Paper Economy - A US Real Estate Bubble Blog

Friday, December 29, 2006

Puppet Prognostications

In what has to be one of the most ridiculous displays of a shameless “party line” style coordinated spin, the Massachusetts Association of Realtors (MAR) has decided to simply “cop” the exact lingo put forth by its national counterpart, the National Association of Realtors (NAR), when addressing the outlook for housing.

Examine the following statements found in two separate “existing home sales” reports (one for the nation by NAR, the other for Massachusetts by MAR) released Thursday:

NAR President Pat Vredevoogd Combs:

“Mortgage interest rates are the lowest they’ve been since January… This is increasing buying power at the same time that sellers are showing a willingness to negotiate price and terms. Combined with a plentiful supply of homes on the market, there’s a window for buyers now…”

MAR President David Wluka:

"With home prices leveling, interest rates remaining low, inventory still plentiful and more sellers accepting market-based pricing, Bay State homebuyers have a special window of opportunity right now,”

If that wasn’t ridiculous enough, Wluka adds this additional scare tactic directed at first time home buyers:

“We just don’t know how long the window will stay open, with factors remaining so favorable. For anyone trying to time the market, the waiting game may be a big mistake.”

Hopefully MAR’s unabashed use of association “talking points” to coax and even scare buyers back into a market that is exhibiting some of the worst housing numbers in the country will show them for being self serving and further discredit an institution that long ago traded its integrity for ephemeral gains.

As with last month, its important to note that the impact of the housing slowdown has been so significant that Massachusetts is now poised for the greatest yearly sales drop of single family homes in at least the 17 years that sales have been charted.

November's 12.6% sales drop brings the current years total of single family home sales to only 38,539, well below the 45,385 total for the first 11 months 2005.

Review the following chart:


As you can see, Massachusetts is headed for roughly 41,689 total single family home sales for 2006 and that’s with a fairly optimistic projection of only a 10% sales decline for December.

The following chart demonstrates what this drop off would look like in the context of single family home sales since 1990. Click on it for a larger, more readable version.


As in months past, be on the lookout for the inflation adjusted charts produced by BostonBubble.com for an even more accurate "real" view of the current market trend.

Key Statistics for November 2006

  • Single Family Sales down 12.6% as compared to November 2005
  • Single Family Median Price down 4.0% as compared to November 2005
  • Condo Sales down 13.6% as compared to November 2005
  • Condo Median Price up 1.6% as compared to November 2005
  • Single Family average “Days on Market” now stands at 130 days in November as compared to 95 days for November 2005
  • Condo average “Days on Market” now stands at 121 days in November as compared to 85 days for November 2005
  • Inventory of single family homes have risen for 21 consecutive months and now stands at 35,254 units listed on the market through MLS. This represents 10.9 months of supply.
  • Inventory of condos now stands at 17,851 units listed on the market through MLS. This represents 12.7 months of supply.

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Thursday, December 28, 2006

Slapping Lipstick on the Pig

Today, the National Association of Realtors released its monthly “Existing Home Sales” report for November along with a stepped-up attempt to spin a “market bottom” message.

As David Lereah puts it:

“It looks like we may have reached the low point for the current cycle in September… We’ve entered a more sustainable period of home sales now…”

Furthermore, Lereah has concocted a sketchy estimate of price declines effect on buyers by adding:

“For every 1 percent drop in home prices, we project an additional 50,000 buyers are drawn into the market,”

Unfortunately, there’s no information disclosing how Lereah has calculated this projection but its presence seems to be attempt to not only spin a positive message from the current and impending price slide but also to remind buyers that they should consider jumping in before a possible rush.

Additionally, NAR President Pat Vredevoogd Combs added:

“…it’s the first time since August of 2005 that interest rates are lower than a year earlier… This is increasing buying power at the same time that sellers are showing a willingness to negotiate price and terms. Combined with a plentiful supply of homes on the market, there’s a window for buyers now with conditions that we haven’t seen prior to the beginning of the housing boom in 2001.”

In reality though, November not only marked the eighth straight month of sales declines but also one of the greatest drops to median home prices on record easily beating a prior record set in September as well as just falling short of the GREATEST SINGLE MONTH DROP TO MEDIAN PRICES SET IN OCTOBER.

Additionally, with the exception of median condo prices for the Northeast and the Midwest regions, EVERY price and sales indicator was DOWN and EVERY inventory and supply indicator was UP, presenting further evidence that the housing market is declining dramatically and thoroughly across every region of the US.

There should be little doubt now that the housing market is experiencing a significant correction even when looking at a national scope.

The following shows the data form all the NAR reports released today consolidated into one view:

National Statistics (Year-Over-Year as compared to November 2005)

  • Median price of all existing homes declined by 3.1%
  • Median price of existing single family homes declined by 3.6%
  • Median price of existing condos went unchanged.
  • Sales of all existing homes (single family, condo, etc.) declined 10.7%
  • Sales of existing single family homes declined 10.2%
  • Sales of existing condos declined 13.6%
  • Inventory for all existing homes increased 30.6% to 3,820,000
  • Inventory for single family homes increased 29.6% to 3,240,000
  • Inventory for condos increased 36.8% to 580,000
  • The number of months supply for all existing homes increased by 46.0% to 7.3 months.
  • The number of months supply for all existing single family homes increased by 42.9% to 7.0 months.
  • The number of months supply for all existing condos increased by 58.6% to 9.2 months.

Regional Statistics (Year-Over-Year as compared to November 2005)

Northeast

  • Median price of all existing homes declined by 2.2%
  • Median price of single family homes declined by 4.5%
  • Median price of condos increased 2.3%
  • Sales of existing single family homes declined 2.5%
  • Sales of existing condos declined 8.7%

West

  • Median price of all existing homes declined by 0.8%
  • Median price of single family homes declined by 0.1%
  • Median price of condos declined 7.9%
  • Sales of existing single family homes declined 17.1%
  • Sales of existing condos declined 16.9%

South

  • Median price of all existing homes declined by 2.9%
  • Median price of single family homes declined by 6.7%
  • Median price of condos declined 5.1%
  • Sales of existing single family homes declined 9.2%
  • Sales of existing condos declined 18.9%
Midwest

  • Median price of all existing homes declined by 4.6%
  • Median price of single family homes declined by 2.2%
  • Median price of condos increased 6.0%
  • Sales of existing single family homes declined 9.4%
  • Sales of existing condos declined 12.4%

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Wednesday, December 27, 2006

New Home Sales: Northeast Meltdown Continues!

Today, the U.S. Census Department released its monthly “New Residential Home Sales” report for November showing continued weakness to the nation’s new home market most notably in the Northeast region where sales were down an astounding 42.4% as compared to November 2005.

Generally reported as showing “strong” signs of market “stabilization”, the report does, in fact, show an increase to the median and average price for a new home but as we all are well aware, the significant incentives that home builders have been offering are NOT reflected in this report so the price movement is a bit of a “red herring”.

Additionally, the report showed significant increases to inventory and months supply on a year-over-year basis.

Look at the following summary of today’s report:

National

  • The median price for a new home was up 5.4% as compared to November 2005.
  • New home sales were down 15.3% as compared to November 2005.
  • The inventory of new homes for sale increased 9.0% as compared to November 2005.
  • The number of months’ supply of the new homes has increased 28.6% as compared to November 2005.
Regional

  • In the Northeast, new home sales were down 42.4% as compared to November 2005.
  • In the West, new home sales were down 9.0% as compared to November 2005.
  • In the South, new home sales were down 19.2% as compared to November 2005.
  • In the Midwest, new home sales were up 1.2% as compared to November 2005.



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Monday, December 25, 2006

How the Bear Popped the Bubble!


Every Bull
Down in Bull-ville
Liked the Housing Bubble a lot...

But the Bear,
Who lived just South of Bull-ville
Did NOT!

The Bear hated the Bubble!
He blamed the Fed, rates and lending!
But the Bulls didn't care, they just kept right on spending.
It could be that Bulls were just very trendy.
It could be, perhaps, they were whipped into a speculative frenzy.
But I think the most likely reason of all
May have been that their noggins were two sizes too small.

But,
Whatever the reason,
Their heads or the craze,
They continued to spend, for days upon days.
And the Bear, staring up from his cave down below
Sensed the limit had been reached, things were going to BLOW!
For he knew every Bull up in Bull-ville that night
Had stretched every dollar, squeezed their finances tight.

"And they're going back for more!" he could see to his dismay
"This just cannot last, not for one more day!"
Then he ran to his closet to fetch a loud-speaker
"I MUST warn them all, before they get in any deeper!"
For, the Bear knew...

...All the Bull girls and boys
Who had been flipping, and borrowing and buying up toys
Were all skirting the edge, sitting perfectly poised
For collapse that once realized... oh, the noise! Noise! Noise! Noise!

Then the Bulls, young and old, will be in a terrible fix.
And they'd have to hunker down and stop all their mad tricks!
And the economy... oh what a mighty deep-six!
It will sink faster than boat load of bricks!

And THEN
Something would happen that he liked least of all!
Every Bull up in Bull-ville, the tall and the small,
Would all start to panic, when home prices stop swelling.
They'd reverse the craze… they'll all begin selling!

They'd sell! And they'd sell!
AND they'd SELL! SELL! SELL! SELL!
And the more the Bear thought of the Bull-Panicky-Sell
The more the Bear thought "This is NOT going to end well!"
"Why for almost a decade I've watched the bubble inflate!
I MUST warn them now!
Before it's TOO LATE!"

THEN
He mounted the loud-speaker
To the top of his car
And a siren with flood lights
That were blazing like stars

Then the Bear said, "I’m off!"
And he drove forty blocks
Toward the homes that the Bulls
Had been trading like stocks.

All their windows were bright. Flat panel glow filled the air.
All the Bulls were all carrying-on without even a care
When he came to a stop in the Bull-ville town square.
"This is the best place," the Bear thought as he reached
For the microphone that he would use when he preached.

THEN
Click! On went the siren, the lights and the speaker!
Then the Bear started yelling! "Things are looking bleaker and bleaker!
You all must come out, listen to what I have to say
Give me a chance to appeal to your senses today!"

Then one Bull emerged through his front door.
Then another came out, and some more... then still more.
Soon the square was abuzz with a large crowd of Bulls
All grumbling and muttering about association rules.

But the Bear went on "You are all in grave trouble!
I have come here to warn you of the Great Housing Bubble!
You see it's been inflating, stretching thinner and thinner..
If you don't stop now, there will be almost no winners!"

"This is the greatest Ponzi-scheme ever devised
Where all of you have been convinced to not question your eyes.
Just go right on speculating... pushing prices up higher
And assume there will always be a greater fool buyer!"

"But Things are now not looking so hot...
Home sales are plunging, The builders are shot!
Inventory is rising, there is no place to hide.
Soon you will be in for a vicious price slide!"

Then he clicked off the speaker and he heard not a sound.
The Bulls all looked puzzled, just standing around.
Then one Bull, an Economist named David Lereah (Pronounced Le-ray)
Stood up and he shouted, "I have something to say!"

"You are a very foolish Bear!" He said with a sigh
"This is a GREAT time to SELL or to BUY!
Yes prices are moderating, that much is sure true.
But that is a HEALTHY sign that the market will pull right on through.
I've seen all the numbers, I release them you know...
And what I've seen is STABILIZATION as we level off at the low"

"So pack up your things and head off down the hill!
We don't need your type of hype in Bull-ville!"

So the Bear did as he was told, all downhearted and grim.
He silently opened his car door and stepped in.
And he backed down the hill and then crawled into his cave.
And he thought about the Bull-ville that he failed to save.

But just then the Bear heard a horrible sound!
A massive explosion that sent shock waves through the ground!
As he looked from his window, he could not believe either eye...
The whole of Bull-ville had been blown to the sky!

And what happened then...?
Well, in Bear-ville they say
That although he was sad...
His pride grew three sizes that day!
And the minute his heart stopped feeling so blue
He published a book title "What To Do and Not To Do If a Bubble Finds You!"




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Saturday, December 23, 2006

BNN – MUST SEE BUBBLE TV!

Twenty new bubbly videos were added to BNN today and some are really a must see.

First, there are quirky interviews with the home builders Robert Toll and Ara K. Hovnanian on the outlook for 2007 as well as their recent optimistic statements regarding housing setting a bottom.

There are several fairly humorous CNBC segments covering the most recent release of the Census Departments “New Construction Report” where the CNBC staff seemingly struggles with the idea that the bump up in housing starts from October to November means very little once put in proper context of the accelerating year-over-year declines to both housing starts and permit authorizations.

There is an excellent two part interview with Professor Susan Wachter of the Wharton business school.

Another CNBC excerpt pits Doug Duncan, Chief Economist with the Mortgage Bankers Association against Douglas Kass, analyst with SeaBreeze Partners Management.

Kass offers excellent analysis of why industry groups like the NAR and the MBA are incapable of seeing where this housing cycle is going as they cling to the traditional measures of strong economy and low interest rates while ignoring the overwhelming evidence that Fed induced easy lending and speculative binge of the last five years has left the nations housing market and economy in a significant bind.

Finally, a slightly disturbing SQARE OFF between Ellen Schloemer, Director of Research of the Center for Responsible Lending and Michael Youngblood of Friedman Billings Ramsey over Ellen’s the recently published study that suggests that 1 in 5 sub-prime mortgages could end up in foreclosure in the next few years.

Youngblood, who has on other occasions showed himself to be incapable of accepting even the possibility that the nations housing market experienced a bubble that is now transitioning to full pop, seems to be nervous, sweating, and even shaky with anger over the reports findings going on full attack against what he seems to see as an almost blasphemous analysis by Schloemer.

This brings BNN to a grand total of over 10 hours of continuous play footage of the Great American Housing Bubble!

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Friday, December 22, 2006

Shiller’s Failed Bubble Scenario?

The National Association of Realtors (NAR) recently published their list of “Real Estate’s 25 Most Influential Thought Leaders” in which they generally heaped excessive accolades on an assortment of real estate industry insiders.

Certainly, there is no harm done in taking note of the “contributions” made by a few individuals and the “thought leader” jargon seems pretty fitting for an industry so steeped in sales and marketing but what is interesting is that in addition to the main list of 25, NAR has included 15 other people who’ve “had an impact” in 2006.

This list is a little different, including such names as Ben Bernanke, The US Department of Justice, and the Participatory Consumer.

So, it appears that, to NAR, there is no venue or press release that is immune from a cleverly positioned talking point.

Nothing demonstrates that better than the inclusion of Professor Robert Shiller in the list of 15 and the accompanying assessment of his contributions.

Why was Robert Shiller included in the list?

According to NAR, Shiller “Got big media coverage equating rising real estate prices with the tech bubble, but we haven’t heard the pop yet.”

Additionally, the NAR assessment of Shiller adds:

“Robert Shiller scored instant media celebrity when his 2000 book, Irrational Exuberance, predicted the tech bubble’s explosion just weeks before the fact. Four years later, when he tried to apply the same principles to the real estate boom, he found out that all investments don’t behave alike. Shiller contended that rising home prices weren’t based in the fundamentals of population growth and supply and demand; they were bubbles, destined to pop. To the contrary, NAR economists predicted that market slowdowns would largely be gradual—a trend that’s playing out today. Shiller’s failed bubble scenario demonstrates that sometimes even smart guys get it wrong

So, it seems that NAR has already concluded that Shiller’s analysis, indicating that much of the nations housing market had gotten excessively overheated and could now be in for a protracted period of decline, is wrong.

That’s some fairly confident sentiment, especially coming from an organization whose Chief Economist clearly stated in May 2005 (on NPR’s Dian Rhem radio show) that 2006 would NOT see a slowdown in the housing market.

So there you have it.

On one hand you have a blatantly self interested industry group that has consistently and in fact purposely been unable to accurately forecast the direction of the housing market instead favoring the propagandist “Pinocchio-economic” analysis that they desperately hope might re-ignite the insane speculative frenzy that served them so well during the last decade.

On the other, you have Professor Shiller who, although you can choose to agree or disagree with his analysis on housing, I would challenge anyone to find ONE example where there is even a shred of evidence that he acted in his own self interest when addressing his outlook on housing and the economy.

This includes the several televised events that pit Shiller directly against the NARs David Lereah who in all cases resorted to obnoxious spin-mistering (remember the Chicken Little slides and comments etc. as well as last summers CNBC town hall meeting) while Shiller, ever patient, confident and academic, put forth his analysis without even the slightest reprisal.

Once again, NAR has shown itself to be a foolish and despicable outfit more inclined to attempt to malign the reputation of a legitimate “thought leader” than to ever challenge itself to address its own obvious failings.


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Thursday, December 21, 2006

GDP Under Pressure

Today, the Bureau of Economic Analysis (BEA) and the Commerce Department jointly released their final revision to 3rd Quarter GDP showing the most severe decline to residential fixed investment seen in over 15 years.

As noted before, “Residential Fixed Investment” encompasses all investments to fixed residential structures including expenditures allocated for purchase, construction or improvements to new or existing single or mulit-family dwellings.

Many bullish economists and analysts had wrongly anticipated that the dramatic fall-off in residential investment seen in the preliminary GDP reports would inevitably be revised lower in the final version thus lessening its impact to overall GDP.

As we can now very clearly see, not only was the decline in residential investment NOT revised lower, but it has been revised UP twice since the preliminary release in October.

Ironically, this inability to clearly see the significance of the impact of the housing decline on the statistics of a GDP report may in fact allude to the very same ineptness that prevents bullish economists and analysts from seeing the considerable “spillover” effects this decline will have on the wider economy.

To put the decline to residential investment in better perspective, consider the fact that it chopped 1.20% from overall GDP, a value greater than the 1.14% contribution of all domestic services rendered in the quarter (think electricity, gas, transportation, medical care, housing services, etc.) as well as easily outstripping both the 1.01% contribution from all fixed non-residential investment (think all commercial structures, all investments in business equipment including computers software and transportation equipment) as well as the 1.00% reduction coming from all imports of foreign goods and services (i.e. imported goods and services are always subtracted from GDP).

The following chart (click for larger versions) shows the percentage change to real residential fixed investment on a quarterly year-over-year basis since Q1 2003.



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Wednesday, December 20, 2006

A Closer Look at New Construction Activity

In an attempt to shed a little more light on the severity of the decline to new construction activity, I have produced a series of year-over-year charts that easily dispels any notion of a bottom having been set.

Each chart shows the percentage change to monthly construction activity since January 2000 on a year-over-year comparison basis.

The charts are broken out by permit authorizations and housing starts and further divided by national and regional areas.

Notice that for both permit authorizations and housing starts, many charts show that declining construction activity is actually accelerating with indicators currently sitting at the lows of the cycle.

Additionally, regions that aren’t currently sitting at the lows of the cycle are generally sitting very close to cycle lows set within the last few months.

Furthermore, most charts show a marked change to the downside at or near January 2006 followed by consistently accelerating declines for the remainder of the year.

Note that both the Northeast and Midwest regions posted significant declines to permit authorization activity in 2005 and 2006.

This may be an early indication of what might materialize for the regional data in 2007 as multi-year declines continue to set deeper lows rather then flatten out as some real estate optimists are predicting.

All data used to generate the charts is freely available at the Census Department's "New Residential Construction" website.

Click on any of the following charts to see a larger, more readable version.

Permit Authorizations







Housing Starts







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Tuesday, December 19, 2006

Today’s New Construction Report

If ever there was a clear signal indicating that the nations housing markets are neither "stabilizing" nor “dancing on the bottom” as some in the residential real estate industry would have you believe it’s today’s “New Residential Construction Report”.

Continuing the consistent and ever worsening deterioration of the US housing market, today’s report provides unambiguous evidence that residential real estate is experiencing a protracted and atrocious decline.

Popularly (and negligently) reported as showing a “rebound” in housing starts from October to November, a little closer inspection of the numbers will provide more than enough evidence to suggest that holding an optimistic “soft landing” outlook is misguided to say the least.

Particularly interesting is that this months report show that every region is now recording high double digit year over year declines to housing permits.

Additionally, housing completions, a lagging indicator that measures the number of new homes that have actually just been completed, is now showing some significant declines which will no doubt soon begin to weigh heavy on the construction employment situation.

Here are the statistics outlined in today’s report:

Housing Permits

Nationally

  • Single family housing permits down 3.1% from October, down 33.3% as compared to November 2005
Regionally

  • For the Northeast, single family housing permits down 11.0% from October, down 28.8% as compared to November 2005.
  • For the West, single family housing permits down 2.3% from October, down 40.5% as compared to November 2005.
  • For the Midwest, single family housing permits down 5.7% from October, down 36.4% as compared to November 2005.
  • For the South, single family housing permits down 1.4% from October, down 29.4% compared to November 2005.
Housing Starts

Nationally

  • Single family housing starts up 8.1% from October, down 28.6% as compared to November 2005.
Regionally

  • For the Northeast, single family housing starts up 5.6% from October, down 13.6% as compared to November 2005.
  • For the West, single family housing starts up 1.4% from October, down 38.5% as compared to November 2005.
  • For the Midwest, single family housing starts up 1.5% from October, down 37.6% as compared to November 2005.
  • For the South, single family housing starts up 14.1% from October, down 22.1% as compared to November 2005.
Housing Completions

Nationally

  • Single family housing completions down 1.0% from October, down 5.5% as compared to November 2005.
Regionally

  • For the Northeast, single family housing completions down 12.8% from October, down 23.8% as compared to November 2005.
  • For the West, single family housing completions down 3.7% from October, down 9.5% as compared to November 2005.
  • For the Midwest, single family housing completions down 4.0% from October, down 9.3% as compared to November 2005.
  • For the South, single family housing completions up 3.5% from October, up 1.6% as compared to November 2005.
Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

As further reports are released, cancellations should show an even greater effect on permitting, starts and completions.

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Monday, December 18, 2006

MIT on the Bubble

Earlier this year William Wheaton, professor of economics at the MIT Center for Real Estate weighed in on the nations residential housing bubble in an excellent paper entitled “Past Housing ‘Cycles’ and the Current Housing ‘Boom’: What’s Different This Time?”.

The paper attempts to explain current home prices by developing an econometric model of home prices using home price data only up through 1998. Then home prices are “forecast” by applying actual 1998 – 2005 historic economic data to the model.

The main idea here is that prices could possibly be sound if there is a way to produce an analytical model that accurately predicts what has actually occurred since 1998.

Models were developed for 60 of the country’s Metropolitan Statistical Areas (MSA) and then the results were compared against what actually happened to prices during this cycle.

The result was a resounding failure for the models in that none of the models could accurately pick up the price movement that actually occurred.

In 47 areas, prices followed a similar pattern to the papers example area of Boston which, per its model, should have experienced a home price correction in 2001 as wages and jobs headed down in the wake of the dot-com recession.

But in reality, no home price downturn ever materialized. Instead home prices actually soared to historically high levels during this period.

In 5 other areas, the models called for little to no price movement which was not inconsistent for theses particular areas that, historically, had not seen cyclical price patterns. Yet, again the actual result did in fact see a substantial move up in prices over this period.

Additionally, in the remaining 8 areas, of which included 6 in Florida, and Phoenix and Las Vegas the statistical models failed completely. These areas were similar in that during the period between 1980 - 1997, they had actually seen steady declines to prices and then prices abruptly surged, doubling or more in just that last few years.

So, in the end the models either dramatically under-forecast actual upward price movement or completely failed to explain the erratic upward price movement exhibited by eight truly unusual markets.

So what was concluded by this study?

The paper concludes by finding that the astonishing upward price movement seen in the current housing cycle was NOT fueled by the often cited “fundamentals” such as baby boomer demographics or construction regulation restraining supply but was instead “driven by an explosive growth in credit availability – in particular the new emergence of the so-called ‘subprime’ lending market”.

Additionally, the paper does a good job of shining the spotlight on another important factor fueling the boom namely the explosive growth of the second home market.

As was noted before, second homes are a bit of a misnomer as the term seems to conjure up a vision of vacation home when in fact the overwhelming majority of second home purchases have been for investment properties that were purchased in an act that was tantamount to speculation.

Professor Wheaton hasn’t seemed to achieve quite the level of popularity that other notable economists such as Robert Shiller or Nouriel Roubini have seen recently but given his contributions and his clear, precise and personal manner hopefully he and his work will receive more notice.

Listen to Professor Wheaton spar with David Lereah back in May of 2005 where Lereah wrongly predicted that housing was NOT going to slow during 2006 as well as other more recent NPR appearances on “All Things considered” during September of this year.

Professor Wheaton Radio Appearances:


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Thursday, December 14, 2006

Wluka Strikes Back!

It is quite clear now that the Massachusetts Association of Realtors (MAR) intends on following the lead of its national counterpart with striking fidelity.

Not only does MAR have its own “leadership” who every month attempt to spin the states housing numbers with a level of artistry only equaled by the great David Lereah himself, but now they seem intent on funding a public awareness campaign that will be closely coordinated with the widely publicized $40 million crusade sponsored by the National Association of Realtors (NAR) that will commence in January.

Furthermore, the MAR president, David Wluka has seen fit to go on the attack against the local media for producing coverage of the housing decline that, as he puts it, “demonstrates a lack of understanding and objectivity”.

In a recent “Letter to the Editors of the Boston Herald”, Wluka is clearly aggravated by an article the Herald published on August 30th titled “Mass. home sale data MAR-red” and attempts to set the record straight while assailing reporter Scott Van Voorhis for his lack of “historical perspective”.

The Voorhis article (which follows below) merely recounted the obvious fact that in the summer and fall of 2005 MAR was presenting a flawed and overly optimistic impression of the states home sales.

But as Wluka sees it, it’s the local media, not MAR that is at fault for dubious housing market coverage.

“Today’s market is a tough one to navigate and consumers deserve credible coverage of current market realities. The housing bubble hyped so much by the media last fall still has not materialized, yet many continue to editorialize as if somehow it will become a self-fulfilling prophecy.”

One can only wonder what “talking points” MAR will be presenting to attempt to persuade the public to overlook the oncoming depreciation of the states home prices.

The following is the Boston Herald article by reporter Scott Van Voorhis:

Mass. home sale data MAR-red

By Scott Van Voorhis
Boston Herald Business Reporter
Wednesday, August 30, 2006

A bad storm is brewing in the once high-flying real estate market, and the Boston area, with its million-dollar fixer-uppers, is right in the eye of it.

For many hapless home sellers, desperately scrambling to find living, breathing buyers, this tempest appeared to come on as quickly as a Gulf Coast hurricane.

Or did it?

The monthly home sales reports put out by the Massachusetts Association of Realtors for years have been the main indicator of the health of the Bay State’s real estate market. And as recently as last fall, the trade group was crowing about near-record sales.

However, other data, collected by a respected local publisher and real estate data firm, paints a different picture.

A steady decline in home sales across the state began in the spring of 2005 and has been building steam ever since, data released by the Boston-based Warren Group shows. (A note of disclosure, I once worked as a reporter for Banker & Tradesman, a publication of the Warren Group.)

Year-over-year declines in home sales of roughly 10 percent or more began in April 2005 and continued steadily, hitting nearly 14 percent in October and nearly 27 percent in July.

Meanwhile, median home prices peaked at $364,000 as early as June 2005 and began dropping steadily after that.

By last summer, let alone last fall, anyone following the Warren Group data would have been well aware of the real estate storm clouds on the horizon.

Yet, except for a few experts and insiders, no one was.

The firm for decades has collected records of all sales transactions right from the courthouse, publishing a thick insert each week in its Banker & Tradesman. But it was not until earlier this year that the Warren Group began an alternative to the Massachusetts Association of Realtors’ monthly sales reports, offering up its version of the numbers to the local news media. As the real estate market began to turn sour last year, MAR, a group formed to promote the industry, was still the main source of statistics for most news outlets.

And the Realtors group saw more evidence for optimism than concern.

While MAR reported year-over-year declines in home sales in April, May and July, it reported increases and new home sales records and near-records in June, August and September.

No increase was too modest to celebrate.

A 0.5 percent increase in single-family home sales in September. Roll out the barrels.

“Sales of single-family homes remain strong last month, climbing to their second highest level on record for the month of September in state history,” the group touted in a section of its Web site called “talking points.”

That was a badly timed fit of happy talk.

Since October, the market’s downhill trajectory has been too steep for anyone to ignore, with prices, not just the number of sales, falling.

But there are no apologies from David Wluka, MAR’s president. He points to differences in how the MAR and the Warren Group collect data, though that doesn’t appear to account for the markedly different results. And Wluka further contends that MAR has always offered a sober appraisal of the market.

Not everyone is convinced of that, though, including Wellesley College’s Chip Case, one of the nation’s top experts on the residential real estate market.
“They (Realtors) have a stake in high (home sales) volume,” Case said. “They care if people are trading. They have a huge stake in optimism. When optimism goes away, people don’t spend money on big-ticket items.’


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Tuesday, December 12, 2006

What’s In a Word

The most significant result of today’s FOMC meeting was the simple insertion of the single word “substantial” in their statement regarding the housing decline.

It appears that Bernanke and the other Fed officials are not only firmly aware of the extent of the housing downturn but they are now also willing to share their outlook publicly.

Let’s examine the changes made to the FOMC housing sentiment in 2006.

May

“The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”

June

“Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”

August

“Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”

September

“The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.”

October

“Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.”

December

“Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.”


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Monday, December 11, 2006

April Showers Bring…?

This coming spring home selling season has got to be the most important event in residential home sales history.

The stakes could not be higher.

Think about it.

If, after all the pent-up inventory hits the spring market, buyers once again refuse to show, things are going to look horrendous especially if the economic and interest rate environment continue to appear favorable.

Here in the Northeast it’s clear that home sellers are taking a hiatus.

Perusing just about any town in the Boston metro area using the Inventory Tracking Tool clearly shows MLS inventories at the lowest levels since the tool became available last May.

Sellers have obviously pulled their listings until spring in hopes of reentering the market in a more favorable environment.

Unfortunately though, this practice is occurring in droves so unless buyers turn out as well, things will end up right where they were last spring except with an even greater numbers of homes for sale.

Additionally, it’s interesting to consider if winter weather conditions will help or hurt home inventories in areas like the Northeast.

If this winter is mild, then you should expect to see some homes start to reappear after Super Bowl Sunday on February 4th when home buyers will be free to spend their Sunday afternoons attending open houses.

A mild winter might help inventory levels as having more reasonably temperate days to sell homes could prompt an earlier start to the spring market.

On the other hand, if buyers don’t show, this could also result in even more inventory backup which is what appears to have happened last winter in the Northeast.

Only time will tell, but it does appear that spring 2007 could represent a significant turning point for the US housing market.

What do you think??


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Friday, December 08, 2006

Conflict of Outlook

The latest release of both the National Association of Realtors (NAR) “Real Estate Practitioners Survey” as well as the National Association of Home Builders (NAHB) “NAHB/Wells Fargo Housing Market Index Report” show that, although the industry groups are now simultaneously promoting the notion that the housing market is “stabilizing”, actual practitioners confidence is at record lows and continuing to slip.

Both reports are essentially surveys that ask practitioners to rate, with a fixed scale, their sentiment or outlook given a series of questions. Then the response scores are averaged and a value of 50 marks the threshold between “strong/good” or “weak” conditions.

Probably the most startling aspect of the NAR report is that is shows that with the exception of seller traffic, every measure of sentiment is now down below 50, in some cases way below, indicating that practitioners are currently experiencing significant weakness and continue to expect more in the future.

Perception of seller traffic, on the other hand, has increased 13.6% which when taken together with a 34.6% decrease in buyer traffic, offers some additional evidence that conditions are continuing to deteriorate.

Additionally, 23.9% of NAR respondents predict that home prices will drop in 2007.

The NAHB report also shows that record low sentiment continues to permeate the industry with all three component measures (current single family, future expectations of single family and current buyer traffic) falling high double-digit percentages bringing the current values down to depths only reached during the 1990’s real estate bust.

So it appears that we have a conflict of outlook and sentiment.

On one hand you have the industry groups who are promoting an optimistic “stabilization” view, on the other there are the thousands of industry practitioners who are indicating just the opposite.

The NAR report shows that versus November 2005:

  • Current Sentiment for single family home conditions has dropped 38.7% to 36.7 from 59.5.
  • Future expectations for single family home conditions have dropped 28.4% to 43.3 from 60.5.
  • Current Sentiment for town-home conditions has dropped 37.8% to 30.5 from 49.0.
  • Future expectations for town-home conditions have dropped 32.6% to 33.9 from 50.3.
  • Current Sentiment for condos conditions has dropped 36.9% to 29.8 from 47.2.
  • Future expectations for condos conditions have dropped 33.1% to 32.9 from 49.2.
  • Current traffic of prospective buyers dropped 34.6% to 32.2 from 49.3.
  • Current traffic of prospective sellers increased 13.6% to 61.9 from 53.5.
  • Current Sentiment for Northeast real estate conditions has dropped 36.3% to 27.9 from 43.8.
  • Current Sentiment for Midwest real estate conditions has dropped 30.8% to 29.8 from 43.1.
  • Current Sentiment for South real estate conditions has dropped 25.1% to 46.8 from 62.5.
  • Current Sentiment for West real estate conditions has dropped 53.7% to 36.5 from 78.8.

The NAHB report shows that versus November 2005:

  • Current sentiment for single family home conditions has dropped 50.7% to 33 from 67.
  • Future expectations for single family home conditions have dropped 29.2% to 46 from 65.
  • Current traffic of prospective buyers dropped 43.5% to 26 from 46.

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Wednesday, December 06, 2006

OH YEAAHH?

First, a major hat-tip goes to CalculatedRisk for posting the audio stream to yesterday's Toll Brothers conference call as well as SeekingAlpha who has posted the complete transcript.

After listening to the call, it’s remarkable to review the traditional media reports and see the shallow depth at which they covered CEO Robert Toll's outlook for the housing market.

It was widely reported yesterday that Toll was essentially calling a bottom in the new home market, particularly for a couple areas of Washington DC and Maryland.

But upon further questioning by analysts during the conference call, Toll backed way off his optimistic outlook suggesting that he was not forecasting optimism but rather simply reporting the market conditions that he seemed to be observing in the last few weeks.

“I don’t think I put my neck out. I think I made a statement with regard to what I witnessed and I thought I should make that statement because that I witnessed it, just as I made the statement many moon ago that things stink and that we were getting chopped but I don’t think that I made a statement with respect to the future.”

I didn’t mean to project optimism... I only meant to project what I had seen in the past...

Furthermore, when Toll elaborated on what he had been witnessing in the Washington DC and Maryland markets, he recounted that for some undisclosed number of communities, on average, two non-binding contracts were signed per community.

“… this past weekend for instance we had quite a few communities take non-binding deposits. These are the deposits before we go into the real deposits for the agreement of sale which are not returnable. We had taken two deposits per community and that would give us heart to believe that markets are responding better than it had in the past.”

Toll then further digressed on the Washington DC market and seemed to really be stretching for legitimate footing while justifying his optimism.

“Let’s just take the DC market as an example. Sales have fallen in the DC market. The DC market probably has an unemployment rate of about 0. And come to think of it, I think every committee in Congress, both houses, is going to change its staff entirely not to mention that there are 40 or 50 odd people that have not been in Washington that will be soon so there’s some minor demand coming from switching politics.”

It was surprising to hear a CEO of a leading national home builder that, in general, builds roughly 8000+ homes a year justify future demand in and around a major city by citing the possibility that 40 or 50 new federal legislators may want to buy a luxury home.

Not to mention that there are 40 or 50 federal legislators leaving DC as well the fact that many federal staff members are probably not exactly luxury home buyers in the first place.

Additionally, when asked about activity other areas around the country Toll seemed to get overly excited by recent results in Detroit.

“You know actually we commented this weekend… we sold 5 homes in Detroit.. that… that’s fabulous..”

Eventually though, Toll admitted that there was little to no margin being made on home sold in the Detroit area.

Possibly the best question was asked by Credit Suisse's Ivy Zellman who asked:

“… Here you are Mr. ‘much more bullish’, talking about big pent up demand and clearly you were surprised on the spiral downward. And for the first time in 15 years you are going to be down versus 06 and I think that you seemed like a very broken man last time you were on the call, and here you are a new man and I’m wondering which Kool-Aid your drinking because I want some…”

Toll obviously seemed a bit flustered by this line of questioning responding:

“I’ve just told the market what we have witnessed so that they have that information to deal with. I’m not making a prediction... “

In a follow up question Zellman asks:

“…you said the stock would continue to surge why only buy 12,000 shares of your stock why not buy a boat load of stock back if you really believe the stocks were headed north here?”

Toll responds oddly:

“… The answer is that I believe that I could make more money with my cash buying land and expanding the business than I believe that I could make by buying my stock. Buying stock is kind of a one time thing I think...”

To that Zellman concludes:

“I think a lot of people, if they ever follow you Bob, and you’re buying and selling, personally would have made a lot of money. And ill leave it at that.”

The following is a transcript of some of the better questions asked in yesterday’s conference call:

Q: Elaborate on you reports of stabilization...

TOLL: Sure, this past weekend for instance we had quite a few communities take non-binding deposits. These are the deposits before we go into the real deposits for the agreement of sale which are not returnable. We had taken two deposits per community and that would give us heart to believe that markets are responding better than it had in the past. And we saw this kind of pickup over the past month approximately so it would appear to us that whereas as I said in the monologue dancing along the bottom for a couple of months recently last month it appears that we are now off the bottom, a level above it and that heartens us. We also noticed approximately the same thing in Maryland though Maryland never went down as deeply, didn’t go into the ashcan as the northern Virginia market probably because there was much less speculation, there were fewer lots available for construction in the Maryland market it was a tighter market so there we are now at a level which is pretty acceptable. Florida picked up a little bit on the east gold coast on primary markets and I think it picked up in Jacksonville... one moment while I search for that... (flips pages) no not really it didn’t really pick up in Jacksonville. I guess that’s about it.

Q: With the glut of recently constructed used and investor homes on the market what differentiating features is Toll Brothers now including in its houses that did not exist a year or so ago.

TOLL: That’s actually a good question. What we’ve done, where we see that we have... I choose not to use the word glut thank you Michael… but where we have more specs than we ever excepted or wanted we have changed appliance packages so that when you walk into the home you see Bosch, Miele, Viking, Wolf and Sub-Zero instead of the great stuff that we have been using. Its just as good, looks just as good but just doesn’t have that brand recognition. So that’s an example of one of the tings we are doing to move.

Q: Realizing its the beginning of December which is typically a time where most builders we talk to are not willing to make a stand one way or the other on what the next several months or even a year will bring with respect to the outlook especially because most builders are waiting till post-super bowl to make a stand based on how the spring selling season actually pans out and Here you are Mr. ‘much more bullish’ talking about big pent up demand and clearly you were surprised on the spiral downward and for the first time in 15 years you are going to be down Vs 06 and I think that you seemed like a very broken man last time you were on the call and here you are a new man and I’m wondering which Kool-Aid your drinking because I want some because that not what we are hearing from a lot of the other.. no one else in the industry is willing to stick their neck out and a lot of people got burned so I’m wondering what do you see in the data because your numbers certainly don’t show it today and there’s clearly a lot of risk that 07 wont bring the optimism to reality that your seeing so why stick your neck out now Bob?

TOLL: I don’t think I put my neck out. I think I made a statement with regard to what I witnessed and I thought I should make that statement because that I witnessed it just as I made the statement many moon ago that things stink and that were getting chopped but I don’t think that I made a statement with respect to the future. I don’t think that I’ve said that because of what we have witnessed that we are going to. I’ve just told the market what we have witnessed so that they have that information to deal with. I’m not making a prediction... the pent up demand statement I believe is accurate and I think it falls logically. Lets just take the DC market as an example. Sales have fallen in the DC market. The DC market probably has an unemployment rate of about 0. and come to think of it I think every committee in Congress, both houses is going to change its staff entirely not to mention that there’s 40 or 50 odd people that have not been in Washington that will be soon so there some minor demand coming from switching politics. but with the unemployment in DC being near 0 and with sales going down and with more people moving into the district with business going up in the district it would logically not definitely but it would logically follow that demand is increasing in the DC market and yet sales were going down until we saw them recently coming off the bottom and dancing above the bottom and therefore we don’t thin that its illogical to assume that pent up demand is building using that market as an example but that is all that we are saying.

Q: I would wonder then why If your as optimistic as you seem...

TOLL: I didn’t mean to project optimism... I only meant to project what I had seen in the past...

Q: OK, well just say that you read an analyst’s work that you said the stock would continue to surge why only buy 12000 shares of your stock why not buy a boat load of stock back if you really believe the stocks were headed north here?

TOLL: Well, I referred to somebody else’s belief but let us say that I believed, which I’m unwilling to make a statement on... let us assume your proposition that I believe, which I don’t necessarily, but let us assume that I do.. Your question of why wouldn’t I buy stock. The answer is that I believe that I could make more money with my cash buying land and expanding the business than I believe that I could make by buying my stock. Buying stock is kind of a one time thing I think...

Q: I think a lot of people if they ever follow you Bob and you’re buying and selling personally would have made a lot of money. And ill leave it at that.

Q: What are the worst markets out there that you guys are operating in today?

TOLL: Las Vegas market in comparison to what it had been doing qualifies for a rotten market and most recently the Phoenix market which did well for us long after everybody else said poor things about it has turned sour for us. Reminding me of Detroit… You know actually we commented this weekend we sold 5 homes in Detroit... that that’s fabulous.. who knows what’s going on in Michigan but we’ve been doing that for a couple of weeks now.. and Minnesota is definitely an F market for us.

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