Housing Doom Housing Bubble Blog

It’s enough to make you burst out singing "Blue Skies". From the National Association of Realtors’ chief economist:

Two things homebuyers shouldn’t have to worry about is a recession or long-term credit crunch.

That’s what Lawrence Yun, chief economist with the National Association of Realtors, told real estate practitioners who gathered at the Kennedy Boulevard headquarters of the Greater Tampa Association of Realtors Wednesday.

Yun, who admits that he has to balance empirical data with a role of advocacy for the housing market, said that while the beginning of 2008 has been weak so far, the second half of the year should see an uptick that could lead to home value growth of more than 20 percent in the next five years. "I think there is enough momentum to bring the buyers back into the market," Yun said.

 Sales typically taper off the second half of the year, so Yun’s "uptick" is unlikely.  And about that "empirical data":

 NEW YORK (AP) — An industry group said Wednesday that pending U.S. home sales dropped to a new low in March, signaling the housing slump has yet to bottom out even as the spring sell season gets under way.

The National Association of Realtors’ seasonally adjusted index of pending sales for existing homes fell to 83.0 from a downwardly revised February reading of 83.8, the index’s previous low. The index stood at 103.9 in March 2007.

Wall Street economists polled by Thomson/IFR had predicted the index would slip to a reading of 83.8.

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As you may recall from last month’s installment of "How the NAR Spins", [I mean turns] Yun was gleefully celebrating a 2.9% month-to-month increase while ignoring the year-over-year 24% drop in home sales.  Yun said last month:

We’re not expecting a notable gain in existing-home sales until the second half of this year, but the improvement is another sign that the market is stabilizing.  Buyers taking advantage of higher loan limits for both FHA and conventional mortgages will unleash some pent-up demand.  As inventories are drawn down, prices in many markets should go positive later this year.

Fast forward to today’s NAR release.  Month-to-month, sales are down 2%, and the YOY is down 20%.  Additionally, rather than "drawing down", inventory rose 1% MOM, and 6.6% YOY.

 Prices

Now Yun is saying:

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On April 12 we posted a news story done by Brahm Resnik on the practice by the Arizona Multiple Listing Service (ARMLS) of forbidding any bonuses offered to buyers agents not being permitted in the realtor remarks.  Yesterday Bob Bemis, CEO of ARMLS, posted a response.  In fairness to Mr. Bemis, I thought I would repost his remarks, rather than leaving them at the bottom of an older thread:

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On April 3, we discussed the story of the Ummels, the unhappy homebuyers that were suing their realtor.  The jury has ruled, and they are saying "caveat emptor":

Friday, April 11, 2008 | A jury sided Thursday with Carlsbad real estate broker Mike Little in a closely watched lawsuit that pitted a local couple against the agent that helped them buy a home. The couple, Vern and Marty Ummel, claimed that Little neglected to mention recent sales in their neighborhood, leading them to overpay by about $150,000 for their home in July 2005.

The case attracted national attention as it posed a hot question: What are the responsibilities of a real estate agent? The real estate camp was concerned that if the plaintiffs won Thursday, it would catalyze and focus a growing urge around the country to find someone to blame — and to hold financially responsible — when houses aren’t worth as much as their buyers once paid. Those who sided with the Ummels worried their case would be chalked up to rich people problems, a matter of a measly $150,000 in the scope of a million-dollar tract home near a golf course in North County.

With an enthusiastic and unanimous response, the jury found that Little had executed a reasonable standard of care when he showed his clients, Vern and Marty Ummel, more than 80 homes in a house hunt that began in May 2005, ultimately leaving them to their decision to pay $1.2 million for their house two months later.

Why did the jury side with the agent?

At least in this specific case, the Realtor was found to have exercised sufficient care in helping the Ummels find their house, including helping them negotiate other offers they made on houses before they settled on this one. That made an important part of the case Vern Ummel’s admission on the stand that after looking at so many homes, he had a good sense of value in the neighborhood.

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Kudos to Brahm Resnik for giving this story wider coverage: [Doom’s own M contributed to this story.]

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Today we’ll try and unravel the twisted logic of Realty Times’ Blanche Evans and Lawrence Yun of the National Association of Realtors.  According to Evans:

This latest report should put the notion to bed that the housing boom was largely driven by speculators. The National Association of Realtors annual Investment and Vacation Home Buyers Survey finds that investors and second home buyers snapped up one third of the homes sold in 2007.

While the volume of sales is down along with home sales in general, the market share of investors and second-home or vacation home buyers is 33 percent, close to the historic norms at the height of the housing boom.

Investors bought 21 percent of homes in 2007, down only one percent from 2006. And vacation home buyers dropped from 14 percent in 2006 to 12 percent in 2007.

Wait a minute. I thought there was a credit crunch. That vacation homes were piling up like college student laundry. That investors got out of housing and moved into gold, corn and oil.

So what’s happening? Primary residence sales declined 10.0 percent to 4.34 million in 2007 from 4.82 million in 2006, but vacation sales (-30.6 percent) and investment homes (-18.1 percent) fell much more, possibly due to tighter credit and economic uncertainty.

You were right Blanche about two things- there is a credit crunch and the vacation homes are piling up. That theory about the boom being driven by speculators has not been put to bed- it’s walking around and wide awake, however.

First of all, according to the 2006 report, market share for second homes is down from it’s peak of 40% in 2005.  Yun is reporting current market share as 33% in 2007.  It’s unclear to me how one has a "historic norm" at the height of a boom, but Evans is in error - market share has clearly dropped. Yun indicates in the report Evans references that there has been a serious decline in investment purchases:

Lawrence Yun, NAR chief economist, said the findings suggest different cycles for each of the sectors over the past two years.  “Investment-home sales declined sharply in 2006 as speculators disappeared, leaving the market to serious buyers, with the pattern continuing in 2007,” he said.

Actually market share has probably dropped significantly more than the percentages indicate- clearly sales numbers for vacation and investment homes have dropped.  Because mortgage rates and loan terms are more advantageous for owner-occupiers, many speculators lied to obtain more favorable financing. Also remember that these numbers are resale only, and do not include new home sales. Financing available through homebuilders made purchasing new homes for investment purposes attractive in the boom years, and many of those new homes are now back on the market as resales.

Evans continues:

Twenty-eight percent of vacation-home buyers paid cash for their property, as did 35 percent of investment buyers.

Plus, investors and second home buyers aren’t interested in short-term gains and plan to hold on to their properties from four to ten years (median) respectively.

Investment homes are $150,000, unchanged from 2006, while the price of vacation homes have dropped $5000 to $195,000.

Eight out of ten second home buyers believe it’s a good time to buy real estate, and a majority plan to buy another property in the next two years.

So what does that tell you? People with more money are spending it on real estate.

Looking at the numbers, it’s clear that a lot fewer "people with more money" are spending it on real estate.  That said, agents I know are telling me they do have a significant percentage of buyers that are speculators. Inqueries I receive certainly indicate that there is a lot of interest in buying investment property, particularly short sales and foreclosures.  To a large extent, I believe that is because "wannabe" flippers are thinking that now is the "bottom", and they are going to make a killing snapping up bargains.  Many of those who might ordinarily be shopping for a primary residence however, are unnerved by current market conditions and are sitting tight or are choosing to rent.  Owner-occupiers are more risk averse than investors- It does not necessarily follow that the "smart money" is on real estate.

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The following ad was in M’s junk mail yesterday:

Note this is a "Realtor communication" - not intended for general consumption.  Coincidentally once more ARMLS reiterated their policy on listings yesterday- no talking about bonuses:

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The National Association of Realtors released their numbers for February Existing Home Sales yesterday, but any correlation between the NAR’s analysis and the data is purely coincidental.  According to Lawrence Yun, chief economist of the NAR:

WASHINGTON, March 24, 2008 - Sales of existing homes increased in February and remain within a fairly stable range, according to the National Association of Realtors®. 

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.9 percent to a seasonally adjusted annual rate (1) of 5.03 million units in February from a pace of 4.89 million in January, but remain 23.8 percent below the 6.60 million-unit level in February 2007.  The sales pace has been in a fairly narrow range since last September.

Let’s just take a look at a couple of graphs to put his comments in perspective.  Here’s what the monthly sales graph has looked like since January 2001:

The increase from January obviously could be explained by normal month-to-month variability- there is insufficient evidence to declare February’s sales numbers an improvement, especially in light of the year-over-year change:

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Many thanks to L for the best laugh I’ve had all day.  Lawrence Yun, chief economist of the National Association of Realtors has offered his own solution for rising foreclosures across the country.  In his proposal he uses the level of mathematical logic we’ve come to expect from the NAR and their economists:

Referring to other proposals currently on the table he said:

All of the proposals are well-intended and most will help mitigate foreclosure problem.  But in addition to some aspects of the bottom-up solutions, what is needed and could well be far more effective is a top-down solution of raising the housing demand.  As I wrote earlier, what is most needed in the current point in the housing cycle is to get the home sales rolling.  Rising home sales will lower inventory and lower inventory will help quickly stabilize home prices.  A recent Boston Fed study showed that home price movements and not interest rate resets as the primary determinant of foreclosures.  If people have less or negative housing equity, then people have an incentive to default on mortgages and simply walk away. 

There is plentiful pent-up demand.  The difficult part is getting this demand unleashed into the marketplace, due the pervasive consumer pessimism related the housing market.  The raising of the loan limit on FHA and Fannie/Freddie backed loans will help unleash some of that demand as more people will have access to lower interest rate loans.  Lower home prices can also work to bring buyers to the market, but it is no guarantee because lower prices can also add to excessive pessimism and raise foreclosures. 

What is critically needed at this important point in the housing cycle is a measure to assuredly and quickly raise home buying activity.  This can be accomplished by providing a homebuyer tax-credit.  A nationwide $5,000 tax credit (the same amount currently in existence for homebuyers in Washington, D.C.) will cost the federal government $40 billion.  If factoring in rising economic activity and accompanying rising tax revenue, then the true cost could be minimal or even positively favorable.  A reversal in the weakness in the housing market, which has been subtracting about one percentage point off GDP growth, can add $40 billion to the U.S. Treasury - essentially offsetting the cost of the tax credit.  If the initial $40 billion cost is harder to swallow than a more targeted tax credit for only the first-time homebuyers will cost the government about $15 billion. 

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Thank you L for sending us this podcast by Dick Gaylord, President of the National Association of Realtors. It is apparent from Gaylord’s comments that he feels that the NAR was instrumental in bringing about Bush’s economic stimulus package:

A few days ago, we achieved a remarkable accomplishment. NAR stood along side President Bush as he signed the economic stimulus package that includes increases in both the FHA and conforming loan limits. The new loan limits will be published by HUD within 30 days and will take effect immediately. [This differs from the transcript provided here.]

Gaylord discusses what he believes will be the benefits of this legislation:

Raising the FHA loan limits alone will help more than 130,000 new buyers enter the market, and more than 200,000 people will be able to refinance their costly mortgages. Increasing the GSE loan limits will result in as many as 500,000 refinanced loans and another 300,000 home sales. These are real numbers, with a real impact on our markets, consumers and – of course– our businesses. And, YOU made it happen!

These numbers are in fact rather optimistic estimates, not "real numbers", and whether Realtors "made it happen" is open to debate. Nevertheless, Gaylord makes a pitch for the NAR’s PAC for additional funds:

We must continue our full-court press on Congress to move FHA Reform out of conference, so that the President can sign it into law. We also must urge the Senate to pass the GSE Reform Bill and send it to the President before this session of Congress draws to a close. With the election on the horizon, it’s vital that we pass these two important bills this year. And, once again, YOU can make it happen. If you haven’t already contributed to RPAC, please go to realtor.org/rpac and donate whatever you can today – $20, $50,$100 or more. Every dollar will help ensure that Realtor issues remain a top priority at all levels of government – this year, and long after the election is over.

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