Signs of the pending bust were overlooked

After the boom: the wake of the real estate bust

Signs of the pending bust were overlooked

A Main Street law office without windows is an odd place for a such a good view.

But Waynesville attorney Frank Queen has had a front-row seat to the mountains from here, witnessing thousands of acres trade hands — land with scenic vistas, along creeks, in forests, behind gates, on farms, hugging cliffs and tucked in coves — during the real estate boom of the 2000s.

“Real estate never goes down. It is completely different than every other investment you have ever been involved in,” Queen said. “At least that’s what everybody thought. Only the Cassandras are the ones who said ‘This is terrible and it is going to end badly.’”

In hindsight, though, everyone should have realized the mountain development boom was following the classic recipe — particularly the smart lawyers with an unprecedented volume of real estate transactions flowing across their desk, carrying astronomical price tags.

“I think the 20,000-foot view of this is that it was a typical boom-bust cycle that has been going on in the market for as long as markets have existed,” Queen said. “Real estate was like any other kind of market. When supply and demand get out of balance, the market corrects itself. Whenever someone tells you ‘This time is different,’ proceed with caution.”

A block down the street from Queen, another of the top real estate lawyers in Haywood County watched the real estate bust unfold before his eyes. Only he didn’t see it coming either.

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“I would sit right here and say, ‘The good thing about Haywood County is I have never seen land prices drop,’” recalled Gavin Brown, sitting at the board table where hundreds of real estate transactions went down. “I thought Haywood County land prices were immune from any kind of disaster. Gavin Brown was dead wrong on that and here I am an experienced real estate lawyer. I was feeding the frenzy.”

Brown’s favorite parallel: the great Dutch tulip bulb mania of the 1630s. During its height, a single tulip bulb was worth as much as an entire farm, selling for 10 times the annual income of a skilled craftsman in the period.

One tulip bulb could change hands several times a day, traded up higher each time. The craze even gave rise to a tulip futures market, with dealers buying and selling bulbs they never saw, solely on contract. Tulip auctions fueled the illusion.

The mounting frenzy became more and more disassociated with the intrinsic worth of tulips themselves. Speculators were eventually betting on a figment — the idea of a commodity that would keep on rising forever.

The tulip craze started out innocently enough. The newly introduced flower in Europe was desired partly for its beauty and partly as a status symbol among the wealthy.

The tipping point was when speculators who had no desire to actually own tulip bulbs got in the game, trading and betting on a presumptive rise in prices.

The same tipping point happened with the mountain development bust.

“Land in and of itself has intrinsic value. You farmed it, you grazed it, you grew trees on it or you got water off it,” Brown said.

Trouble came when buyers got in the game who saw the mountains as a sort of stock market, buying lot and land with the intention of flipping it.

“Like in any other kind of financial crisis, it’s when you get derivative type investment,” Brown said.

Brown’s own file room is exhibit A in the real estate boom and bust. Thousands of file folders containing land transactions are shelved by year on long metal racks. He walked back through time to the mid-2000s, proudly showing off the top years that consume row after row, each too long to span with his arms. Keep walking, and you get to 2009, but don’t blink. There’s hardly enough files to fill a single row.

The mark of the development boom and bust will remain on the landscape for decades to come. A vast inventory of lots carved out of mountain subdivisions — thousands of them waiting for buyers who don’t exist — could languish for a generation or more.

The no-lose proposition had a critical flaw: that demand was infinite and prices would always rise.

“Everyone assumes in this situation there is no risk. It is guaranteed. Most people never saw the risk. Everybody got carried away,” Brown said.

For the record, Queen personally thought the sale prices were “excessive.” But what trumpet could a small-town Main Street lawyer blow to alert America they were paying too much for mountaintop lots?

“Everybody in retrospect can see the big-view lot prices were outrageous. Everybody is a genius who didn’t buy one of those. But there are an equal number of people who bought and flipped them — and are geniuses because they sold in time,” Queen said.

The ones who decidedly aren’t geniuses — at least not anymore — are the developers caught with gobs of overpriced lots on their hands in mountain developments with not enough takers.

“They thought all they had to do was announce the damn thing and it would sell. The only problem is there’s a zillion mountains and a zillion views,” Queen said.

Jay Coward, the top real estate attorney in Jackson County, isn’t so sure the real estate bust was a fait accompli, however.

Sure, the prices seemed insanely high.

“But how do you interpret it?” Coward said.

Buyers drive the market, and if they’re willing to pay $300,000 for an acre lot, then by definition, that’s what the lot is worth.

Finding fault

There’s no one-size-fits-all, no good guys and bad guys, no singular character who should have wizened up to the havoc being wreaked in the real estate market.

“You can collectively point the finger at all of us,” Brown said.

But the blame game is rampant nonetheless.

“There is a great inclination when something big happens and people get hurt to say ‘It must be someone’s fault,” Queen said. “The fault is in the stars, that’s what Shakespeare said.”

However, Coward is quick to come up with a villain behind the bust.

“It was the toxic mess on Wall Street,” Coward said. “We didn’t know there were these crazy toxic loans out there that were going to bring the entire financial system to its knees.”

Coward said the market didn’t shrink, taper or even fizzle. It instantly “vaporized.”

“It was more like a tornado all of a sudden arrived. The storm came suddenly and you either were taken out or somehow managed to hunker down in a bunker and ride it out,” Coward said.

Coward thinks the developers caught mid-stride with a development and driven to bankruptcy would have succeeded if not for the external financial crash. That’s what spooked lot buyers, and what ultimately cased demand to dry up — not an actual slump in desirability of mountain land.

“I think the lots would have sold out if it weren’t for the recession. You would have had some filthy rich developers that made a bunch of money off Western North Carolina,” Coward said.

That image of the filthy rich developer, profiting hand over fist, makes them an easy scapegoat in the blame game, and the hapless lot buyers paying inflated prices as the victims.

But it’s not quite accurate, Queen said.

Developers were sitting on top when the house of cards tumbled down, but they didn’t build it alone.

“It is wrong to mistake effect with cause,” Queen said. “This isn’t a tragedy and there aren’t victims. It is people trying to get ahead with a no-lose proposition.”

The baby boomers who chased the dream of a mountain retirement, the speculators who bought and flipped lots to make an easy profit, the mountain farmers who sold their family land, even the laborers swinging hammers from dawn to dusk to feed the boom — they were all part of it.

Going once

The first explorers who laid eyes on the Smokies described the unfolding ridgelines as endless, more than man could ever fill up.

But in the height of the boom, the line of buyers seemed endless, with not enough mountains to go around — or so everyone believed.

Courting buyers for mountain land tapped the region’s long-standing history of hosting wealthy Southerners escaping the summer heat. They came in droves in the late 1800s and early 1900s. Arriving by train from Atlanta, Savannah and the like, they settled in at countless resort hotels of the day for a three-month respite in the cooler climes of the mountains, the men periodically traveling to and from to conduct businesses back home.

Flash forward, and those are the same clientele who fueled the second-home and vacation-home market in the boom years.

It wasn’t all that hard for developers to connect the dots.

“Their advertising and marketing was to people of the hot South. They were the same people who in the past had come here and stayed in hotels,” Queen said. “There was obviously a demand that caused the developers to reach out.”

Queen was one of the first eye-witnesses in the real estate world to detect the new breed of buyer now known as “half-backs.”

These are the retired middle-class factory workers from the north — from Ohio to New York — who set out to retire in Florida but discovered the mountains en route, being “halfway back” home.

Halfbacks aside, the whole concept of a mobile retirement is new-fangled in human geography.

“People are retiring to a place they didn’t work,” Queen said. “The fundamental driver for all of this is a demographic trend of boomers retiring.”

In particular, boomers with disposable income, looking to spend their idyllic golden years somewhere other than the town they worked in their whole lives. They bought into the mountain real estate craze, dreaming of that storybook retirement.

Dreaming, after all, was half the fun. For many mountain lot buyers in the 2000s, retirement was years away, but with lots flying off the shelf, getting in on the ground floor was crucial — and besides, there was nothing to lose.

“They always figured in the back of their mind it didn’t matter whether they actually retired here or not because nobody ever lost money in real estate. Everybody is a genius,” Queen said.

Selling out

There’s another part of the equation of course: the mountain people who sold their land to developers in the first place.

Farms and mountainsides passed down for generations, staying within the same family since the days of early settlers, were sold in the blink of an eye. Land that lasts forever was traded in for cash with a far more fleeting nature.

Queen cautioned against quick judgments of those who sold out, however. His grandfather, Sam Queen, got a call from a man in the late 1960s wanting to sell 100 acres of his family land to send his daughter to college.

“They didn’t want to sell it to people they didn’t know, which was a peculiarity of mountain folk at the time. So they sold the land to us for what seems to be a ridiculous small sum of money now and even then wasn’t very much,” Queen said.

“If you asked that girl today, who is now retired, did they need their 100 acres out in rural Haywood County or did she need her college education and the life experiences and career that came from it? The conversation doesn’t go very far,” Queen said. “That is the story of economics. It is, ‘What were your needs at the time?’”

Certainly, selling land their forbearers had settled and farmed for generations for short-term gain was a hard choice.

“Yet you need a new car, and yet you have children who need college educations, and yet…” Queen said. “So you are sitting here on this thing and you have a need that can’t be met by this thing you are sitting on.”

Queen’s family still owns the farm passed down from his great-great-great grandfather — with one exception. The big, old maple tree in the front yard isn’t there any more. His grandfather cut it down one day when everyone else was gone.

“The family asked Sam what in the hell had he done. Why had he cut the maple tree out of the front yard? He said ‘Let them that lives the longest carry wood the furthest,’” Queen said. “People’s minds are motivated by what they need to get by with today, and not necessarily this mystical relationship or abstract notion.”

His grandfather lost the shade tree, but didn’t have to go nearly as far to haul firewood anymore.

On the horizon

If real estate lawyers are the bellwether of the bust, they are also the harbinger of the rebound. None would attest a comeback is on the horizon, but Coward has seen real estate transactions rise.

Coward will likely never be back to the level he was in the heyday. In 2008, he had 26 employees churning out real estate closings. By 2010, he had dropped to the staff to six.

Two years ago, weeks could pass without a closing. Now, he is seeing activity every day.

“People have regained some confidence but not to the point we are at a turn around,” Coward said. “It is out of the doldrums. It has plateaued. It is no longer lifeless and cold on the operating table. It is beginning to breathe again, but that’s about all.”

Over coming months, join The Smoky Mountain News as we explore the lasting and far-reaching implications of the real estate boom and bust in the mountains. The summer-long series will examine what went wrong, what can be learned, and where we go from here.

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