No Bottom in Sight – Iím Starting to Feel Sorry for Realtors
Not that I‚Äôve been counting, but over the last couple of years I‚Äôm sure I‚Äôve written more than 50 articles about why the housing market hasn‚Äôt hit any sort of bottom, and can‚Äôt possibly recover anytime soon.¬† And although some of what I‚Äôve written on the subject of housing has been quite serious, much has also been, well‚Ä¶ let‚Äôs just say its been on the snarky side.
Thinking back, I can remember writing about the National Association of Realtor‚Äôs Chief Eclownomist during the bubble years, David Lereah, who I believe a story had said was retiring‚Ä¶ or had retired after the housing bubble blew up in his face, and left the rest of us struggling to get the gum out of our collective hair.
I remember writing about him because I recall rhetorically posing the question:¬† Retired?¬† Can you be a retired liar?¬† How would anyone ever know?
So, while admittedly I‚Äôve made fun of the National Association of Realtors (‚ÄúNAR‚ÄĚ) and their ongoing stupidity for quite a while, I have to concede that lately it‚Äôs becoming less fun.¬† It‚Äôs starting to feel like making fun of some aging C-list television star from the 70s who shows up drunk to sit on a float at the Rose Bowl Parade, and clearly deserves more pity than ridicule.
I realize that the NAR is operating along the same lines as the National Typewriter Association would have been back in 1984‚Ä¶ struggling to hold onto its membership dues, and hoping against hope for a miracle.¬† Some of what I read in the articles inspired by NAR press releases these days only makes me want to give whoever said what was said‚Ä¶ a hug.
I suppose I should be grateful that the recent Facebook movie-turned-IPO debacle didn‚Äôt spawn a flock of Technorati-youth pumping up the media with stories of how VCs are once again funding deals scribbled on napkins that promise to create a ‚Äúnew economy,‚ÄĚ because if I had to endure that, in addition to the housing market madness that permeates the press these days, well‚Ä¶ the strain would be more than I could bear.
The real estate religion has got a huge industry supporting them too‚Ä¶ a entire slew of companies and organizations obviously left over from the 2003-2007 era.¬† They want the excitement of a booming housing market again sooooo badly that they‚Äôre capable of deluding themselves into near bliss based on the thinnest of headlines.¬† I mean, it‚Äôs almost like if one more home sells in Scottsdale than sold on the same day one year ago, they‚Äôre booking association conferences at The Phoenician and there‚Äôs a line at the leasing desk at every Mercedes, BMW and Lexus dealer in the valley.
From NBC Economy Watch‚Ä¶
‚Äú‚Ä¶ some analysts and pundits are rendering a stunningly cheery verdict on the housing market.¬†
The New York Times declared last month that, after several years of erroneously sunny pronouncements, there are concrete signs ‚Äúthe housing market is starting to recover.‚ÄĚ¬† The Wall Street Journal ventured even further with a story and tweet declaring, “the housing bust is over.”
And it‚Äôs not just the media, the industry and various industry associations that are willing to jump into the hyperbole of the moment with two left feet, the agents themselves are just as willing to grab their pom-poms, throw on a skirt and start yelling, ‚Äúgive me an ‚ÄėH‚Äô‚Ä¶‚ÄĚ
‚ÄúWe‚Äôre seeing dozens of offers on every listing, last week two Open Houses turned into riots and six people were killed rushing the door…‚ÄĚ
‚ÄúCanadian investors driving 18-wheelers packed with pallets of cash are competing to buy up the American Southwest before the Chinese figure out what‚Äôs going on‚Ä¶‚ÄĚ¬†
‚ÄúThere has never been a better time for first time buyers.¬† One young couple I‚Äôve been working with actually flipped three properties while still in their senior year‚Ä¶ they used the proceeds to pay off their student loans and still had enough left to put 50% down‚Ä¶‚ÄĚ
‚ÄúWe need more properties on the market‚Ä¶ nothing stays listed more than an hour.¬† I listed a home last week on Tuesday morning and by the time I drove back to my office ten minutes away, there were already three offers on my desk.¬† They‚Äôre all still trying to outbid each other‚Ä¶ the last bid is 300% over the listing price.¬† This is so fun‚Ä¶‚ÄĚ
(Okay, so I‚Äôm kidding‚Ä¶ sort of.)
So, this year started out depressed, as well it should have, but very quickly, and I do mean within weeks, a six-year downturn was transformed into a robust recovery based on‚Ä¶ well‚Ä¶ nothing really.¬† None of the fundamentals changed, that‚Äôs for sure‚Ä¶ unless getting worse counts.¬† But, no matter… everything was being described as on its way back.
And then‚Ä¶ June happened.
According to Reuters on July 25, 2012‚Ä¶
‚ÄúU.S. new home sales post biggest drop in over a year.
New U.S. single-family home sales in June fell by the most in more than a year and prices resumed their downward trend, suggesting a set back for the budding housing market recovery.¬† The Commerce Department said on Wednesday sales tumbled 8.4 percent‚Ä¶‚ÄĚ
Nonetheless, perhaps because optimism is a hard thing of which to let go, later in that article it said‚Ä¶
‚ÄúStill, housing remains the bright spot in the economy.¬† Sectors such as manufacturing have slowed significantly in recent months amid fears of tighter U.S. fiscal policy early next year and a lingering debt crisis in Europe.‚ÄĚ
And that sentence is even more remarkable when viewed next to the sentences that followed:
‚ÄúHousing continues to be challenged by high unemployment and stringent lending conditions, which are make it tough for many Americans to own a home.
Loan applications to buy homes fell last week, despite record-low mortgage rates, a separate report from the Mortgage Bankers Association showed.
Last month, the median price of a new home fell 3.2 percent from a year ago, adding to the report’s weak tenor.
The drop in new home sales last month, coming on the heels of a decline in sales of previously owned homes, underscored the uneven nature of the housing market recovery.
The inventory of new homes on the market increased 0.7 percent to 144,000 in June, but remained near record lows.
New home sales last month dragged down by a 60 percent drop in the Northeast and an 8.6 percent fall in the South.‚ÄĚ
Yet, even in light of those factors housing is supposed to be characterized as ‚Äúthe bright spot in the economy?‚ÄĚ¬† Well, okay then‚Ä¶ if you say so.¬† You have to be careful reading stuff like this, because just like when eating ice cream… if you‚Äôre not, you can get a brain freeze.
And just what was it that we were supposed to be so happy about until June hit the wall?¬† Here‚Äôs what the Reuters article says it was…
‚ÄúThe housing market had been improving in recent months, with new home construction in June hitting its highest level since October 2008 and confidence among home builders this month touching its best level in more than 5 years.‚ÄĚ
First of all, aren‚Äôt ‚Äúnew home construction‚ÄĚ and ‚Äúconfidence among homebuilders‚ÄĚ at least closely related‚Ä¶ if not the exact same thing?¬† And why should ‚Äúbuilder confidence‚ÄĚ be an indication that the housing market is in a recovery?¬† Builders being confident could be due to a lot of things‚Ä¶ and besides maybe it‚Äôs overconfidence.
The same article had one reasonable sentence from Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.¬† He said‚Ä¶
“Housing is still far from healed, with the last few months showing decelerating jobs growth.¬† It is difficult to get behind the idea that we have any meaningful momentum in housing.”
Well, personally I agree with Tom, but I‚Äôm learning that his second sentence, although it should be true‚Ä¶ simply isn‚Äôt.¬† Clearly, many people have no trouble whatsoever getting behind the idea that we have ‚Äúmeaningful momentum in housing.‚ÄĚ¬† In fact, they‚Äôve been ready and willing to get behind that idea every few months, even as property values have steadily fallen and foreclosures have steadily increased.
So, here we are yet again‚Ä¶ housing, which was on its way to recovery during most of the last six months, seems to entering its annual second quarter revision to recession.¬† Here‚Äôs US News and World Report on July 27th‚Ä¶ under the headline:
‚ÄúJust when you thought the housing market might be on the mend, news that foreclosure activity is on the rise across the country reopens a painful wound.‚ÄĚ
I‚Äôll tell you what‚Äôs painful‚Ä¶ intermittent exposure to the level of stupidity required to write that headline and opening paragraph.¬† Negative equity MIGHT make the foreclosure crisis worse?¬† Yeah, and it might not?
The foreclosure crisis is being caused by the negative equity, you brainless sycophants at US News, haven‚Äôt you learned even that much about what‚Äôs going on around you?¬† It‚Äôs just inexcusable and embarrassing, and not only for the magazine itself, but for the real estate industry participants that obviously made this story possible.
The article goes on to say that almost 60 percent of the nation’s largest metropolitan areas saw increased foreclosure activity in the first half of 2012, which should not be news to anyone that has not been incarcerated in a foreign prison for the last six months.¬† And then it says‚Ä¶
‚ÄúAs if that weren’t bad enough, things could get a lot worse thanks to the gigantic negative equity problem, which has pushed many homeowners to the brink of foreclosure and put immense pressure on household finances.
Loans currently in the foreclosure process amount to about $45 billion in negative equity, according to RealtyTrac CEO Brandon Moore. But that figure balloons to $1.2 trillion when you add in the more than 12 million underwater mortgages that haven’t started the foreclosure process‚ÄĒ26 times the negative equity currently associated with troubled loans.
40 million Americans choose to pay a mortgage every month and even if just a small fraction of those choose not to do so, things can compound and get much worse pretty quickly,” Moore says.
For the time being, the vast majority of those 12 million or so Americans with underwater mortgages continue to make their monthly payments, but the longer the housing market and economy stay stuck in the mud, the more likely it is they could run into trouble.‚ÄĚ
And there you have it, ladies and gentlemen‚Ä¶ the crux of the matter.
So, RealtyTrac says there are now 12 million Americans with underwater mortgages, and although I couldn‚Äôt tell you what the number actually is, I can tell you that it‚Äôs more than the 12 million quoted.¬† Why?¬† It‚Äôs simple.
First of all, the reported numbers are all over the place, but let‚Äôs just say there are a couple million people in foreclosure now.¬† Well, the impact of those foreclosures as they occur will be that home values will fall further, so there‚Äôll be more negative equity right there.¬† Which will lead to more foreclosures, and hence more negative equity.¬† Reduced consumer spending along the way and presto‚Ä¶ higher unemployment‚Ä¶ and we‚Äôre back to the foreclosures.
And if you re-read the last sentence in the quotes just above, you’ll see what it’s really saying.¬† You see, the longer people are in a negative equity position, the more likely it becomes that they get hit with a “life event,” such as divorce, illness/injury, or job loss.¬† And when any of those things hits you at the wrong moment… well, you’re a foreclosure waiting to happen.¬† If you were in an equity position when one of those things occurred you might sell the home or maybe borrow against it to get through the crisis, but if you’re underwater, you’re fairly likely to become a foreclosure crisis statistic.
State budget deficits, that already mean fewer jobs and higher taxes, aren‚Äôt going to help anything, and neither is the cold hard reality of the aging boomers‚Ä¶ or the uber-tight credit markets.¬† The delay in family formation that results from student loan debt isn‚Äôt going to make first time buyer happen any faster than usual, and neither is de-leveraging trillions in debt, in general.
And Lord only knows the impact a broken EU will have on things in the next few years.¬† All I do know is that it will happen and it won‚Äôt be a positive thing.¬† Feel free to take it from there.
As I‚Äôve said before, these things are not possibilities‚Ä¶ they are all that can happen.
Don‚Äôt you see what they‚Äôve done this time?¬† Even if they could come up with a new form of securitization that would make capital run like it‚Äôs leaving Greek banks, I don‚Äôt think we‚Äôd borrow and spend it again like we have in the past, do you?¬† No, they let this one cut us too deep and for too long.¬† We‚Äôve changed already and it‚Äôs far from over.¬† Mail me a check for $25,000 and I‚Äôll likely save every penny of it‚Ä¶ maybe payoff a credit card, but that would be it.
So, there will be no recovery in the housing markets, they are down and staying down.¬† The low-end homes in some areas may have bottomed out, but that‚Äôs only because those homes are selling below their replacement cost and at the lowest interest rates in history.
A couple more paragraphs from US News and one other and I‚Äôll wrap this up‚Ä¶ hopefully for the last time.
‚ÄúBut the government’s intervention into the foreclosure process might actually be doing more harm than good, according to Moore. Though improper foreclosure practices have been scrutinized and now more heavily regulated, those actions do little to address the potential the negative equity problem poses to unleash a new, perhaps more devastating flood of foreclosures.‚ÄĚ
Oh, yes‚Ä¶ by all means, don‚Äôt stop the fraudulent practices, because they were going swimmingly.¬† Just ask a judge in Florida.¬† You see, we‚Äôll consider almost anything if it will make housing come back like we remember it.
“This is an issue that’s going to get bigger before it gets smaller,” Moore told CNBC in a recent interview.¬† “My concern is that I don’t hear anybody else talking about it and I’m seeing the problem go unaddressed by the big banks [and] by the presidential candidates.”
I think I‚Äôve been insulted, along with many of my blogging peers‚Ä¶ lots of us have been talking about it for‚Ä¶ oh, I don‚Äôt know‚Ä¶ at least four years.¬† But, that‚Äôs not what‚Äôs bothering you is it?
No, Mr. Moore‚Ä¶ you‚Äôre starting to freak out because you‚Äôve recently realized that the whole thing is a non-issue as far as Washington D.C. is concerned, and that is scaring you big time.¬† I wonder how many Realtors are studying for their insurance licenses.¬† That‚Äôs what‚Äôs coming, you know‚Ä¶ right around the corner.
I‚Äôll close with a chart from good old Dr. Housing Bubble, the best source for real real estate data for Southern California, where we still have a long way to fall.¬† The rows highlighted in blue are the areas in which at least 10 homes sold in June 2012.
¬†Here are a few of his highlights:
- A 23 percent year-over-year fall in the prestigious 90210 zip code
- Mid-tier and upper-tier markets price declines are still very much likely to occur as demonstrated by the data above.
- Even a place like Calabasas saw their median price fall by 40 percent year-over-year with 15 sales.¬† This is happening in what is the hottest summer for the housing market in a few years.¬† Why are these above zip codes seeing sizeable price cuts?
Good question.¬† Can you guess at what the answer is?¬† I‚Äôll give you a hint.¬† You know how Realtors have been talking about a lot of people paying cash for homes lately?¬† Well, there actually aren‚Äôt many of those people.¬† It‚Äôs the loans, silly‚Ä¶ there aren‚Äôt any‚Ä¶ or many.
Here‚Äôs how the Dr. phrased it‚Ä¶
‚Äú‚Ä¶ the jumbo loan market is still constrained.¬† Most of the Fed action and MBS buying is happening with conventional loans.¬† Even today, the only game in town is the government.¬† FHA insured loans are the number one player for getting first time buyers in with a tiny 3.5 percent down payment.‚ÄĚ
And Dr. Housing Bubble also points out that we‚Äôre likely bottoming out on the interest rates thing‚Ä¶ not that it makes any difference.¬† Yes, Bernanke can QE3 to his heart‚Äôs delight, but the only outcomes will be a temporarily giddy stock market followed by rich people getting richer.
And he shows some fabulous data on Japan, for those of you who believe in the Interest Rate God‚Ä¶ Japan has had interest rates at right around 3 percent since the early 1990s, and home prices have done this:
So, that‚Äôs hopefully the last time I‚Äôll have to do this‚Ä¶ at least until 2013.¬† I don‚Äôt think there‚Äôs time for another faux recovery in the housing markets between now and the election in November.¬† One never knows, of course, but I may sit the next one out anyway, and just watch the NAR and others embarrass themselves‚Ä¶ again.