The Good the Bad and the Ugly

Another interesting phenomenon that seems to be occurring at this point in the housing cycle is the inability of some to accept the bad with the good.

It seems that some of the real estate industry’s best cheerleaders have ingrained in their minds a certain number of half-truths and either intentionally, or as a side-effect of being deluded by the mania, continue to spout them off at any opportunity.

Sometimes these bits of deception can be fairly obvious, for example, David Lereah’s apparent inability to ever forecast a real estate market that depreciates.

Other times, the assertions can be a bit tricky as they hold some merit but quickly lose value upon closer inspection.

Here are just a few:

1. The housing market is NOT like the stock market.

David Lereah (Chief Economist for the National Association of realtors):

“If the house down the street is up for $50,000, but sells for $450,000, does that mean that the next-door neighbor's going to sell their house the next day because they're nervous?”

Alan Greenspan (Former Federal Reserve Chief):

"Any analogy to stock market pricing behavior and bubbles is a rather larges stretch,"

This assertion seems to be made to substantiate the stability (or lack of volatility) of the housing market versus the stock market. On the face of it, it seems plainly true. People don’t (and can’t) just trade housing like stocks.

But what does this really say about price stability?

It’s important to remember that prices are set by the participants that ARE actually buying and selling not by the one sitting on the sidelines.

This is especially true for real estate where valuations are “fuzzy” and are generally based solely on comparing (i.e. “comps”) a particular property to others that have sold recently in the same neighborhood. In a down real estate market, a small number of transactions can force prices lower as sellers compete for fewer buyers.

This is why we are now seeing an increasing number of reports of neighbors getting into ugly squabbles with each other as they disagree over listing prices. All sales reflect on all other properties in the same neighborhood.

What is more, Sellers all have different interests, some can try to hold out for the top price, others want to cut and run but given the relatively low volume of transactions and the standard of “comping”, prices can be brought down dramatically while owners who don’t sell can only look on.

So, it is true that as the housing market continues to slow, some home owners can turn a blind eye and continue to live happily in there homes without giving it a second thought, but does that mean the housing market is less volatile than the stock market?

2. There is NO national housing market.

Michael Youngblood (Veteran Analyst of Friedman Billings Ramsey & Co.):

“The housing bubble argument is overblown, because there is no national housing market, so there can't be a national house-price bubble. However, there are bubbles in 75 of the 379 markets studied.”

Alan Greenspan:

"There is no national housing market in the United States. Local conditions dominate, even though mortgage interest rates are similar throughout the country. Home prices in Portland, Maine, do not arbitrage those in Portland, Ore. Thus, any bubbles that might occur would tend to be local, not national, in scope."

This assertion seems to be made generally to allay any fears that a deflating housing bubble might take the whole of the economy with it.

In most other eras, this statement seems to hold muster as there has apparently not been a housing correction that affected the whole of the United States since the Great Depression.

All the other well known housing corrections, such as Florida real estate bubble of the 1920’s and the east and west coast corrections of the late 1980’s were generally localized to specific markets.

In fact, in many parts of the country, the local real estate markets are considered to be “non-cyclical” as they have historically not shown the typical boom and bust pattern so well known to the coastal metro markets.

But what does this really say about the current housing bubble?

By many metrics, this current run-up is more exaggerated than any in history. In many major metro markets it’s nearing ten years since prices dramatically diverged from such basic fundamental factors as wages, rents and building costs.

By many industry insiders own admission, the real estate market surged in the “low interest” environment following the dot-com crash, and propped up the economy, creating jobs and wealth and thus preventing an even deeper recession.

It seems that almost every major metropolitan region of the United States, and frankly most of the rest of the industrialized world has experienced a similar dramatic run-up in housing prices over this period.

Are we to think that if all these “local” bubbles were to deflate simultaneously the economy would be able to easily absorb the fallout?

Additionally, the National Association of Realtors relies heavily on national housing numbers as a means establishing the state of the housing market in their periodic reports. Granted, they also produce regional numbers (east, west, central, south) but the national numbers are generally the “top line” numbers picked up and reported by the news media.

It seems obvious to most that changes in the national median home price might have little in connection with changes in the median price of one of the US’s more hyper-inflated cities such as Boston or San Francisco.

Why would industry insiders play both sides of the picture? That is, assert that there is NO national market when addressing the possibility of a housing bubble, but rely on national numbers when reporting on the status of the housing market.

3. The historic run-up in the housing market propped up the economy during the 2001 – 2002 recession, but won’t drive it in to recession as it deflates.

David Lereah:

“The recent U.S. real estate boom has made money for an incredible number of households in America. In fact, in 2001 and 2002, many economists (including me) claimed that real estate was the only sector propping up the economy and keeping it from full-blown free fall.”

“During the first four years of this decade (2000-2004), home owners and investors in residential real estate collectively enjoyed a $4.6 trillion increase in the value of their properties!”

“housing contributed to 68 percent of economic growth last year, which is just an incredible statistic. So can it support and prop up the economy?”

This one just seems to be an exercise in wishful thinking as the numbers are truly astounding no matter how you look at them.

Housing and related activities in the form of home construction, real estate transactions, banking, and other services accounted for 20% of GDP for every year since 2001.

As the pace of the housing market continues to slow, many industries in the sector will hit upon hard times. Home construction has already taken a significant beating that has yet to fully work its way through the general economy. Stories of stalled projects, massive cancellations, unpaid construction workers, layoffs etc. are just starting to emerge.

Only time will tell what the overall effect of the housing slowdown will be but it’s probably best, as a rule, to accept some downs with the ups.