David Lereah, Chief Economist of the National Association of Realtors, (NAR) is at it again. In a press release today, he expressed his boundless optimism for an early recovery:
Existing-home sales are expected to rise gradually in 2007 from current levels, with annual totals comparable to 2006, while new-home sales will continue to slide, according to the latest forecast by the National Association of Realtors(R).
"Roughly three-quarters of the country will experience a sluggish expansion in 2007, while other areas should continue to contract for at least part of the year," he said. "Most of the correction in home prices is behind us, but general gains in value next year will be modest by historical standards."
Notably absent is any evidence for his projections. Lereah throws a lot of numbers around, but does not cite any trends that might substantiate his thesis. In other reports, Lereah has tried to cite anecdotal evidence of strength. (i.e. his "Nardi Gras" presentation, where he insisted that things were still great in Alaska) There must be a shortage of good news.
Last week Ivy Zelman of Credit Suisse accused Bob Toll, CEO of Toll Brothers of "drinking the Kool-aid." It appears Lereah is drinking the same flavor.
I want some of what Lereah’s been drinking!
Absynthe, is it?
That dude is a whack job to the 10th power.
I’m a fence sitter. I was berated by my coworkers for living in a very modest one bedroom apartment, while making enough money to afford the “median” priced home here in Tucson. It seems that a LOT of people drink the “it will get better, so you should buy now… or be priced out forever” Kool-aid.
I laugh (and point my finger) at these people. They are either in ignorant bliss or simply too retarded to grasp the gravity of our housing market situation.
This is what I tell them: If I bought a house today I would lose everything I put down and any equity in the home for at least 6 years. Home prices have dipped 3-6% in the last few months and there is nothing to stop them from tumbling further. If I wait… I’m much better off both short term and long term. At least I’m guaranteed a % if I put my down payment into a CD.
This is why:
For the sake of argument we will call at the equity tappers; “tappers”. Tappers started refi’ing and tapping equity to buy the “boat/RV” or “investment home” with non-trad loans about three years ago all the way up to the first quarter of 2006. The tappers hoped to refi to a fixed when the interest rates went up or begin to reset (sometime in the very near future).
Most of the tappers are now under water. They can’t get an appraisal to come in where they refi’ed for the large sum of money, the comps are not there. They are stuck with ballooning payments and a really nice “boat/RV” or non-performing “investment property”.
They are going to either sell the boat/RV at a loss to try and buy some time… just browse craigslist or boat trader for some good deals. Or they are going to sell the property at a value that another buyer is willing to pay. Both situations will be responsible for the price tumble.
1 in 3 to 1 in 5 is now in a situation where their homes are not worth as much as they paid for them. They could never really afford the home in the first place. They were told that most people only stay in a home for three to five years, and when the ARM on the McMansion resets they can sell for a tidy profit. They were told that the housing market is always a sure thing; a quick way to make some money or upgrade to a more desirable location with the power of equity. These people were not smart enough to realize markets go up and down, and if its down and you HAVE to sell you are SOL.
From our local economist
The Housing Hangover: Take Two Aspirin and Call Me in 2008
http://www.elliottpollack.com/word_docs/ASU%20Speech%202006_final%20presented.pdf
Great post and comments. I’m not sure anything better than this summers studies has come along to predict a “bottom” or the slope of “recovery”, which mostly indicated early 2008 followed by a below inflation level of appreciation thorough 2011 ( as I remeber). However, in the same manner as we often deride the “irrational exuberance” of realtors, we need to guard against “unrealistic pessimism”.
I agree with most of what TusconDoomer wrote, especially regarding “Tappers”, but I have to question whether there is any basis for suggesting that one third, or even 20%, of US homeowners are in the “situation where their homes are not worth as much as they paid for them”. Even if the statement were recast to embrace “total mortgage debt”, and thus capture many of the recent “tappers”, the percentages appear unsupportable (or at least unsupported), especially given the large amount of housing stock remaining in the hands of purchasers from more than 3 years ago, many of whom have not been playing mortgage
ATM games and some who are at or near retirement and own the home outright.
Similarly, if we are too focused on the sub-prime mortgage situation we fail to realize that: 1. it is not a significant piece of either the overall outstanding borrowings or total outstanding securities, 2.it is the group everyone rational expected to default in far greater numbers during a downturn,and 3. a modern economy does not rely on the “lowest common denominator” as an overall predictive proxy. Sometimes our “doomer” opinions appear based on interesting, but small or aberrant pieces of the market, kind of like estimating world worker productivity change by sampling only Western Europe!! Gold bugs have been famous for this kind of rhetoric and “reasoning” for decades. To mix a metaphor, they are constantly grasping at straws they predict will break the camel’s back. Well guys, the camel has carried alot of your straw so far. I hope knowledable housing market observers like those on this site can avoid joining this largely economically irrelevant group of habitual naysayers, who always see the next bit of bad news as proof that gold’s (gun’s, mountain retreat’s, societal collapse’ etc.) day is coming.
On a final note, given the focus recently placed on those who “struggle to pay” their mortgage (toxic or not) and Tuscondoomers accurate picture of many “Tappers” spending home “equity” on silly toys, I hope those people most concerned about the “hardships” on US middle class homeowners noticed that the Latin immigrant community has somehow been able to increase what they mail home from $240 in 2004 to $300 per month in 2006…this from people earning $900 per month on average!(Az. Republic, 12/11/06) Perhaps, after selling the “boat/RV”, the tappers can then learn something of personal thrift, spending priorities and true hardship from these hardworking people.
I am surprised that Lareah’s pant’s aren’t on fire wirh all the canards he has spun. OUtside the US many of the articles are decidedly downbeat and in fact seem to be dreading what is coming.
Good post Mike, I guess that I need to clarify my position a bit.
I’m sure my numbers are off, and I certainly don’t have a crystal ball. My pessimism is really just focused rage. I’m angry.
Fiscal responsibility? HAR-HAR! To most, that means being able to afford the minimum payment on the credit card(s) bill every month. Keeping up with the Smith’s, as it were, is a disease worthy of major medical studies. At least in my opinion.
I was priced out of the market for a long time. Only recently was I able to secure a career with enough earning potential to even consider buying a house. Even now, I can “afford” a median priced home, but I would have to make some serious “entertainment/travel” sacrifices… which isn’t a deal breaker in and of itself.
This leads me to:
Why should I pay 2xx,000 dollars for a “Brand New” POS house 5 feet away from another house? I can’t imagine the Californians paying 4 times that for the same thing. It’s absolutely insane; these “new” homes are total garbage.
I have to make a long term commitment (say a 30 year mortgage) on a house that is considered to be, at best, a 20 year home (before major repair work is needed). Basically, as a buyer, I’m being asked to buy something that is almost guaranteed to break well before I’m done “owning” it. There is very little logic in that for me.
In the past, homes were built with brick a mortar. They had real roofs and proper foundations. In Tucson these homes are located around the University of Arizona. They were considered “50 year” homes at the time of construction. 5 years ago you could buy one for 50-100K. Now they are going for 275-500K, with significant repairs needed. INSANE!
Why?
The corporate mentality is, “Where can we cut costs?” Rather than, “Where can we inject value?”
The consumer mentality is; “Where can I get the best price for xxx? I don’t care what the opportunity cost is, I don’t care what the real value is, I WANT xxx!” Rather than; “Do we need xxx? If so, let’s save so we can afford the best. If not, let’s save for a rainy day.”
I’m in the medical field so pardon my simplistic algorithm; I view the economy similar to the basic view of the human body; Air moves “in and out”; blood goes “round ‘n’ round.” Anytime one of these things is not functioning correctly you have a major problem. We have a major problem:
The economy is on a heavy morphine drip (credit) suppressing the need to breathe (save).
Metroplexual, you just assume he wears pants. After he has lost his shirt, logically, what goes next? I also am concerned about foreign press on the US housing market,but most especially that which focuses on increasingly punative state tax policy for non-resident owners. Foreign demand for US properties, even if the property no longer offers appreciation opportunity , can be a favorite hedge against confiscation and currency or political instability in their own nations, especially when alternatives in other relatively stable nations, because of restrictive ownership laws or tax policy,are practically unavailable. While this is probably not significant to the market in Kansas City, this demand is important for some areas like South Florida. The disasterous effects of Florida’s so-called “Save Our Homes Amendment” property tax system for all non-florida “residents”, including American “snowbirds” and foreign buyers, are becoming more widely known and threaten to kill the hugh, untenable and unfair subsidy flowing to long time Florida residents. This tax system benefits primarily the organs of government and public employment by masking the cost of government for florida voters through placing massively disproportionate property tax bills on non-residents.(Yah, I know it sounds nutty, because it is) Recent proposals to make this system even sweeter for florida residents (portability) and thus worse for non-resident owners, along with the windstorm insurance problem, has rightly dampened demand all over Florida, especially from clued-in foreign buyers who until recently would only learn of this tax trap after closing.
Tuscondoomer,thanks, we agree on so many things that I hated to point out the one little issue. I am also angry about the situation, but from a different perspective. Keep your head in the game, there may be alot more opportunity in the mid-priced housing market soon You appear to be focused on the right stuff, like spending priorities and how poorly recent homes have been constructed in the Southwest. One advantage to South Florida is that the hurricanes keep the builders honest(largly) and code enforcement is intense. It looks like Az has always been, and remains, the stick and mud builders paradise (and thus consumer purgatory),that we used to read about out east.
It doesn’t appear that CNN-Money totally fell foe Lereah’s talking points. This story seems to be a bit more realistic:
http://money.cnn.com/2006/12/11/real_estate/home_sales.reut/index.htm?postversion=2006121113
Judge-
I keep pretty close tabs on what reports come out when. When this press release came out, I was asking myself why, when new home sales aren’t due out until 11/27, and existing on 11/28.
My guess is Lereah’s trying to do a preemptive strike here, admitting short term pain, but showing “light at the end of the tunnel.”
During the S&L crisis, median home prices dropped for four years, and did not return to former levels for another two. Calling a bottom at this point would be extremely difficult, as none of the indicators really are showing any moderation. Inventory is down a bit, but that tends to be a seasonal phenomenon. Lereah’s long on predictions, short on defining trends.
I’ll bet Bernanke’s laughing about the interest rate predictions as well. We’re all pretty much guessing the Fed will hold this week, but after that- I doubt the Fed knows for sure where rates will be next September, never mind Lereah.
Twist — I think you’re right. Lereah knows the end-of-month numbers are going to stink on ice, so he’s trying to get his spin quotes out on the net now, so lazy reporters will have some “yeah, but” quotes to throw into their stories when the negative numbers are released.
What I find most humorous (but not “ha-ha” funny) is how often Lereah and the spin-meisters have already said, “This is the bottom. The market has stabilized.” How many times can they throw this head-fake until they lose any credibility they might have left? What will they be saying next year or in 2008 (provided they still have jobs in the REIC)?
Unrelated point: I find it odd how many supposedly intelligent people seem to buy into the following theory: “The housing market would be just fine if it wasn’t for all of the negative blogs out there scaring people out of the market and on to the sidelines.”
I’ve run into that mind-set in many stories on the Web and elsewhere, as I’m sure you have. Do these people really believe that what we post here is actually affecting the market? I think these sites are good at offering cautionary tales to potential buyers, sure, but the sales numbers are what they are. If people are sitting out the market, it’s because of their pocketbooks and common sense, not because some Web site told them to.
Twist, “Pretty close tabs”..that may qualify as the understatement of the month. Girl, you release data ahead of its official release date and are generally all over this stuff as it happens. Heck, your even an interviewed “pundit” in the MSM.
Judge-
I think they are sticking with “almost a bottom” to give themselves wiggle room. As for credibility, I think of the line from the song, “If I Were a Rich Man” in Fiddler on the Roof – only you need to insert “economist” for “rich man.”
The most important men in town would come to fawn on me!
They would ask me to advise them,
Like a Solomon the Wise.
“If you please, Reb Tevye…”
“Pardon me, Reb Tevye…”
Posing problems that would cross a rabbi’s eyes!
And it won’t make one bit of difference if i answer right or wrong.
When you’re rich[or an economist, i.e. Lereah], they think you really know!
It would be kind of nice to have the power over the U.S. economy that is being ascribed to bubble bloggers. Think of the possibilities for John and me. We could call up GW and say, “We want a large subsidy for Doom, or we shave a couple of points off the GDP!”
It’s a pretty silly theory, but you do see it around.
Old Mike-
Thank you for the compliment- I’m probably just more impatient than anyone else. [and averse to "downstream" data!]
A rebound by the end of ‘07? Hmmm … can Mr. Lereah’s estimates be trusted? Let’s got the instant replays to see if there’s a pattern of
rosy predictions :
Anyone seeing a pattern yet … ?
Funny. Fitch Ratings today released a pretty gloomy report for RMBS performance in 2007.
Subprime mortgages from 2006 are expected to perform at a level of ‘worst on record’ next year.
But hey, manufactured housing should do well! Maybe that’s his source of optimism!
HousingGuy-
I haven’t really tracked manufactured housing. I got curious, and found this little tidbit on manufactured housing from a Dec 8 Motley Fool article:
In 1998, the industry shipped about 370,000 manufactured housing units. For 2006, the industry will ship around 123,000 units, a decline of more than 60%. The last time the industry shipped this few units it was 1962, JFK was in the White House, and I would not be born for another 20 years.
http://www.fool.com/news/commentary/2006/commentary06120814.htm
I wonder how the doll house market is holding up?
Housing Guy -
I’ve put your link on the sidebar under this memorable title: “Collateral Damage: Rate Resets, Housing Struggles to Put More Strain on U.S. Residential Mortgage-backed securities (RMBS) in 2007″. Thanks for the find.