How Healthy is the Real Estate Market? An Interview with Sean O’Toole – Round Two


When the Foreclosure Era began in 2006, Sean O’Toole had spent five years buying and selling California foreclosures. He had a ton of foreclosure data so he shelved plans to start a general property listing site and launched one in 2007 devoted entirely to foreclosures, providing data from public sources exclusively, ForeclosureRadar, which became popular with investors in California.

I wanted to speak with Sean today and get his opinion, from his unique position, on the current state of the US Housing Market.

The Interview

You had a driver’s seat in the whole Foreclosure Era, maybe more so than anyone in the whole country. Looking back on what foreclosure did to housing in America, what’s the takeaway? How did those six years of distress sales changing housing in America? What are the good things and the bad things?

I think the most surprising thing to me is that anyone would think foreclosures caused anything in housing. Foreclosures did no damage to our markets. What did damage was excess credit, excess lending. Foreclosures were just the result. People keep looking at foreclosures as the disease. They are just the symptoms.

We’re making the same mistakes now that caused the so-called foreclosure crisis. We’re putting people into loan modifications that are far worse that the worst of the worst pay option ARMs, yet we seem to think they are a solution.

The other thing that drove prices up to a point of being unsustainable was pay option credit, and look at what we are doing to interest rates. We are driving interest rates lower and lower and lower, creating artificially higher prices, but is a 3 ¾ percent on a thirty year mortgage really sustainable long term? Should government be subsidizing those loans?

In some ways, we are in a less healthy position now than we were in 2007. The bigger surprise to me is that nobody learned anything from that, and instead, we are taking away lessons that are worthless. For example, people point to the fact that we made “pulse” loans in 2007, meaning anyone with a pulse got a loan. That was absolutely the worse time to give anyone a loan, not just somebody who had a pulse. We were lending at unsustainable high prices. Yet, at the bottom of the market, when prices were so low you could have done 100 percent financing to somebody with bad credit and never lost a dime, it was very, very hard to get a loan. The problem with making pulse loans in 2007 wasn’t that people couldn’t qualify, it was that the price was too high.

But that’s not the lesson we took away. The lesson we took away is that we had to drop prices because we made loans to people who couldn’t qualify. We had to drop prices because they were too high to be sustained by the incomes of the buyers.

When you talk to people about their expectations, they end up saying they need to get back to where they were in 2005.

Where they were in 2005 was really, really unhealthy for our economy. When you put that much on a house, our incomes nationally need to double to be back to those price points with a healthy economy. That said, we’re trying to get back at those price points with unsubsidized lending, unrealistic loan modifications and other band-aids that fail to see the real problem, which is that those prices just aren’t affordable by the income we have.

Small investors have mushroomed and they are still growing in numbers today. Do you see them surviving? Will investor small or large continue to account for 20 percent of home sales?

Why investors came into their own in California and other markets when they did is because real estate was actually a good investment. What I think the National Association of Realtors and others have missed is that lower prices actually make real estate a better investment, not the other way around. If they don’t understand real estate investors, they are making a fundamental error because we are never going to have more than two thirds of the country as homeowners, not on a long term sustainable basis. It just doesn’t make sense. It doesn’t make sense to own a home for two or three years. It’s a poor investment decision. You may get lucky through artificial appreciation in a two to three year period, but anyone who is planning to move or has a short-term job, they should be renting.

So do you think that the numbers of small investors will return to the level of 2007 or 2008?

What we’re seeing right now is a rise in price. In California, we are certainly pushing the bounds of what is possible, and maybe a little beyond that. Buyers do what buyers have always done, which is buy as much house as their banker tells them. They did that in 2007 and they do that today, and that’s what prices reflect.

The other thing that prices reflect when the bankers aren’t out of control as they are now and they were in 2007 is they reflect the return on investment. Hedge funds came into all these markets across the US in a big way because they realized return on investment was too high. Sacramento, Riverside you could buy houses with 10 percent return on investment all day long. So they came in and pushed prices up dramatically very quickly because they realized they should back up the truck until return on investment was below seven, in which case they should stop.

So coming back to your question about investors as a share of the market, as prices go up, return on investment goes down. This year I expect to see prices go up and return go down. Return on investment and affordability are closely linked. It really comes down to income, affordability and what a person can pay for rent.

People got confused that investment is appreciation. That that’s where you get your return on investment. The real source of return on investment is return on rents.

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. One of my favorite quotes here: ” Foreclosures did no damage to our markets. What did damage was excess credit, excess lending. Foreclosures were just the result. People keep looking at foreclosures as the disease. They are just the symptoms.”

    Thanks for sharing such an informed perspective with us, Steve.

  2. Nicholas Spohn on

    Great article. And oh how often people mistakes the symptom for the disease. The return on investment is going down, but it is going down on stocks and bonds as well. At least with real estate an inflated price environment does not mean you cannot find good deals and good investments. Investors just need to be more diligent.

  3. Only two comments?
    Proof positive we are heading for a worse correction then anyone is going to believe.

    In Philadelphia new construction is at a fever pace new condo’s, houses, apartment buildings are going up in most of the hot areas. All the while newer properties in those same areas are not selling, but instead being converted into break even of negative cash flow rentals by the owners who cannot get their properties sold.

    It is hard to believe the basic tenant of REI has been lost. On a long term hold you try to own the place free and clear to take profits over time. Instead investors think stripping out equity to buy more properties that are all now in debt is a good idea.

    The problem I see is in the very near future (years) the banking system is going to need to raise interest rates due to the Fed ending QE. When this happens these low interest rate high priced properties are going to be worthless for resale. Upside down is going to be the new normal. Over supply of rentals is going to make it very hard to get the tenants needed to pay those notes off.

    As I have commented before (and been ignored I am sure) owning many properties with lots of debt and low cash flow is not preferable to owning a few that are paid off.
    The idea that at some future time these properties are going to double in value is fantasy. The only thing that has made RE double is inflation, those dollars do not buy anymore then they did when the house was half the price when purchased.

    In the last cycle I sold a few properties to pay off others, in this way I used the phony uptick in prices to consolidate my portfolio by lowering debt on other properties.
    The smart money will sell into this once again staged RE market using the money to pay down debt.

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