the tragically misinformed, and affirm the instincts of all who’ve suspected that there’s much more to the sloppy stories being peddled as truth in more than two decades’ worth of news, books, and movies presented by others too naïve, intimidated or corrupt to tell it like it is.

Think you’re smart? Get smarter here. And hurry. The future of our great nation will manifest from the willingness—or the unwillingness—of its citizens to pull their heads out of the erosive sands of intellectual and behavioral atrophy."

—NORA FIRESTONE, Pro-American talk-radio host and former housing and business news reporter.

I thought I understood real estate before I read this book, but these authors lived what they wrote about and not from the comfortable ivory tower of academia. Their boots on the ground perspective is refreshing and is more credible than anything else I have read about the great recession. If you want to understand the factors that lead to the great housing recession and what still might be coming, this book is for you. If you want to see a prescription for preventing another housing crash, this is a must-read.

—TREY GARRISON, Real Estate Journalist

This book is a very interesting read. Some readers may find parts of the book hard to believe, but Agostinelli and Michaud did their homework. A great book for just about anyone to read, but a must read for anyone in the real estate and mortgage lending business and industry regulators.

—ROBERT JONES, Retired Equifax Account Executive

"Easy Money and the American Real Estate Ponzi Scheme points fingers at the real culprits of the recent housing crisis and demonstrates how we are headed in the same direction, again. As real estate industry insiders, they are fearless. They take on Wall Street, politicians, the Real Estate Industrial Complex, housing advocates and defaulted borrowers themselves. Why? Because they fear another housing crisis is coming in the not too distant future. We cannot afford to buy our way out of another housing crisis and leave trillions more for our children to pay above and beyond what we are already leaving them."

—SCOTT HUDSPETH, CEO and founder of Agent Mastermind– largest online weekly Real Estate training in the Nation

I would recommend this book to anyone looking to educate themselves on the inner workings of the real estate industry. Whether you are just starting out in real estate or are a veteran of many years in the business, the work of Agostinelli and Michaud captures the essence of what has taken place in the industry over the past two decades and how those policies are impacting the market today.

—BILL GASSETT, recently a #1 RE/MAX Realtor in all of

New England

The authors take on the powerful forces of the real estate industrial complex and politicians that created much of the problem of the great housing recession. They also make a compelling case that homeownership is not a great financial investment or an appropriate way to bridge the wealth gap.

—MARK LANGE, Commercial Lender

This book is a must read for anyone involved in real estate. The authors give a detailed and insightful account of the housing collapse. I found myself wanting to highlight section after section. The authors described exactly what we saw in our local market when dealing with the banks.

—DEBBIE DRUMMOND, Las Vegas Realtor

It is clear that the two authors are not your father’s real estate brokers. They make a compelling case for the true causes leading to the housing bubble and what should be done to prevent another one.

—KELLY SULLIVAN WALDEN, Best selling author of

I Had the Strangest Dream

John and Chris have written a masterful guide about how to avoid another national housing crisis by examining the true story about what created the last one and pointing out where we failed to address what is likely to bring us the next crisis. If we don’t heed their advice, our children will likely have a much diminished lifestyle paying off their parents’ debt.

—MELANIE HOLDEN, CEO of ReKindering Company

Once in awhile a book comes along that is informative, courageous and prophetic. John Agostinelli and Christopher Michaud wrote such an account about the true causes of the last real estate crisis, the overreach of government that so affects housing and the legacy of debt we created for our children to pay. America should heed their advice. It’s sobering and offers a fresh perspective.

—LYNNE ROTHSTEIN, CEO of Pathways To Change

"Easy Money is easy to read, informative, and full of valuable information. This information can be worthwhile to someone in their early twenties starting out and wanting to buy their first home or beginning a career in real estate investing. I found Easy Money appropriate for me as a person who is retired and considering down-sizing my home. A bad decision impacts not only the rest of my life, but what I may leave to my children. So anyone can have a better real estate experience after reading Easy Money. Thanks John and Chris!!"

—TERRY HENDRIX, retired Finance Director, TV/Radio Host, and Income Property Owner

A sophisticated yet accessible analysis of the real estate cycle told by veteran real estate experts who witnessed the recession first hand and masterfully demonstrated how government policy made it worse and how many of those policies are still in place today. A must read.

—CLIFF LIBBY, EVP Sales and Marketing of Avenue 100 Media Solutions

John and Chris deliver an insider’s view of the housing crash and pseudo-recovery, backed by stats, charts and interviews with key experts. They cut through the political blame game with a balanced approach and sound reasoning. As a result, you’ll come away armed with the truth—that everyone contributed to the crisis—from Capitol Hill to Main Street.

—MATT JOHNSON, CEO of Pursuing Results

Easy Money and

the American Real Estate

Ponzi Scheme

by John Agostinelli and Christopher Michaud

© Copyright 2016 John Agostinelli and Christopher Michaud

ISBN 978-1-63393-332-3

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means – electronic, mechanical, photocopy, recording, or any other – except for brief quotations in printed reviews, without the prior written permission of the author.

Published by

Ea$y Money Publishing

www.easymoneyinamerica.com

www.agostinelli.com

508-283-4958

978-496-9687

DEDICATION

To the younger generations that will be paying the bill our generation is leaving you. It’s unfortunate that we have not found a way to stop the deficit spending.

Our greatest wish would be that this book will help influence our politicians to stop living beyond our nation’s means.

TABLE OF CONTENTS

COVID-19 UPDATE

Acknowledgements

Foreword—Trey Garrison

Introduction

Chapter One: Front Row Seats in the Age of Destruction

Chapter Two: What We Saw in Our Market

Chapter Three: The Real Estate Cycle

Chapter Four: Dysfunction Junction

Chapter Five: The Federal Reserve

Chapter Six: Malfeasance and Malpractice

Chapter Seven: Desperate Times, Disparate Measures

Chapter Eight: Politics as Usual

Chapter Nine: Too Big, So Bail?

Chapter Ten: Mission Creep

Chapter Eleven: Government-Sponsored High-Risk Mortgages

Chapter Twelve: The Fall Out

Chapter Thirteen: Other Forces Affecting Housing

Chapter Fourteen: Is Owning a Home a Good Financial Investment?

Chapter Fifteen: Money Was Easy— The Lessons Are Hard

Chapter Sixteen: Parting Thoughts

Expert Interviews and Insights

About the Authors

Appendix A

COVID-19 UPDATE

The American Dream is alive and well despite the temporary, yet harsh, economic and emotional impact of COVID-19. However, this pandemic has shaken the confidence of our citizens to the core. Our country and much of the world faces severe economic ramifications from massive unemployment and unused economic capacity. We believe it’s important to give our readers an update as to what this means for housing and how this will affect the real estate cycle, which we review in Chapters 3 and 4.

In this pandemic update, we will run through the state of the housing market just prior to the pandemic, where the market stands at the time of this writing, and what we expect to happen moving forward. All the same economic housing factors apply today as they did at the time of the original publishing of the book, but we believe this section will bring some clarity to the fog of sensational headlines about the real estate market during this pandemic.

You can still make a great real estate investment or a bad one. The principals of highest and best use still apply even if buyer/seller desires or the availability of homes for sale change. The demographics will change as a result of new trends in the real estate market—for example, more young people that had been moving to the cities may now prefer to move back out to the suburbs or more rural areas. The lower costs of housing will also entice employees who can work remotely in these less dense areas. Employers will also benefit by not having to pay higher wages when employees move to less costly areas. Other trends are also likely to change.

We need to recognize that humans have faced risk since we first walked the earth. Historically, there have been a huge number of afflictions and diseases that have been contained or eradicated because of advances in science and technology. This will be no different. How we react to it will be the key to both our physical and economic health.

The way we work, recreate, learn, interact, and perform business will be different. Some good may come as a result, including higher business efficiencies through telecommuting, and more affordable college options that include e-learning. Buying and selling property is likely to change too. Listing agents will increase the use of video tours, drones, and 3D tours to provide buyers a better feel of the property prior to a physical showing. Features and amenities buyers and sellers want will also change. People are likely to view their home as a safe haven, and many will want more space, an office, a place for the children to study and play, and an integrated outdoor space. Many people will avoid heavily traveled public places, cruise ships, airlines, bars, restaurants, concerts and sporting events, at least in the near term. Will the emotional power of excessive comfort surpass financial logic and drive buyers towards homeownership that’s unaffordable, as we saw in the run-up to the peak of the last real estate cycle? We hope not.

Pre-COVID-19

Pre-COVID-19 trends in housing had reflected a rising, but not meteoric rise, in home prices. While the pandemic will have a lasting impact on housing, people will need to live somewhere. But where is the market headed?

The real estate market and greater economy were generally acknowledged as robust leading into the pandemic, although we would argue that the government’s continued deficit spending aided it. The unemployment numbers were the lowest they had been in fifty years; wages were growing, albeit at relatively modest numbers. Overall, our economy was well positioned prior to the pandemic. Home prices had enjoyed loosening credit and underwriting standards since the Great Recession, but not to the extreme 2006 peak levels. Lower interest rates had been capitalized into increasing home prices, and household formation was exceeding the production of new homes. This resulted in tight inventory in the market that still exists today. As we predict in Chapters 15 and 16, credit was loosening, defaults were down to pre-Great Recession levels, and prices were growing.

Prior to the pandemic, many buyers discovered that the house they desired had received multiple offers, a process that created a de facto auction that further forced prices higher. Home prices grew at average rates ranging from 3 to 10 percent from 2012 through April 2020, depending on the market area. The one to four months’ supply of housing inventory in many parts of the country was historically below what the industry considers being in market equilibrium—which is six months. The number of days homes stayed on the market were well below industry norms in many markets. The higher end of the market had a more balanced supply, but the middle and lower-end markets continued to have a supply and demand imbalance. As we describe in Chapters 3 and 4, the real estate market was in the expansionary phase of the real estate cycle, with room to grow before hitting the next real estate cycle peak—until the pandemic hit. These two chapters may be the most important for buyers and sellers alike.

Immediate Effects to the Real Estate Market

Home sales volume was strong, showing a 10 percent year over year increase at the end of 2019, but fell to a pale 0.8 percent in March 2020. We believe both listing volume and sales will continue to decrease in the near term as sellers wait it out and see what happens to the real estate market.

Buyers have also pulled back as those that have been laid off or are worried about losing their jobs have stopped looking. There are fewer listings and buyers. This will insulate prices in the near term, and this supply–demand balance will be a piece to the puzzle in determining future pricing. There is good news for those still looking to purchase, however, as home mortgage rates have come down significantly to the lowest thirty-year mortgage rates on record and are likely to go lower; we may see rates go below 3 percent prior to 2021.

Because of the pandemic, most Americans have lived, studied, worked, taught, cooked, and exercised at home, and have a reinvigorated appreciation for homes with some elbow room, a home office, a place to work out, and other amenities. These preferences hold true for any demographic and shine a favorable light on homeownership. The challenges in the near term are unemployment, wages, access to financing, and a likely increase in the supply of homes. We expect those who waited to list their homes will do so as the number of COVID-19 cases continue to decrease, and restrictions are lifted.

Since real estate prices are a function of the economy, we have yet to see the full impact of the meteoric rise of unemployment in a brief period of time. There are national statistics in real estate, but an often-spoken adage within the real estate industry is that all real estate is local. The real estate market of concern to most buyers and sellers is the one they live in. There are many variables that make one community desirable, or not, and they can change. A simple example is a large employer moving out of a community. It may have a devastating impact on that real estate market, but fifty miles away, there may be little or no impact.

The real estate markets are slow to react because most buyers/sellers don’t need to buy/sell; their decision is not usually driven by absolute need. However, in dire economic times, there are some forced to sell if they have lost a job, when their savings run out, or if their forbearance period expires. As the full economic impact of massive unemployment permeates the country, we will see price drops in various real estate markets around the country. How long and steep the declines remain depend on whether Americans get back to work sooner rather than later. The longer it takes to get back to full employment, the more it will adversely affect home prices.

A broad-scale economic catastrophe and our government’s response to it can manipulate the real estate cycle, but prices will fluctuate up and down to meet equilibrium in the market driven by the interests of buyers and sellers who create it. The predictions we made in Chapters 15 and 16 still stand, and because of this pandemic, we believe the latter range of our prediction will prevail. Usually, the housing cycle can absorb a recession on its climb to a new peak, and the market begins to enter a mid-cycle recession. Following that downward drift in the cycle, based on the immediate effects of the pandemic’s mass unemployment, we estimate the decline to be in the 2 to 7 percent range in this scenario. This is a far cry from the National Association of REALTORS’ economist predicting home price appreciation of 4 percent in 2020. As employment bottoms out and rises through the winter and spring, the upward trend in prices may resume. Interest in the real estate market will probably recover in the spring/summer of 2021, barring a notable increase in COVID-19 cases during the fall/winter of 2020 to 2021 or if employment gains are weaker than expected. Some markets will be hit much harder than others. Cities that have been hit the hardest, that are densely populated and have seen a run-up in home prices, are the most vulnerable to price declines.

If all goes well, unemployment should begin to decline by the spring of 2021. However, it is likely that unemployment will remain in the low double digits for some time. Employers will be cautious. Some jobs will never come back, and more automation will be injected into the workplace. World trade, imports, exports, and manufacturing are also likely to be transformed, given the current international political climate. Some of these changes will have a negative impact on our economy, at least in the short term.

Since housing contributes about 18 percent to the US economy, there will be incentives to spur mortgage lending, housing sales, and potentially provide for bailouts of defaulted homeowners. Pressure from the Real Estate Industrial Complex (REIC), housing advocacy groups, and their political allies will be enormous, as they seek to carve out their piece of the government’s monetary feast. Next spring/summer, there will be an upward trend in the real estate cycle, with many conditions working in favor of housing; then home prices could match those that led up to the Great Recession. If we have not learned from the calamity of the last housing crisis, there could be a rise and fall in the housing market like the Great Recession of 2008. If we get a second wave of the COVID-19 in the fall/winter of 2020 that is not contained, and there is no vaccine, then massive unemployment could occur again. At that point, all bets are off, and we could head into a housing abyss that we haven’t seen since the Great Depression of the 1930s.

Where the Real Estate Market Is Today

In uncertain times, lenders fear making loans to nearly any borrower without a government guarantee, and thus they have raised their credit criteria because they can be held accountable for making loans to the un-creditworthy. At the beginning of the pandemic, even the most creditworthy of borrowers had difficulty obtaining rate locks when the Federal Reserve fired up the printing presses again and started purchasing mortgage-backed securities and bonds. Though mortgage rates may look attractive, jumbo mortgages and buyers with lower credit scores have experienced difficulty in obtaining them. Self-employed borrowers, investors, and those looking for cash-out refi’s have also had the same problem, but it has been a measured approach targeting the highest risk loans.

The amount of home equity available to homeowners reached a record high of $6.3 trillion in August 2019, according to Black Night, Inc. This is the share of equity available for homeowners with mortgages to borrow against while still holding 20 percent equity in the home, which is a lender’s traditional risk threshold without a mortgage guarantor—usually an insurance provider. People have been reluctant to tap into that equity with cash-out refinances based on residual fears and memories from the last real estate crash. Homeowners are in better financial condition than they were leading into the last real estate cycle peak because they have more equity in their homes. This also means that there are fewer homes with negative equity (owing more in mortgage debt than what a home is worth), which reduces overall market risk. This scenario bodes well for financially stressed homeowners because many have a built-in safety net through their equity. They can borrow against the home to get them through the pandemic-induced recession, provided a lender will make the loan.

As we discuss in Chapter 4, the homeownership rate has fluctuated from 64.1 percent in 1990 to a high of 69.2 percent in 2006 before crashing all the way back to 63.7 percent in 2016. The current homeownership rate is 65.3 percent in the first quarter of 2020, which is close to long-term averages. The underwriting standards have not gotten too loose, which is another indicator that the real estate cycle is not yet at a market peak.

The debt-to-income ratio has increased slightly since the Great Recession, but is not worrisome at this point. Those mortgages that have debt-to-income (DTI) over 45 percent make up a quarter of the mortgage market. These mortgages will cause high foreclosure numbers if there is a significant drop in prices. That is a concern. If 45 percent or more of a household’s income is spent on a mortgage, not much is left for all taxes, food, fuel, insurance, auto, and education expenses. It doesn’t take much of a shift in household income to push these marginal borrowers into default as they have less savings to see them through an economic downturn.

The Case-Shiller Index shows that the nation’s median home price was less than 3 times the median income in February 1998, but increased to 5 times by December 2005. After the Great Recession reached the bottom of the real estate cycle in January 2012, that number had decreased to 3.5 times median income. By January 2020, the median-priced home cost 4.4 times the median income. This ratio is getting high and adversely affects affordability. While not yet reaching the high levels that occurred prior to the Great Recession, the signs indicate that pre-COVID-19, this risk factor was creeping up. Post COVID-19, those numbers are likely to increase, at least in the short term.

Real Estate Buyers and Sellers Beware

Some agents will use fear to motivate the sales process. Now, it’s more important than ever to utilize an experienced professional skilled in all facets of real estate. Finding a broker who has a deep understanding of how economics affect real estate is ideal when buying or selling in this environment. There will be opportunities for the well informed whether prices are rising or falling, depending on your investment desire, but basic economics will rule. Those who are overextended are the most likely to get hit the hardest. We have cautioned buyers and sellers about that extensively in Chapter 14.

Some big real estate box stores, like Zillow, Redfin and OpenDoor, have recently canceled their purchase agreements, which were really options to buy, to the detriment of the homeowners who thought they had sold their homes. The sellers found out that the language in the contracts had twelfth-hour escape clauses or small deposit amounts, which is the only thing sellers received when the big-box bandits cancelled the purchase. There will be a lot of image-building required for these entities to get their mojo back; even the big-box entities are not immune from the ire of the public. This bodes well for the smaller local investor that is more likely to close the deal than these larger players that are set up to win at all costs. As of this writing, a couple of these entities are getting back into the offer game. This is a reminder of caveat emptor if you are going into negotiations with some of these national players. Proceed with caution as they will probably cancel contracts again if there is another outbreak or if profitable projections don’t pan out. Since the risk of low-margin house-flipping was completely exposed, these instant-offer players will also adjust their models to factor in the additional market risk, which will mean lower offers for sellers.

The government’s initial reaction to housing at the federal and state level has been to provide tenants and buyers with relief through forbearance on mortgages and edicts against evictions for nonpaying tenants. With a no evictions policy, the government is setting up landlords for failure. They will find it difficult to make their mortgage payments, maintain the properties, and to comply with building codes as rental income dries up. Many renters, knowing that nonpayment can’t be reported to credit agencies, have just stopped paying. It will also cause some small landlord foreclosures and bankruptcies, but additional bailouts from Congress are likely. The problem with policies like these is that they are now much more likely to occur again, just as we predicted in Chapter 2.

A huge 88 percent of single-family rentals are owned by mom-and-pops, or small investors who own no more than ten rental units. In addition, there is a significant number of two-to-four-unit owner-occupied multi-family homes who rely on rental income to make their mortgage payments. There are several court cases arguing the constitutionality of these eviction laws; multi-unit owners’ and landlords’ financial stability weighs in the balance.

There is no safety net for commercial property owners as politicians see that the public has no appetite to bail out the supposed well-to-do. Strip mall owners who were already feeling the pressures of