Wednesday, October 04, 2006

“First… the good news”

In keeping wither their recent “spin the dirty laundry” approach to public affairs; the National Association of Realtors has produced a fairly comprehensive “market by market” home price analysis for 119 of the nation’s largest metropolitan regions.

Each individual metro report contains sections dedicated to local price activity, affordability, home sales, mortgages trends and fundamentals as well as a final “Risk Factor” summarization and “Pricing Scenarios” predictions.

In typical fashion, NAR tries in earnest to present the data in its most positive light spinning some significant indicators of the market instability with fine tuned hocus pocus.

In the section dedicated to affordability, they suggest that home prices, having significantly outpaced incomes in recent years, results in a price-to-income ratio that is often cited as an implication of a housing bubble. Each report then goes on to suggest that since mortgage interest rates have been at historical lows, a more relevant ratio to analyze in determining the existence of a bubble would be the ratio of “median mortgage servicing” cost to “median income”.

Certainly, this classic “it’s not how much it costs that matters, its how much you can afford” logic makes things look significantly better as you ignore the fact that the overall debt burden has just doubled (or more) and instead focus on the cost of just the loan payment relative to the current income. Not to mention that many markets show absurdly high percentages of ARM loans so the servicing costs are likely to be increasing soon.

Additionally, the “Pricing Scenarios” section attempts to mask the very real scenario whereby just a 5% drop in home prices puts the majority of the metro areas 2005 home buyers into negative equity. NAR terms this grim scenario “equity loss”.

Each report then closes with a five point sales pitch on the tax benefits of owning a home, why homes are not like other equities (i.e. cant trade like stocks so doesn’t show the same volatility) and the fact that national median prices have not declined since the Great Depression.

Arguably, the most interesting statistic disclosed by the reports are simply the sheer number of metros exhibiting the obvious signs of the asset run-up as wells as the now prominent slowing to decline.

Second best might be the unbelievable percentage share of ARM loans that have been used to finance homes. Most metros will show 20-30% with some, such as Las Vegas, showing a whopping 58% of all loans being ARMs.