Hindsight is a wonderful thing- particularly with the help of the internet. We can more easily review past advice, and see how well the crystal balls and tarot cards of housing analysts were working.
A review of some of last summer's articles showed an interesting theme from the "See-no-Hear-no-Speak-no" bubble folks- the theory that the bubble was protected by low interest rates.
An article by Jim Jubak, written 6/10/05 was entitled "Why There is No Housing Bubble." Jubak discounts a number of serious economic concerns to make his point:
With the 10-year U.S. Treasury bond yielding below 4% and 30-year mortgages available at 5.1%, there isn't a housing bubble.
Mind you, I'm not saying that U.S. consumers don't have too much debt, or that the U.S. economy isn't dangerously dependent on the housing sector for growth, or that all the money sloshing around the globe isn't encouraging dangerous speculation.
But those are different problems from the one getting all the headline attention at the moment.
It's just that, for all the teeth-gnashing and pundit-moralizing, we really don't have a housing bubble that's anywhere near bursting. Current 10-year interest rates are just too low. And I certainly don't see interest rates rising enough in the next year or so to burst a bubble, either. (emphasis mine)
In an article posted 6/14/05 Timothy Middleton wrote "Put the Real-Estate Boom in Your Portfolio." Middleton expressed his bullishness on REITs (Real Estate Investment Trusts) by saying:
It's a familiar story. Like everything else having to do with property, real-estate investment trusts have been on fire. Even with an early-year pause, the stocks are up 20% a year over the past five years.""Despite those gains, the REITs should continue to climb, so long as interest rates stay low."(emphasis mine)
Fast forward to 2006. On 6/8/2006 Businessweek in "Will Bernanke Tank Housing?"- David Lereah, Chief Economist for the National Association of Realtors was quoted as saying- This is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable. (Translation- "Higher interest rates could burst our bubble.")Fast forward to 2006. On 6/8/2006 Businessweek in "?"- David Lereah, Chief Economist for the National Association of Realtors was quoted as saying-The question any more really isn't "Will the bubble pop?" The question is really more "fizzle" or "bang." Inventories are rising across the country- In a Raymond James article reprinted in Minyanville, we are given a clue as to how much air is going to need to be let out:
Fast forward to 2006. On 6/8/2006 Businessweek in "?"- David Lereah, Chief Economist for the National Association of Realtors was quoted as saying-
€œFrom an inventory perspective, today also appears more challenging than during the late 1980s based on absolute levels of inventory (565,000 today vs. 358,000) as well as months' supply (5.8 months today vs. 5.0 months). Some pundits have prophesized that inventory levels should moderate, based on many investor cancellations having already been dealt with; thus, cancellation rates should slow in the back half. While we do not disagree with the thesis that investor cancellations may be moderating, we believe that, based on discussions with our contacts, most cancellations today are legitimate buyers who are walking away from earnest money deposits out of fear of declines in home prices. Furthermore, we expect inventory levels to build even further in the back half.€€œAnother aspect of inventory that we consider is the €œhidden inventory€ that we have written about extensively. This is inventory that is not currently captured in the traditional single family inventory data because these are homes that are for rent, and show up in the rental stock data. Over the past several years, single-family vacancy rates have spiked, we believe as a result of a surge in investment by individuals in single-family real estate. In summary, given the high inventory levels in the various supply channels, there are more vacant houses in the U.S. today than at any time in history. We estimate that there are currently six million vacant housing units comprised of vacant for sale units, vacant rental units (including condos, duplexes, and apartments), and unsold homes in the new construction pipeline. We believe selling these inventory levels down to more normalized levels will take two to four years, (emphasis mine) similar in time frame to the 1987-1991 housing correction.(emphasis mine)
Buyers are nervous and waiting on the sidelines. Sellers are loathe to give up the perceived equity gains on the last couple of years. Until there is a break in this deadlock, the rate of decline will be difficult to call- but prices will need to come down- not moderate their growth, or level off- but come down.
If that doesn't sound likely I make two recommendations: (1) Bookmark this page, and return next summer to laugh and ridicule this post. (2) Pick up a few investment properties to flip. Now is the time to buy- you've got plenty to choose from.
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It is amazing to me that these guys are such cheerleaders in spite of the evidence. BTW my favorite on MSN is Bill Fleckenstein, he is totally the opposite of Jubak (not that I agree with either ) and he is very entertaining.
As long as sellers aren’t FORCED to sell their home, the list prices won’t have to drop. Unfortunately, for the sellers, More often that not the sale of a house is NECESSITATED by some event. It’s always interesting to me that people (who are TRYING to sell or looking to open a HELOC) will tell you what their house is worth. I’m sick of hearing that. AFTER you’ve sold AND closed escrow on your home, come tell me what it sold for. That’s precisely what it’s worth…What a buyer will pay for it.
With upwards of 52,000 homes listed in the PHX metro (and growing every week) and a dwindling pool of buyers, sellers perceptions of worth are bound to change (along with the list prices). Sooner or later prices will come down. If they don’t, they’ve defied 5,000 years of basic economics.