Tuesday, January 30, 2007

MarketWatch Slams David 'Paid Shill' Lereah

MarketWatch slams David Lereah in an article titled 'Realtors' economist stayed sunny all year. In the most excellent article, it is written

There are two universal truths at the National Association of Realtors: 1) It's always a good time to buy or sell a home; and 2) We've seen the worst of the housing market correction.

That is the gospel at the the National Association of Realtors which is desperately trying to keep home sales and home prices high. Lereah is sounding even more pathetic then normal. He recently said:

"With fingers and toes crossed, it appears that we have hit bottom in the existing home market"

Despite Lereah's convoluted body the market will continue to decline in the coming year. David Lereah has lost credibility, it is refreshing to see the mainstream media criticize David 'paid shill' Lereah.

52 comments:

  1. That "fingers and toes" comment should give all right thinking investors pause. Or will their greed overwhelm their good sense?

    ReplyDelete
  2. It has been stated here many times that by the time the "Mainstream Media" is talking about something, that "something" has already passed.

    This blog repeatedly made that point about the "housing bubble". (Cab drivers, meter maids, Matt Lauer, etc. were all talking about what a 'great investment' real estate had become). That surely was an indication that a bubble had formed.

    Now, you're saying that it is refreshing to see the MSM is talking about a down trend in housing markets. So if the MSM is talking about it, doesn't that mean (by your own statements) that the down trend has passed?

    Or will you modify this theory to meet your needs?

    - GILMFRMAFPFP

    ReplyDelete
  3. Awesome story, only if ever newspaper in the U.S.A would print it. He should be brought up on criminal charges and serve 10 years in jail. To think good 'ol Ben B takes this guys advice and runs with it. When is this ass going to get fired!

    ReplyDelete
  4. hey DJ,

    how about an offshoot blog highlighting floppers in this area? there are some huge losses happening now, even the odd foreclosure at "bomb-proof" condos that the REIC's hiding from prospective buyers.

    Thanks.

    ReplyDelete
  5. "He should be brought up on criminal charges and serve 10 years in jail. "

    Yeah, we should jail all people who say things we disagree with. And all homeowners too.

    ReplyDelete
  6. So if the MSM is talking about it, doesn't that mean (by your own statements) that the down trend has passed?

    This is a good point. IMHO (I don't know what others have said), the amount of negative mainstream media coverage could be a very good indicator of a bubble. For example, a lot of people were talking about the presence of a tech bubble way back in 1998. In fact Chairman Greenspan used the term "Irrational Exuberance" with reference to the stock market back then, and this was reported by all media. But it was not until 2000 that the articles kept getting more and more frequent, and this is when the stock market finally peaked.

    There has been no shortage of mainstream media articles about the presence of a potential bubble in real estate. These articles are also getting more and more frequent. It is pretty clear that we have already peaked (mid 2006?). However, I don't think coverage in MSM is any indicator of when we come out of a bubble. This could be short or long like the Real Estate recession of the 90's in Southern California. This will happen when we return to fundamentals.

    ReplyDelete
  7. The MSM is the ultimate gauge of "Stick A Fork In It". By the time they get around to calling pot black, the kettle has rusted away!

    ReplyDelete
  8. anus :5:56

    David Lereah is nothing more than an outright liar. His sheer presence is a danger to the American public.
    Having any person of his power, and when I mean power, the Federal Reserve listens to his ridiculous forecast, along with Joe six-pack and his family. Lereah is a problem of catastrophic
    proportions. I still disagree with the actions and forecast of the former CEO of Enron and his goons, but they were served a perfect platter. There is clear intent on Lereah’s part here and he will get his menu of options served soon enough.

    ReplyDelete
  9. anyone forward that artilce to haggerty at WAPO? Would be good to send it to them everytime they quote Lereah without pointing out that he is a paid shil posing as an economist

    ReplyDelete
  10. The best way to find out whether there's a bubble or not is to use common sense and make comparisions to long run trends. Was it always that a professional making in the upper curves of the income (if income is normally distributed, then about 2 standard deviations from the mean) was not able to comfortably afford a 1 bedroom condo?

    Basically, true that house prices are not going up anymore (and the downward trend seems to have stabilized as well), but the income still has a ways to catch up. That means about 2-3 more years of completely flat prices while incomes catch up.

    ReplyDelete
  11. "There are two universal truths at the National Association of Realtors: 1) It's always a good time to buy or sell a home; and 2) We've seen the worst of the housing market correction."

    They also forgot the third law of housing according to the House of NAR:

    A home will always go up like Viagra

    Dr. Housing Bubble

    ReplyDelete
  12. A lot of people are nervous as hell.
    They have a house they want to sell.

    Great depression Johnny, what's that you say?
    The personal savings rate is below zero today.

    Call the pot black and kettle rusted away,
    for a housing recession is well under way.

    Give it 5 or 10, I don't know when,
    but a housing boom will begin again.

    Until then, well, good luck!

    ReplyDelete
  13. 2-3 years while incomes catch up???


    what the fuck are you smoking??

    my income hasn't budged in 15 years and i don't see that changing anytime soon.....and if it did i would need to make 3 TIMES MORE THAN I DO NOW TO GET BACK TO THE SAME RATIO OF INCOME TO HOME PRICES AS IT WAS IN 1991.

    btw doesn't it seem weird that david takes a vacation and Lance doesn't post???

    like i've said before Lance is a troll

    ReplyDelete
  14. anon said:
    ""He should be brought up on criminal charges and serve 10 years in jail. "

    Yeah, we should jail all people who say things we disagree with. And all homeowners too."

    This is simple hyperbole...and yes we often use it when talking about those we strongly disagree with, like Lereah. And I did not post the hyperbolic comment.

    ReplyDelete
  15. "Was it always that a professional making in the upper curves of the income (if income is normally distributed, then about 2 standard deviations from the mean) was not able to comfortably afford a 1 bedroom condo?"

    This isn't the case now.

    ReplyDelete
  16. I don't think it's a sin that a leader of an industry group is always saying that his industry is always in good times.

    It is a sin that many media outlets have quoted him over the years as if he were an impartial expert, rather than a paid shill.

    And at least Lereah has an excuse (a paycheck) for being wrong. If you had called up real estate economists at universities, instead, how many in 2004 or 2005 would have said "stick a fork in this baby." My recollection, from the times that I did see less partial real estate experts quoted, is that they also said that things should continue to go well.

    Sooner or later, Americans need to realize that our financial media AND academic economics profession is just awful. Most are just right-wing hacks selling total free trade and deregulated finance, ideas that should have died years ago. It amazes me that the same morons who were predicting "Dow 36,000" back in 2000 are still on TV and in the papers today. After the 90s tech bubble, I thought all those "experts" would be completely discredited. But the same clowns are still out there as the primary financial "experts" on TV today, while people who told the truth, like Bill Fleckenstein, are still marginalized.

    So maybe Lereah will still be considered a real estate expert in 7 years, even as real estate completes its dizzying crash.

    A Redskins fan

    ReplyDelete
  17. DC Condo Watcher:

    LOL, professional in a one-bedroom, "condo." I am in the same boat and even if I could buy what I wanted, woiuld refuse on priciple- people have lost their minds.

    In any event, there is simply no way prices are going to remain flat. In this regard, do you really think that employers are going to raise wages 2-3X above current levels? I say no way in hell.

    ReplyDelete
  18. There is an interesting article in today's (Feb 5) Wall Street Journal:

    Vacant Homes For Sale Cloud Economic Hopes

    Data Pointing to Glut Are Worst in Decades; Impact of Speculators


    Amid brightening hopes that the U.S. housing market is stabilizing, some economists are zeroing in on a piece of data that could augur badly for the consensus view: the homeowner vacancy rate.

    That figure, an often-overlooked measure of how many homes for sale in the country are empty, has climbed to its highest level since the Census Bureau began tracking it four decades ago. Last week, the bureau said that in the final three months of 2006 there were about 2.1 million vacant homes for sale.

    That brought the national homeowner vacancy rate to 2.7%, up from 2.0% a year earlier. Before 2006, the number had never risen above 2.0%. Like the housing economy more broadly, the measure varies by region: The South had a homeowner vacancy rate of 3.0%, the Midwest had a rate of 2.9%, the West had a 2.4% rate and the Northeast had a rate of 2.0%.


    For reference, D.C. is considered in the South Region. The magnitude of this statistic is telling: 150% of historic high.

    Everyone is hoping that the worst of the downturn is over. But vacant houses will be the ones that will have the most pressure to decrease prices, because owners need to move and speculators will cut their losses.

    Everyone seems to be hoping as well that the spring buying season will turn everything around. Everyone expects that all the buyer that have been waiting on the sidelines will come out in droves and rekindle the insane demand that was crack to the REIC over the last 5 years. The problem is, this is a hope and not based on economic reality, because interest rates are going up on a daily basis (I know because I have received quotes) and wages are not (or at least not at the same rate as housing inflation).

    If there are buyers on the sidelines waiting to jump in the market when prices fall and sellers waiting to jump into the market when prices go up, Economics 101 tells you that the market will not clear and inventory will increase.

    The question is who blinks first? It may be the speculator who can no longer afford to pay a mortgage on a vacant house. Traditionally, home buyers with more than one mortgages (a rough proxy for speculators) was at 8%. This number went up to over 30% in the D.C. area at one point during the frenzy (400% of the normal presence).

    Who is going to create the great demand this spring in the market when speculators are gone and first-time home buyers (traditionally 40% of the market) have been priced out of the market? What about all the leap-froggers, who can no longer afford to cash out their equity and buy up? Where, I ask you, are all the buyers going to come from? Is there a cadre out there just waiting to pay more money because it is spring time and they are feeling generous?

    Can five years of double-digit gains really be corrected by 6 months of stabilizing prices? Is the housing market really that fluid?

    ReplyDelete
  19. Saw this today on a perma-bull realtor's site:

    'The average price per square foot has decreased by 21% in the past 12 months, which indicates that larger homes have been purchased recently as compared to 12 months ago.'

    Interesting perspective...what insight!

    ReplyDelete
  20. http://www.housingtracker.net/old_housingtracker/location/DC/Washington/

    Inventory plunged again to its lowest level since March 2006. 6 more weeks and we'll be back to unchanged year over year - or better.

    ReplyDelete
  21. DC is a wild card in my view. A lot of areas in California and Florida, and also Vegas and maybe even Ariona, are doomed, but DC has some major mitigating factors.

    The reasons why DC (or parts close in DC) won't keep falling:

    1. Inventories are low, especially in inner zip codes. We may be approaching a point where inventories are about as low as they were the year before.

    2. Rents keep rising. Housing prices can only fall so far when rents keep rising.

    3. DC didn't have a lot of subprime action. Foreclosures were up nationally between December 2005-December 2006, but were actually down in Virginia, DC, and Maryland during the same time period. That's pretty remarkable considering 2006 was a down year.

    4. DC doesn't have a large percentage of negative amortization loan products. DC has a fair amount of interest-only loans, but there isn't the same sort of sticker shock and large resets on those loans as there are with neg-am loans.

    I'm actually looking at a place. At a bid of 7-8% below asking, my total everything monthly payment (including taxes, fee, whatever), would really be a 20-25% premium above rents in the immediate area. In an area where rents are growing, that's perfectly reasonable. (Essentially, it's a 3-5 year period to get to a point where I pay less for the place than the rent would be. That doesn't count any potential appreciation.)

    In addition, based on assessment data and the work that the owner has put into the place, the bid I'm thinking of would basically be like giving 3% per year appreciation over the last 3 years. It'd be as if the 04-05 bubble never happened.

    I'll also add that the major factor that got me looking was the fact that my building, which I love and have greatly enjoyed, wanted a huge rent increase. In the past, I've always been able to negotiate pretty low rents, and get a deal, or move to an even better place where I could get a deal. But this time, no dice. If apartments can demand major rent increases and leave no room for negotiation, that tells me that housing prices can only fall so far. I might add that I still think they have a long way to fall in my present zip code, IMHO.

    The X factors: Are there a lot of investor-owned units in areas that will have to drop further in price? I can certainly see it in some places. Heck, I'll name some problem buildings: Clarendon 1021, Rhapsody, Eclipse.

    Will there be a lot of people in DC who have to sell due to resets? Given that there were fewer foreclosures in 2006 than in 2005 in the DC area, that seems unlikely, but it's not impossible.

    Essentially, anything that makes the DC market go down by a lot will have to drive both rents and prices down. It's possible, but not likely, at least close in.

    I will add that the outer areas, like Loudon County, are still totally doomed.

    ReplyDelete
  22. Housingtracker is a great site. I love their data. But let's look at year over year, which is really the only valid comparison. Year over year, inventory is up almost 22%. Yes, with the Super Bowl and deep chill, inventory is a little lower than recently, BUT IT ALWAYS IS THIS TIME OF YEAR.

    I also suspect that many sellers think they are going to "hold on" until the bubble begins again. I suspect people like me can pay rent longer than people like then can pay mortgages, taxes, and insurance. We shall see.

    A Redskins fan

    ReplyDelete
  23. Who says first-time buyers are priced out?

    ReplyDelete
  24. Caveat Emptor,

    The data from the NOVA run-up and then multi-year flat line (late 80's to late 90's) shows a spike in prices in '91 after going negative for one year in '90. So this would suggest that in the year prices initially decline, '90 in this case, a pent up demand builds that sets things off the following year. Though it seems this is a last gasp of the bull run seeing as how prices then remained pretty flat through to '98.

    source: http://www.nvar.com/market/history.lasso

    Of course, even with the spike in prices, the dollar volume of all transactions was down around 30%. So it likely wasn't the low end of the market propping things up.

    My $0.02

    ReplyDelete
  25. Anon 2/5/07 2:04 PM,

    Between 2/1/06 and 3/14/06 inventory increased about 20%. I would expect inventory to grow more quickly approaching the spring selling season. In order for 2/1/07 inventory to be flat YOY in 6 weeks time, there would have to be no net additions to inventory. I find this unlikely.

    My $0.02.

    ReplyDelete
  26. People, please stop twisting contrarian theory to your own purposes. The true contrarian philosophy only states that the crowd is usually wrong at key inflection points (tops, bottoms, trend reversals, etc.) not that they are wrong ALL of the time. In fact, when the crowd joins in something, that is usually the trends largest and strongest move. For example, when all of the daytraders joined into the tech bubble, or when all of the specuvestors jumped into real estate we saw huge moves in both of these assets.

    So stating that because the MSM has now started to pick up on the housing bubble/bust and that somehow this means that the trend will reverse is absurd. Remember the HUGE move (down) is still in front of us as the crowd starts to realize that RE isn't the place to be and stampedes for the exits.

    So in several years when the MSM runs a story on the cover of Time about how RE is terrible and it will always be lousy, then PERHAPS we will have seen a contrarian trigger where a key inflection point is missed and the contrarians will know the time to buy has arrived.

    ReplyDelete
  27. "Inventory plunged again to its lowest level since March 2006. 6 more weeks and we'll be back to unchanged year over year - or better."

    Yes and I will be hunting leprechauns whilst riding atop my unicorn.

    ReplyDelete
  28. If you look at Housing Tracker, you'll see a big increase in inventories during August 05 to November 05, but then a fall in inventories between August 06-November 06. I think that's an important difference in terms of what we can expect in prices.

    To get some big price decrease in 07, you really need a story here that has ARM resets driving a lot of selling and foreclosures. But foreclosures in the DC area fell during 2006 even though 2006 was a down year and even though foreclosures shot up in the rest of the country.

    I think the big drop is still a possibility, but it's looking less likely, especially for close in areas.

    ReplyDelete
  29. Redskins said:
    " I suspect people like me can pay rent longer than people like then can pay mortgages, taxes, and insurance. We shall see."

    That's right ... renters always have more resources than homeowners. (Okay ... I couldn't resist ... This once ...)

    ReplyDelete
  30. Re: First time home buyers priced out of the market:

    From a Nov 2005 article in the Washington Post:

    District home prices have risen so rapidly that more than 80 percent of the properties for sale last year were financially out of reach for the average city household, according to a report by Urban Institute researchers released yesterday.

    The report used the example of a public school teacher to show the effect of rising house prices. A teacher with a typical $45,000 income buying a first home could have afforded one-third of the D.C. homes for sale in 2001. By 2004, with a $52,000 paycheck, that teacher could afford only 17 percent of the properties on the market. That means a household with a $44,926 income -- the city median last year, according to estimates by the demographics data company Claritas -- could afford even less.


    Here is the math. Assume the median income in 2007 has risen to $50,000. This family’s monthly gross is $4,167. Financial consultants will tell you that housing costs should be between 25% and 40% of your gross monthly income, after deducting your other debt payments. Assume our family has payments of $400 a month in auto loans, student loans, and credit card payments. This means that they should be able to afford between $640 and $1270 per month in housing costs.

    If a family finances 100% of the cost of the house with a first tier mortgage at 6.5% and a second tier mortgage at 7.75%, the monthly payment they can afford is between $89,000 and $175,000 (including taxes). With an 80/15/5 loan at these same rates, they can afford $93,000 to $180,000, but they need to have between $16,000 and $22,000 in the bank for closing costs (including the 5% down).

    According to housingtracker.net, the median asking price for homes on the market for Feb 2007 is $440,000. For the 25th percentile, the asking price is $330,000.

    Of course, banks have been willing to lend people more than they can afford with interest only and ARMs. But this is a house of cards that will take 3-7 years to collapse when the principal payments become due or the rate adjusts. People have made huge bets that (1) intrest rates will remain low; and (2) their incomes will go up sufficient to cover the added costs. And it will accelerate. As housing prices boomed over the last 5 years, people became more and more extended.

    ReplyDelete
  31. mytwocents,

    The data from 91 is interesting. And that flatline from 91-98 is certainly a painfull memory for many, particlarly those who sold in 98. It would be interesting to see how many interest only and ARM financings were in the market at that time. And how many speculators. And how big of a margin between median incomes and median home prices.

    I have no doubt that there are many buyers that have held off making purchases in the last year to six months such that there is a backlog of buyers. I know because I am one. But what is going to get them into the market? Higher prices? This seems to be NAR's strategy to recreate the frenzy. But the frenzy of the last 5 years or so was started by good old demand outpacing supply. The demand was fuled by several factors which are unsustainable, and created "froth." How much froth we will have to wait and see. I am suggesting that one buying season is not going to resolve the matter that was created over many years but, instead, could make it worse if there is also a backlog of sellers who have held off putting their home on the market (or removed their home from the market) waiting for prices to go back up. I have seen indications that this is the case.

    My question is what economic factors indicate that buyers will suddenly be willing to pay more money that they have not been willing to pay in the last year?

    ReplyDelete
  32. caveat empetor,

    we've beaten to death the subject of why the median income is a meaningless figure in dc. try again.

    ReplyDelete
  33. Lance "I am taking my ball and going home because I cant convince anyone home prices are going up so I can sleep at night"

    Lance "blah blah blah"

    Redskins quote about renters in this area is pretty dead on. I think renters have a lot of resources in this area and more flexibility.

    50% of all homes sold last year were IO. With home prices dropping 10% in the district last year that means they have negative equity. Which means... you guessed it. NO HOME EQUITY LOANS. I can quit my job and live for the next two years here on my savings. Savings I wouldn't have had if I bought at some absurd level. Rents are that much cheaper. AND contrary to all the BS in the paper, rents are going down. Homedebtors are really affecting the rental market. AS an example. A close friend at work just moved out of his apartment, 1100$ a month. He renting out a basement of a townhome, isolated from the rest of the townhome, for 450$ a month, all utils included in a better area. He makes about 100k per year. You might think he is stupid for being a "renter". But he is banking away some serious cash. He plans on buying if prices become reasonable, or he said he will just leave and buy a house cash somewhere else. Personally, I think anyone who took an IO loan in the last two years is a complete idiot. The stupid shall be punished.

    ReplyDelete
  34. Anon 5:24

    I reject your premise that median income is “meaningless,” or that you can settle that debate by fiat. If you are willing to dismiss one-half of the population as excluded from being a potential source of first-time home buyers, I reiterate my question, where are all the buyers coming from?

    But setting that point aside for now, I gladly accept your invitation to try again. After all, my point was that first-time home buyers are being priced out of the market. Lets look at the median income for first-time home buyers.

    From the WaPo 3/25/06:
    The median income of entry-level Northern Virginia buyers was $86,100, and 68 percent of first-time home buyers were ages 25 to 34. First-time home buyers accounted for 38 percent of the houses bought in Northern Virginia, compared with 40 percent nationally. . . . The median income of all home buyers was $104,600, compared with $71,600 nationally.

    Lets look at our median entry level buyer. Assume the median income has risen with inflation and is at $89,000 for 2007, and assume their monthly debt load is $600 ($350 car payment, $150 student loan, $100 credit card). Net gross monthly income is $7,400. Using the 25% to 40% scale, financial advisors would tell this buyer that they can afford a monthly payment of between $1,700 and $2,700 per month. With 100% financing at 6.5% first tier and 7.75% second tier on a 30-year fixed, the buyer can afford a home priced between $235,000 and $375,000. With an 80/15/5 loan at those rates, the buyer could afford between $245,000 and $395,000, but they would need to have $27,000-$35,000 in the bank.

    Again, HousingTracker.net says that the median price of houses on the market in the area in Feb 2007 is $439,800, and the 25th percentile is priced at $330,000.
    This means that our first-time buyer can afford only one in four homes on the market. Think about this: 38% of the buyers who are actually in the market (and haven’t already been priced out) can only afford 25% of the homes. Hence my point: first-time home buyers are being priced out of the market. And hence my question: Where will the buyers be coming from to clear the increased inventory?

    Just for smiles, I ran the numbers on the median incomes as well. Assuming a 2007 annual salary of $108,000 with the same $600 a month debt load, the median buyer can afford homes between $290,000 and $465,000 with 100% financing and $305,000 to $485,000 on an 80/15/5 loan (with $30,000 to $40,000 in the bank). These numbers suggest that if the market is to clear at current levels, many buyers must be willing to become house poor. Perhaps they will. My bet is they will not.

    If the only answer lies in creative financing with interest only and ARM loans, I put that answer in the same category with those who at the beginning of this decade suggested that this is a “new economy” and price to earnings ratios do not matter. NASDAQ 5,000? That was nearly seven years ago. Today it is still half that.

    ReplyDelete
  35. Anon 5:24

    I reject your premise that median income is “meaningless,” or that you can settle that debate by fiat. If you are willing to dismiss one-half of the population as excluded from being a potential source of first-time home buyers, I reiterate my question, where are all the buyers coming from?

    But setting that point aside for now, I gladly accept your invitation to try again. After all, my point was that first-time home buyers are being priced out of the market. Lets look at the median income for first-time home buyers in Northern Virginia.

    From the WaPo 3/25/06:
    The median income of entry-level Northern Virginia buyers was $86,100, and 68 percent of first-time home buyers were ages 25 to 34. First-time home buyers accounted for 38 percent of the houses bought in Northern Virginia, compared with 40 percent nationally. . . . The median income of all home buyers was $104,600, compared with $71,600 nationally.

    Lets run the numbers for our median entry level buyer. Assume the median annual income has risen with inflation and is at $89,000 for 2007, and assume thier monthly debt load is $600 ($350 car payment, $150 student loan, $100 credit card). Net gross monthly income is $7,400. Using the 25% to 40% scale, financial advisors would tell this buyer that they can afford a monthly payment of between $1,700 and $2,700 per month. With 100% financing at 6.5% on the first tier and 7.75% on the second tier with a 30-year fixed, the buyer can afford a home priced between $235,000 and $375,000. With an 80/15/5 loan at those rates, the buyer could afford between $245,000 and $395,000, but they would need to have $27,000-$35,000 in the bank.

    HousingTracker.net says that the median price of houses for sale in the area in Feb 2007 is $439,800, and the 25th percentile is priced at $330,000.

    This means that our first-time buyer can afford only one in four homes on the market. Think about this. 38% of the buyers who are actually in the market (and haven’t already been priced out) can only afford 25% of the homes. Hence my point: first-time home buyers are being priced out of the market. And hence my question: Where will the buyers be coming from to clear the increased inventory?

    Just for smiles, I ran the numbers on the median incomes as well. Assuming a 2007 annual salary of $108,000 with the same $600 a month debt load, the median buyer can afford homes between $290,000 and $465,000 with 100% financing and $305,000 to $485,000 on an 80/15/5 loan (with $30,000 to $40,000 in the bank). These numbers suggest that if the market is to clear at current levels, many buyers will have to be willing to become house poor. Perhaps they will. My bet is they will not.

    If the only answer lies in creative financing with interest only and ARMs, I put that answer with those in beginning of this decade who suggested that this is a “new economy” and price to earnings ratios do not matter. NASDAQ 5,000? That was nearly seven years ago. Today it is still half that.

    ReplyDelete
  36. "My question is what economic factors indicate that buyers will suddenly be willing to pay more money that they have not been willing to pay in the last year?"

    Rising rents. Rents are rising. I think your analysis of the median income first time buyer is useful, but we have to remember that that potential buyer is making a buy/rent decision. If they're already spending a lot on rent, then paying slightly more to buy isn't as crazy as it seems. In most areas, prices haven't fallen enough to move the buy/rent equation back to the buy side, but they're a lot closer than they seem if you don't factor in rising rents. You don't need prices to fall as much to achieve a correction if rents are rising, too.

    And again, I point out that foreclosures fell in the DC area during '06, which is pretty amazing since it was a down year and there were a lot of ARM resests during that period.

    Maybe the ARM resests will do it this year, and give us the big scenario of rising inventories pushing down prices which then forcing more rising inventories due to borrower distress, but if resetting ARMS and falling prices didn't force foreclosures in DC in 06, even when the rest of the country had a major increase in fotreclosures, what makes us so sure they will now? It looks like the decline in prices during 06 was just sellers cashing out after the market hit its peak in 05.

    Let's also remember that inventories actually rose during Fall of 05, which gave us the first leading indicator of a fall in prices, but fell during Fall 06, so it's a big wild card as to what will happen to inventories come this spring.

    A quarterly history of inventories:

    4600 in Sep 05
    7000 in Dec 05
    8000 in Mar 06
    12000 in June 06
    11500 in Sep 06
    9500 in Dec 06
    8400 today

    So the question is, will we see the same seasonal pattern this year as we did last year? If so, expect more price decreases as inventory increases.

    But should we expect the same pattern across Spring 06 and Spring 07, since the seasonal pattern of Fall 05 (rising inventories) differed from the seasonal pattern of Fall 06 (falling inventories)?

    ReplyDelete
  37. Actually, as I look at your analysis, Caveat, I see an important errors in reasoning. Mainly, you unintentionally assume that the median first-time homebuyer is equivalent to all first time homebuyers, which creates severe problems with your analysis.

    First, if 1st time homebuyers made up 38% of all buyers, and we believe that 1st timers are nearer the bottom of the homebuying distribution, then the median 1st time homebuyer is on the 50th percentile point of the bottom 38% of homebuyers, which puts them at 19%. And if 19% of the homebuyers can afford 25% of the homes, then things aren't that bad.

    Now, I'll allow that not all first time homebuyers are at the bottom end, so that the median first-time homebuyer might be above 19%.

    But once we factor in that first time homebuyers are more likely to be on the low side of the buying distribution, and that the median first-time home buyer is poorer than exactly half of the other first-time homebuyers, then prices don't look as crazy.

    ReplyDelete
  38. Caveat Emptor said...
    “Again, HousingTracker.net says that the median price of houses on the market in the area in Feb 2007 is $439,800, and the 25th percentile is priced at $330,000.”

    Heads up, HousingTracker uses asking prices, not sold prices.

    -The numbers provided here are asking prices derived from MLS listings.-

    ReplyDelete
  39. caveat - you make a lot of poor person's assumptions. i feel bad for you.

    ReplyDelete
  40. Caveat Emptor,

    Your logic is faulty because you make the unfounded assumption that current earnings (i.e., income) plus the "20% deposit" are a buyer's sole resources. In the example given a few weeks ago, it was shown that most middle class houses in northeast DC never go on the market but instead get passed on to the kids ... the same kids who under your assumptions would not be in a position to buy ANYTHING in this metro area. Additionally, as Va_Investor's example shows, a great number of people buying those places that are for sale can depend on family money either already in their possession or accessible when needed. Not everyone is in that position? Correct. But like the bubbleheads like to say, prices are determined at the margins ... by those willing sellers and ABLE buyers who end up at the table dealing. NOT by the whiners out in their rentals looking on ...

    ReplyDelete
  41. caveat emptor said:
    "Lets run the numbers for our median entry level buyer. Assume the median annual income has risen with inflation and is at $89,000 for 2007, and assume thier monthly debt load is $600 ($350 car payment, $150 student loan, $100 credit card"

    This is very enlightening. Entry level buyers who don't have family or personal wealth backing them DON'T have $350 car payments of $100 credit card payments. They buy a cheap cheap junker for cash and they make sure they never charge more on their credit cards then they can pay off that month. You can't have your cake and eat it too.

    ReplyDelete
  42. "That's right ... renters always have more resources than homeowners. (Okay ... I couldn't resist ... This once ...)"

    Traditionally, no. But now, maybe yes. Traditionally, a homeowner was someone who had put down at least 20% of the payment of a home, and had passed a rigorous bank income examination, one that many people could not pass. Now, a home "owner" is someone with $5 in his pocket and a willingness to say whatever he wants on a stated income doc.

    A Redskins fan

    ReplyDelete
  43. Redskins said:
    "Now, a home "owner" is someone with $5 in his pocket and a willingness to say whatever he wants on a stated income doc."

    I can buy the $5 part of your argument (though it's more like $5,000 since at minimum their closing costs had to be covered by buyers when sellers had their choice of buyers), but I think you greatly overestimate the use of "no doc loans" (which is what I'm assuming you mean by "say whatever he wants on a stated income doc.) "No doc loans" are considerably more expensive (interest-wise) than regular loans and they require a large downpayment ... so it wouldn't be the $5 down guy using 'em. Unverified income loans are used by doctors, lawyers, and other self-employed professionals who have the bucks but don't have an employer who can verify their income for them. The average person (and ALL those $5 down guys) MUST have whatever they put down on the application verified. Of course, in today's hi-tech environment, that verification can be as simple as a credit check, but it is still verfied. Perhaps you think it isn't verified because it just happens quicker than you think possible? I bet you think that when Home Depot gives you a credit line "on the spot" they haven't verified? Wrong .... they have ... Just like the lenders of home loans have.

    ReplyDelete
  44. LOL

    Yeah lance... everyone will just use their trust fund to buy whatever they want.

    This is right up there with your stupid saudi princes buying up housing idea.

    ReplyDelete
  45. "First, if 1st time homebuyers made up 38% of all buyers, and we believe that 1st timers are nearer the bottom of the homebuying distribution, then the median 1st time homebuyer is on the 50th percentile point of the bottom 38% of homebuyers, which puts them at 19%. And if 19% of the homebuyers can afford 25% of the homes, then things aren't that bad.

    Now, I'll allow that not all first time homebuyers are at the bottom end, so that the median first-time homebuyer might be above 19%."

    I have a couple corrections to your corrections.

    First, The numbers he is using came from the absolute top of the bubble. By spring of 06 things were already so skewed that the data is faulty to begin with. The people who were still able to buy late in the run-up just as the market turned are not a normal sampling.

    What would make this an interesting exercise would be to find similar data points from 5, 10, 15, and 20 years ago and compare them. We already know that housing prices more than doubled over a period when wages increased only incrementally.


    Also, I think your are overestimating the extent to which first time buyers are at the bottom of the market. The bottom of the market is made up of crappy one bedroom condos... many many first time buyers are young couples or families and will buy something at least slightly better than that. Additionally... those same bottom end properties are the same ones that are targetted most heavily by speculators. In this market speculators recently made up a double didget percentage of the total market, heavily skewed towards the low-end.

    ReplyDelete
  46. Lance said...
    “This is very enlightening. Entry level buyers who don't have family or personal wealth backing them DON'T have $350 car payments of $100 credit card payments. They buy a cheap cheap junker for cash and they make sure they never charge more on their credit cards then they can pay off that month. You can't have your cake and eat it too.”

    So, entry level buyer’s can’t afford $100 credit card payments and $350 car payments, but they can “afford” current housing prices? Then why all the “creative financing” of the past few years? Why the run up in foreclosures? Talk about having your cake.

    And for an extra slice, you then post that they can only “afford” it if mommy and daddy lend a hand:

    Lance said...
    “Your logic is faulty because you make the unfounded assumption that current earnings (i.e., income) plus the "20% deposit" are a buyer's sole resources. In the example given a few weeks ago, it was shown that most middle class houses in northeast DC never go on the market but instead get passed on to the kids”

    You know, for about a year, we had a person posting as “Lance”, and he too would regularly post contradictory assertions.

    ReplyDelete
  47. As Robert pointed out, those prices on tracker are asking prices. These days, you can shave 5-7% (and then some!) off of that and of course have the seller pay closing costs.

    So a buyer will end up paying 330 on a house with an asking price of 350. That would mean that the median first-time buyer can afford more like 30% of the houses on the market.

    Prices still have a ways to fall in many parts of the DC area. But not as much as we might think.

    ReplyDelete
  48. "This is very enlightening. Entry level buyers who don't have family or personal wealth backing them DON'T have $350 car payments of $100 credit card payments. They buy a cheap cheap junker for cash and they make sure they never charge more on their credit cards then they can pay off that month. You can't have your cake and eat it too."

    This dosen't apply to me, I can afford my new truck, goodies and still sock away enough for a large down payment on my future house. So, I can have my "cake and eat it too. Renting makes more sense by far.

    ReplyDelete
  49. I've been lucky enough to see decent price drops in areas where I've been looking in DC. Although I'm not saavy enough to come up with these dramatic financial examples of who can afford what, I will say this stuff is based on location..and I know that's an obvious statement. DC isn't a very large city, but because the demand to live in certain neighborhoods is SO varied these examples don't often don't mesh with what is actually happening. I don't know that you can do an analysis by neighborhood. Zip codes are as close as you can get, but they consistently include several different neighborhoods (ex. Trinidad, SoFlo, U Street Corridor, NoMa). Perhaps people need to be honest with some of the neighborhoods they are considering. I've seen some really nice or at least completely livable houses 3 bed/2bath(not condos) in NE DC for under 300K. I think that is reasonable. These are decent neighborhoods. No, it's not Dupont Circle, but those places are priced at a premium because of the trendiness.

    I don't know if I'm arguing bubble (or if I ever really have)so much as I am arguing that people simply need to get off of their computers and get on the ground and take a look at what some of these other neighborhoods have to offer. I think people would be really surprised. Anyway..sorry for the rant.

    ReplyDelete
  50. Anon 6:40 said:
    "This dosen't apply to me, I can afford my new truck, goodies and still sock away enough for a large down payment on my future house. So, I can have my "cake and eat it too. Renting makes more sense by far."

    So, you're saying that were we to look at your financial position in 2000 and compare it to your financial position in 2007, the amount you have "socked away" in the last 7 years far exceeds the extra amount you'd have to pay for a house now? I doubt it ... You're just rationalizing spending your way through life vs. biting the bullet now for a better life in the future. Watch out or you will end up a still a renter twenty years from now ... With nothing to show for your spending other than faded photographs of all those new cars along the way which seemed like such a good investment "back then". We are not all born with silver spoons in our mouths ... And those of us who aren't can't compare ourselves to those who are. If we really want a chance at buying the same houses and condos which for them are so affordable, we have to sacrifice. We can't expect to live the same lifestyle as then AND get that house someday. The resources just aren't there. And the pittance you are able to put away after blowing your money on new vehicles "goodies" won't help you much. And when you say "truck", please at least tell me you are referring to one of those small stripped down, fuel efficient small pickup trucks ... and not one of those expensive to maintain, all-frills, gas hogs. If it's the latter, you'll really be validating my suspicisions as to why a housing price bust is your only chance of affording your own home ... on the little that is left after you've blown through your paycheck on instant gratification!

    ReplyDelete
  51. Thank you all for your comments. Except Anon 1:15. What the hell are you talking about? Feigning pity is a poor excuse for a supported argument, and smacks of unjustified arrogance. If you are saying I believe people make poor persons choices based on poor person thinking ala Rich Dad, Poor Dad, I plead guilty. I believe people are buying more house than they can afford. But if your argument is otherwise, go look up the definition of argumentum ad hominem before your next post.

    Keith,

    I think you are right that the rental market is the largest potential source for first-time home buyers, but not the only source. In fact, the imbalance in the rental market in the late 90’s caused some or much of the boom that followed. I have heard anecdotal evidence both that rents are rising and rents are falling. According to the post below regarding the NY Times article, condominium developers over built, speculators over bought, and the next few years should see a glut of rental units. After all, the speculator’s mantra is “If I can’t sell it for a profit, I can always rent it out.”

    HousingTracker.net has some interesting analysis of historical trends on affordability:

    http://www.housingtracker.net/affordability/dc/Washington

    one of which is the price to rent ratio comparing the median single family home sale price to the median annual rent for a 3 bedroom apartment in Washington DC as determined by HUD. This ratio fluctuated between 175-200 throughout 2001-2004, but has since risen to about 290, suggesting that rents are getting cheaper relative to home sale prices. Or at least rents in that segment. Looking at the mortgage payment to rent ratio, it was roughly equal (1.0) from 2001-2002, then dipped in 2003 to where buying was cheaper than renting from 2003-2005. It equaled out again in 2005 and since has risen to closer to 1.5, suggesting it has become more expensive to own than to rent.

    I also agree that foreclosures have been relatively low in DC, which has historically been the case. Although, the craziest IOs and ARMS that were taken out at the height of the frenzy in 04 and 05 have not reset yet, and interest rates have not risen too far above the historical lows. I have heard, again anecdotally, of people who are on the verge of foreclosure, have taken all the equity out of their house, and are just waiting for the sheriff to come knocking. If anyone has a good source to track foreclosures in the area, I love to see it.

    And, Keith, you are also right that I overstated my conclusion on first-time home buyers. The median first time home buyer, and those making less, assuming they make up the bottom of the market, is only 19%, and this does not make things look as crazy. My apologies. But affordability has a distribution too. Some buyers have zero debt and a sugardaddy with deep pockets, they can probably afford 40%. Someone with larger student loans can afford less. If the median first-time home buyer were really following their financial advisor’s advice, they would be looking at houses in the $270-290K range. You are right this is not as far out of whack as I thought. Sorry for ringing the alarm bell.

    But in rethinking my analysis, I realize I did not prove what I had set out to prove, which is first-time home-buyers are being priced out of the market. I can’t do that by looking at buyers who are in the market. What I have proven (at least to myself) is that people are buying more house than they can afford relative to traditional economic analysis. Going back to our median home buyer, he or she should be able to afford a house between $340,000 and $350,000, or perhaps up to $400,000 if they have no debt. If the median asking price of $440,000 is discounted 7%, this is still $409,000. To me, this is a significant disparity and tells me people are paying too much for houses.

    I think a more useful analysis for my point is to compare median salary to first-time home buyer salary, and realize that the former is almost half that of the later. Granted, it doesn’t prove the point.

    But if you look at HousingTracker.net (Hey, I’m not getting paid by these guys, I just think they have some information worth examining) the price to income ratio from 1997 to 2002 hovered just above 2.0. By 2003 it had climbed to 3.0, by 2005 it was up to 4.0 and as of the last quarter of 2006 it is at 5.0.

    Lance,

    You are setting up straw men and then gleefully knocking them down. If you are talking about houses that are passed through families that never go on the market, then I guess you are not talking about the affordability of the housing market, are you? These a receivers of gifts, not buyers of homes.

    Yes, we are talking about ABLE buyers, and my argument that the pool of able buyers is shrinking. Buy you counter what you allege to be an unfounded assumption that income and savings are a first-time buyer's sole resources, by making the conspicuous-by-its-breadth inferential leap that one example means “a great number of people” in the market can rely on family wealth. You follow this with your own unfounded assertion that every entry level buyer does not have a car payment or credit card debt, completely blowing by the point. It is because many people do have this debt that they cannot become first-time home buyers because they are being priced out of the market.

    So if your answer to my question of “Where are all they buyers going to come from?” is “An endless supply of trust fund near-do-wells and fiscally responsible 20 somethings” then yes, the sky is truly the limit for home prices. Give me some hard data on this and I will submit a contract today.

    ReplyDelete
  52. I'm about to make a first time offer on a 1BD+1BA+Den condo in downtown dc that will be delivered in 2007. I am thinking about asking 20-24% off the listing price and I am not working with a broker. Do you think I'm totally going to get laughed at? The condo is priced in the mid-500s.

    ReplyDelete