This title truly comes from the heart. Reading the Wall Street Journal today, I stumbled across the latest report from the lead economist at the National Association of Realtors. In the face of overwhelming negative information and despite their own lowered forecasts, Mr. Lawrence Yun states,
Existing-home sales should be relatively stable over the next few months, holding in a modest range, with some pent-up demand growing from buyers who’ve been on the sidelines.” He continues on to say, “A modest upturn is projected for existing-home sales toward the end of the year, with broader improvement to include the new-home market by the middle of 2008
Perhaps he considers the third time he tries to shovel this to the markets will be the charm. I am not sure what it takes to be an economist, let alone head of economic research at the National Association of Realtors, but the first interview question must be “Do you have a pair of unbreakable, impenetrable, gigantic Rose Colored glasses?”
Before I move forward, I want to say that I understand that there are many different economic philosophies out there. From Regan’s supply side economics to our own Jeff Brown’s interesting economic theories, there can be many ways to interpret various economic indicators. Instead of spouting my own point of view, I will layout simple economic trends and let you the reader be the judge of where you think the market will go.
The Current Market Climate:
- The Subprime mortgage market has been shut down, shutting out at least 10% (probably more) of the buying market
- Alt-A (Loans below prime, but above subprime) mortgages have taken a huge hit, shutting out another indeterminate amount of buyers (~2-5%)
- Fed chose to hold interest rates steady, resulting in higher expected mortgage rates
- Adjustable rate mortgage resets hit many consumers in their wallet very hard
- Time on the market has increased significantly for most markets and overall
- Defaults have been climbing and have showed no signs of slowing. Additionally, defaults significantly lower market values, resulting in lower selling prices
- Leverage finance troubles in the broader economy will have an effect on real estate prices
- Economic growth has been strong, but investors fear the debt market and businesses might be hurt. This is evident in the recent volatility in the stock markets
- For the first time in 60 years, the broad residential real estate market is expecting a year over year decline in prices
- Major homebuilders are reporting significant drops in revenue and net income
- Mortgage REITs and Mortgage companies are going out of business
- No one (aside from the NAR economist) is project any kind of recovery on the debt side until the end of the year or later
Clear all that up in five months? You, the reader, be the judge of when you expect a recovery.
Greg Swann says:
If lenders will be chasing fewer borrowers, why wouldn’t rates go down?
August 8, 2007 — 9:02 am
Michael Cook says:
Great question Greg. The main reason is risk. Lenders are becoming more atune to their risk/return profile. In recalibrating and reassessing their exposure, especially in light of the subprime failures, they will need to raise rates to ensure they are covered. This would be juxtaposed to the fact that there are fewer buyer. Unfortunately with all the exiting of products, lenders are simply waiting on the sideline instead of competing. Caution is king currently, so that is why you are not seeing the normal supply and demand effects.
August 8, 2007 — 9:08 am
Patrick Hake says:
Was he speaking of volume or sales prices? Over the last year we have been measuring year over year numbers that compared a bad market (2006) to a worse market (2007). There will come a point in the future where we will do the opposite. It is completely possible with the huge amount of inventory that volume could pick up compared to the preceding awful year while prices continue to decline or remain stable. As the economist for NAR his focus should be on what affects Realtors the most. Volume or turnover is probably more important than actual sales prices to most real estate related businesses.
August 8, 2007 — 9:08 am
Brian Brady says:
“If lenders will be chasing fewer borrowers, why wouldn’t rates go down?”
They will…for the lion’s share of the home buying public. Michael is correct when he says that the fringe borrowers, whom I liken to the smokers class in life insurance, will pay dearly for home rates.
My guess? Leveraged markets, like mine, will be stagnant for the time is takes to absorb the shrunken buyer base. Greg’s market will recover FROM THIS more quickly because of the relative affordability.
The real winners? Des Moines, St Louis, Albuquerque, et al. Buyers are more apt to qualify for a conforming loan and the HUD loans wil fill the Alt-A void. We may actually see a pop in Middle America
August 8, 2007 — 9:53 am
Michael Cook says:
Patrick,
He does speak of volume mostly, but he also touches on prices. I just dont see the volume increases coming. In order to have volume increases, either sellers have to lower prices or buyers have to step up to the plate and decide to buy. While I think the sell side of that equation may cooperate, I just dont see buyers having the ability to take advantage of it in the next five months.
“As the economist for the NAR his focus should be on what affects Realtors the most.”
This statement I actually disagree with. The NAR consistiently portraits itself as the voice of the real estate market. Although their constiuents (sp?) are clearly realtors, they have worked very hard to show themselves as the friend of the consumer. In order to support that claim, they should offer objective economic advice. Instead of using this influence positively and objectively, they often attempt to manipulate the market with their reporting. If they were simply a realtor focused organization their analysis would not be the leading story in the wallstreet journal. Sorry for the rant, but its something that really gets under my skin.
August 8, 2007 — 10:07 am
Patrick Hake says:
Sales volume could be lower next year, or then again it could be higher. I don’t know:)
My main point was that at some point the current year will be bad enough that the next year will be better. This does not mean that it will be a good year, it just means that it was better than the previous year.
As for NAR, they are an association that represents sales people for a commodity. It is common sense that they will report on that commodity with a positive spin.
If they have taken on the role as the market experts, it is only because the media that reports on real estate is either lazy or clueless.
I think most educated readers of the WSJ realize that NAR is biased towards real estate appreciation in their predictions.
I pay very little attention to opionions when statistics are reported. Especially when the reporting party has a vested interest in what they are reporting on.
Even if they were completly free of any interest in the market, it is still impossible for them to predict the future. There are too many variables involved. If you could isolate all of the variables, they may be able to get a good sense of the markets direction. Economic analysis is done holding all other things equal. The fact is that all things are rarely if ever equal.
Their predictions are really nothing more than an educated guess. They have been wrong a lot over the past few years. Eventually the market will turn and they will be right. At that time they will probably choose to ignore their previous failures.
August 8, 2007 — 11:49 am
Robert Kerr says:
The NAR press releases have gone from reliable to funny to just plain pathetic in the span of 24 months.
It’s sad watching a professional organization willfully destroying its reputation with each new blue sky forecast in the face of overwhelming contrary evidence.
August 8, 2007 — 12:13 pm
Chris says:
So whats the NAR supposed to do? Say the market is horrible if you can don’t move? Its membership would love that message, you must consider the source. Its the NAR’s job to try to boost consumer confidence, or at the very least not hurt it. If the consumer doesn’t buy and sell property the NAR’s members are hurt.
Someone has to be positive about all this. I don’t care what the real estate market is doing, the NAR better be positive. If not what are my dues getting me?
August 8, 2007 — 1:22 pm
Indianapolis Real Estate says:
Yes, NAR “works” for and on behalf of Realtors but like Robert said they have completely devalued anything they have to say with their ridiculous claims of positive forecasts in such a gloomy market. A positive spin is one thing, lying and cherry-picking data is another. People are too smart and educated these days to blow smoke like this and have them believe it. Maybe NAR thinks if they come out with doom and gloom in their forecast it will become a self-fulfilling prophecy. What I know is that anyone with a brain pays no attention to what NAR has to say. Their opinion would garner much more respect if they actually told the truth, or something close to it.
August 8, 2007 — 1:54 pm
Charleston real estate blog says:
So we’ve gone from the laughable Lereah to the yuckable Yun. I heard annual dues are going up but perhaps eliminating the economist position at NAR might eliminate the need for an increase.
Brian, people have to want to move to those places you mention but instead they are moving to where the jobs are.
Michael, thanks, I love your posts.
August 8, 2007 — 2:32 pm
BR says:
It’s easy to point out bad indicators in anything. There were folks who had bad things to say when the dow reached 14k.
A few factors you did not mention that could push buyers to the ink & contract is that gas prices are falling, election cycle, interest rates falling, sales prices softening, ADOM’s up, increased new home inventories, and short sale investment opportunities. These factors are the things real estate upturns are made of. Had the feds increased rates I would agree 100%, but right now, I think I see a great 4th quarter.
With these factors, would you tell a buyer to wait 5mths?
August 8, 2007 — 3:08 pm
Michael Cook says:
BR,
This is why I write here. I just had a feeling there would be disagreement. You mention some interesting points, but I am not sure I can connect all of them to the consumer.
Gas prices??? I would find it very interesting if a future buyer said now that I am saving $.20 a gallon I can finally afford a house again.
On the other hand, election cycle, interest rates, and investment opportunities are very interesting points. I am not sure how many consumers are atune to election cycle effects, but they are certainly very real. As the elections gets closer and a clear front runner is established, consumers might feel better about their futures. Unforunately this time will fall in the natural down season of the real estate market. Still, it has a shot. Great point.
Interest rates are a different animal. Greg also pointed this out in a post today, but I fall on the opposite side. Looking at a longer trend, interest rates seem to be trending upward. Similarly, the divergence of jumbo rates and convential rates tells me that there is more repricing to come. Not sure if this will affect the future of convential rates, but I dont expect them to go through the floor. This also does not address the issue of tightened standards and higher loan fees. Finally, I think the removal of the other subprime and alt-a consumers will be more than enough to keep volume and prices down.
Investment opportunities also seem to be a stretch because of there is very little talk (aside from the NAR) of a real estate recovery on the horizon. Most investors are bottom feeders and there are very few experts suggesting the bottom is here. Experts have been suggesting that this is the beginning of major issues in the debt markets. Most investors that I know feel like they can wait for prices to seriously decline before they get in the game.
Great perspective, but I just dont see the things you mentioned turning the market around. Feel free; however, to call me on this if the market goes gangbusters in five months.
August 8, 2007 — 9:06 pm
Jeff Brown says:
Fine, well reasoned post Mike. Using NAR as your whipping post though is like Ali picking on an eighth grader. To be credible enough to knock down, the ‘post’ has to be made of something more impressive than balsa wood. 🙂
Assuming nothing of great import happening on the national security front, it’s entirely possible some markets will surprise the experts.
Brian’s midwest comment could actually happen – and the buyers would come mostly from the midwest itself. Kansas City has one of the highest per capita disposable incomes around. Given the atmosphere Brian writes of, that area could be like the rookie from ‘A’ ball who hits .300.
August 8, 2007 — 9:32 pm
BR says:
Almost anyone knows what factors play into ones mind when thinking about buying:
Cost of living:
gas
food (did you know the price of a gallon of milk has risen almost 38 cents since January in some regions?)
The home:
interest rates
sales prices
PAYMENT
There’s more, but these are the top issues that effect decisions. We call it consumer confidence, and when oil prices are surging, interest rates are surging, sales prices are surging, property taxes are surging- it weakins that very timid spender.
My connection is simple: What I am telling you is the opposite is happening, and yes, that 20cent reduction on the gas price sign IS a psychological motivator when the pundints are saying oil is expected to fall, interest rates slid a quarter point and the fed left them alone, home prices dipped 1/10 of a percent, these are kitchen table issues that play into the election cycle that lead to higher consumer confidence.
I think it’s funny that when reading your origional post, I found it hard to attatch most of your reasons the market looked gloomy to a kitchen table decision. most residential consumers could care less whos quarterly profits are up, in fact, it’s great news to hear they’re down- it’s time to cash in…
August 9, 2007 — 7:16 am
Michael Cook says:
BR,
This is a macro vs. micro view. Most of the things I mention are macro, while most of the things you mention are micro. From the macro perspective interest rates are the highest they have been in at least 5 years and leverage markets are seriously faltering. People hear and feel that because they dont track rates daily or monthly like people in the financial community, but rather only look at rates when they want to refinance or make a purhcase.
Additionally, when they attempt to get a loan and are told they do not qualify because they have slightly below average credit, regardless of how they feel, they arent getting a home. Similarly, the leverage finance issue goes directly to the economy. I wrote a post several days ago on how this relates to the broader market, so I will not rehash it again.
Overall, I think we are at a point in time where macro factors will prevent or significantly influence consumer behavior regardless of their micro thinking. Now access to capital has been limiting people’s behavior more so than their feeling about buying. Add to this the refinance boom of the previous years and you get the situation we are in now, lots of sellers and a declining amount of buyers. Whether they are not buying because they cant or dont want to is debatable, but I fall in the they cant.
Finally, I would also dispute your micro argument. Consumer sentiment has begun to falter and I would expect as negative news continues to propagate the media that it will certainly fall. Taking a slightly longer term view, many of the items you mentioned (gas and food) have experienced significant increases over the past year or so. I personally dont feel a month or even three month respite will push consumers back into the real estate market. Again, here I could be wrong, but even if I am on this front, the macro factors will prevent volume or sales from recovering by the end of the year.
August 9, 2007 — 11:02 am
Michael Cook says:
For those still following this thread, check out the Wall Street Journal article talking about how the turmoil in the credit market could affect consumers.
http://online.wsj.com/article/SB118659638858891955.html?mod=hps_us_whats_news
August 9, 2007 — 2:03 pm
BR says:
For all of our sakes I hope I win this debate come quarter 4 close. But if I am wrong and the sky does fall I’ll personally send you a brand new umbrella.
August 9, 2007 — 3:07 pm
Michael Cook says:
Thats one thing I can agree with BR because my stock portfolio took quite a hit today and I am trying to get a condo in New York City. Despite my gloom and doom advice, I am practicing the do what I say not what I do method. I will be sure to post my new address for that umbrella as a nice constellation if things get worse. If things do get better I will be sure to write a post about how big of a moron I am.
August 9, 2007 — 4:40 pm
Smithers says:
Michael, Did BR send you that umbrella?
October 25, 2007 — 10:51 pm
Michael Cook says:
You know he didnt, but I will be sure to remind him about that. Thanks.
October 26, 2007 — 5:23 pm