Friday, May 26, 2006

David Lereah on Existing Home Sales

Yesterday, the National Association of Realtors (NAR) published their existing home sales (pdf) data for April.

Total existing-home sales including single-family, townhomes, condominiums and co-ops slipped 2.0 percent to a seasonally adjusted annual rate1 of 6.76 million units in April from a downwardly revised level of 6.90 million in March, and were 5.7 percent below the 7.17 million-unit pace in April 2005.

David Lereah, NAR's chief economist, said the decline was expected. "“Our leading indicator for pending home sales was trending lower, and our forecast model is showing a modest decline for the second quarter with sales leveling out before rising in the fourth quarter,"” he said. "Higher interest rates are slowing home sales, but we see this as another sign of a soft landing for the housing sector which remains at historically high levels."
David Lereah still seems solidly in the 'soft landing' camp. This is what Mr. Lereah had to say in response to the new numbers:
"This may be the bottom. It appears May is a little better." - David Lereah 5/25/05
The bottom? The boom lasted about 5 years. It has been less then a year from peak in the bubble markets. We are certainly, not at the bottom.


  1. And we'll probably just see more inventory - there are still plenty of speculators who will try to get out, plus normal sellers. Inventory is going to remain high for a while it seems.

    My question is what kind of model the NAR is using that all of a sudden shows sales rising in the fourth quarter - isn't the fourth quarter traditionally the slowest?

  2. Their very own ass model. It just produces hot air.

  3. I think we've established that there is no truly "National" housing market. (See the jokes about the market in North Dakota). However, there are common traits shared by housing markets across the country.

    So if we are applying traits to the housing markets across the nation, it is fair to apply other nation-wide factors to the discussion as well. (we've been doing this with discussion of the national economy)

    Now lets look at population growth in the United States in general. Where will these people live? What kinds of jobs will they hold? And where are those jobs located?

    Hispanics Account for Almost One-Half of U.S. Population Growth

    by Carl Haub

    (January 2006) With a population growth rate of nearly 1 percent a year, the United States is the fastest growing developed country in the world. While many European countries are facing population decline, the U.S. population is growing as fast as or faster than many developing countries. And the total population of the United States (currently at 296 million) is expected to reach 300 million some time this summer—and about 450 million by the year 2050.

    A relatively high birth rate and high rates of immigration are usually credited as the reasons for the United States' comparatively rapid population growth. Women in the United States average about two children each—far higher than most European countries—and 1.2 million people immigrate into the country annually. But exactly how do those factors interact to produce continuing population growth?

  4. WOW imagine that, David Lereah is not making statements about growth in the real estate markets. In fact he is using the word "decline" in his forecasts.
    I was having hope the he was coming to his senses, then this is statement "This may be the bottom. It appears May is a little better." blew that hope away.
    I eagerly await all the other nonsense statements he is going to say as the house prices spiral downward and inventory reaches "historically high levels".

  5. Isn't it an unfounded accusation to say that "we are certainly, [sic] not at the bottom"?

    Can someone post evidence that would support their contention that the real estate market will drop 20% or more? Not anecdotes. Not conjecture and speculation. Actual empircal evidence.

    Because it seems to me that most bubbleheads take a few stats here, and a few stats there, mix them together with some anecdotes and guesses, and concoct a witches' brew that points directly to the worst housing bust in American history with massive numbers of foreclosures and essentially the collapse of the "housing industrial complex."

    It just seems a little far-fetched and lacking in actual evidence to support such dramatic claims.

  6. fritz
    "Can someone post evidence that would support their contention that the real estate market will drop 20% or more? Not anecdotes. Not conjecture and speculation. Actual empircal evidence."


    If someone could provide such evidence, I wonder if that person predicated the outragoeus price increases back in 2002.

  7. So then, the answer is no, you cannot provide any empirical evidence that would support claims of a massive real estate price drop?

  8. Zero recognition of population growth of 4 million (known) people in the first six months of 2006. Factor in another 1.5 million "undocumented" people, and you have 5.5 million additional people in six months.

    OK, so they quadruple-up in their housing accomdations. They still consume 1.5 million new additional housing units (apts. or "houses") in six months. Lets be extra-conservative and say DC gets 1% of those folks. That's about 15,000 housing units to be absorbed by an increase in demand four housing (rentals, probably)

    Now lets discount all of this by 20% for a margin of error. That is 15,000 minus 20%; 12,000 new housing units needed. Now lets pad it some more and say those units are needed in 12 months instead of six. 12,000 units in a metro region with millions of people. A drop in the bucket, right?

    Oh I know, they'll all just move into Silver Spring and the Seven Corners area of Arlington. It's gonna do wonders for renters.

  9. No, I am asking for empirical data that supports the contention that real estate prices will drop by double digits in the near future. In other words, I am asking to see proof of the bubblehead creed of massive devaluations that will threaten the financial stability of the country.

  10. fritz
    "So then, the answer is no, you cannot provide any empirical evidence that would support claims of a massive real estate price drop? "

    Can anyone provide empirical evidence what will happen in the future?
    If someone back in 2003 told me that he believes that a 500 sq. feet studio condo in Silver Spring is going to sell for 300K in 2005, I would respond by saying you are out of your f__king mind! If I asked him can you provide me empirical evidence to support your claim, what do you think his response would be. Personally I believe these massive price swings are due to emotion and not rational thought and who can predict people's emotions empirically?

  11. "Can someone post evidence that would support their contention that the real estate market will drop 20% or more? Not anecdotes. Not conjecture and speculation. Actual empircal evidence."

    So Fritz, can you post real empirical evidence to show that it WON'T happen? You can't. That's why these things are called "predictions."

  12. Most predictions are reconsidered when empirical evidence is at odds with the projection, in other words when they are wrong. With Bubbleheads, being wrong merely increases their resolve that they are in fact right, and the longer they are wrong the more convinced they are of their rightness, all of which makes for an entertaining read.

  13. Fritz - please look up Jeremy Grantham.

    All market deviations of more than 2 std deviations have reverted violently below the mean, then crept back up to the mean.

    Also read Edward Chancelor

    "being wrong merely increases their resolve that they are in fact right"

    What increases my resolve is being right - for example, getting out of Nasdaq in March 2000 proved I was right then.

    Just like this guy, who also now thinks there's a housing bubble

  14. clarification - "Just like this guy" means that Eric predicted the Nasdaq drop, told others to get out in early 2000, and got out himself in March 2000.

    I have a little private prediction about another argument that the deniers are about to make. I think you're really predictable - please don't let me down.

    "Just like this guy, who also now thinks there's a housing bubble"

  15. It would be refreshing to see a bubblehead refer to their belief in impending doom as a "prediction" only.

  16. bitterrenter
    "With Bubbleheads, being wrong merely increases their resolve that they are in fact right, and the longer they are wrong the more convinced they are of their rightness "

    Are us telling us that there is no bubble burst? No price decreases?
    Are people able to sell houses within a couple of days and at asking prices? Do you live in North Dokota? What are your thoughts on where the real estate market is going to go?

  17. " It would be refreshing to see a bubblehead refer to their belief in impending doom as a "prediction" only."

    It is OBVIOUSLY a prediction as human beings cannot for certain what the future holds.

  18. So in other words, the entire premise of impending doom is simply an emotional one (for some, it appears that they're rooting for a housing price collapse out of bitterness at having missed the ride), rather than one based on any sort of demonstrable facts or logic.

    Asking for proof of an assertion is NOT asking for proof of a future event. It is simply asking for one who is making a hypothesis to point to evidence supporting that hypothesis.

    So far, no one has been able to provide any evidence to a pretty simple request, given that this blog is dedicated to the viewpoint that there is a massive bubble and it's only just begun to burst.

  19. fritz,

    I am NOT predicting "impending doom", merely gloom.

  20. fritz - "no one has been able to provide any evidence to a pretty simple request"

    I gave you some pointers above.

    Also look up Shedlock an "Mike Morgan" and Florida.
    (I suspect you won't, much as you studiously avoided my last post)

  21. David said: "I am NOT predicting "impending doom", merely gloom."

    This isn't correct. I recall you saying that "A Perfect Storm" was upon us. Right? Shall we dig all the words out of your previous posts to prove that you are indeed predicting DOOM? Or are you revising your position?

  22. David also said: "I don't know for sure what will happen, but I do know that we are skating on thin ice!"

    The metaphor of skating on thin ice is a strong indicator that catastrophe is about to strike. The context in which you used these words were in reference to the national economy, not just the local housing market.

  23. fritz:

    Here is some data to make the case that prices will fall:

    For at least this market, the P/E ratio was stable over one decade, then shot up tremendously starting in 2003 (today's P/E ratio is twice the long run average). This means that prices would need to fall 45% compared to rents for a correction.

  24. "I recall you saying that "A Perfect Storm" was upon us."

    Here is the post:

  25. " David also said: "I don't know for sure what will happen, but I do know that we are skating on thin ice!"

    When did I post that?

  26. "When did I post that?"

    It was part of your commentary on the fact that the WaPo Express printed your "house on fire" analogy.

  27. Ohhh, an "expert" looks at P/E ratios to predict the future! Here is another "expert" who says that P/E ratios are irrelevant!

    "according to Christopher Michaels, P/E ratios are one of the least important parameters of a stock's price performance." Mr. Michaels, Publisher of IntelligentValue Newsletter, says that P/E Ratio was beaten by seven other criteria in an extensive five-year study that found seven stronger criteria with the top one producing a return of 105% per year. Read more about the study at

  28. What happens when the E part of the ratio starts to rise? The Fed has been telling us recently that rents are on the rise. Rising rents(Earnings) and stagnant price will make the PE look 'better'.

  29. "It was part of your commentary on the fact that the WaPo Express printed your "house on fire" analogy."

    Please LINK. Can't find.

  30. Anon 9:51
    "The metaphor of skating on thin ice is a strong indicator that catastrophe is about to strike"

    This metaphor means a catastrophe could happen if you are not careful. I must be really bored at work!

  31. dc_too
    "Oh, dear, the room is filling up with bitter realtors again."

    How many of you participants of the blog are "bitter realtors"?
    Please raise your hands.

  32. Looking for the "thin ice" reference. I just stumbled across it previously. In the meantime, here are your doomsday words from May 7th. Does this sound like the "gloom" you purport to predict? Or is it DOOM?

    Last year we bubbleheads saw the smoke and correctly inferred that the house was on fire [there is a housing bubble]. Now, the flames are apparent in the bubble markets. Still, many in the housing industrial complex refuse to see the flames that are engulfing the house.

    posted by David @ 12:46 PM

  33. Even that bastion of journalistic accuracy and integrity known as "The Washington Post EXPRESS" has this to say about your blog. (Look it up yourself. It is probably framed on your wall in your apartment)

    " thinks rising gas prices coupled with already high housing costs present an economic doomsday scenario for the United States"

    Did they get it wrong, David? Should they have said "gloomsday" scenario instead?

  34. "Zero recognition of population growth of 4 million (known) people in the first six months of 2006."

    The population growth rate has been just about 1% for the US in recent years.
    That means about 1.5 million in the first 6 months of 2006.
    And yes the Census Bureau counts include every legal and "illegal" resident.
    Please visit the Census Bureau for the numbers, and not create them out of thin air.

    And yeah they also keep track of the housing units for every county in the US.
    Housing Units have been rising at a rate greater than population growth rate.

  35. There is more to forecasting than predicting that a series should revert back to its long-run mean. I doubt home prices are a stationary time series...current price patterns are very much correlated with previous years.

    In plain can't say what goes up most go down. You have to try to find and explain trend breaks in the series. Trying to predict "a bubble burst" now should be a hunt for a break in the trend...explainable by either a new shock to the economy...or the end of an old shock.

    Simply arguing that home prices must go down because they have been going up for so long is not any more intelligent then arguing they will continue to go up at their current pace forever.

  36. fritz said:
    blah, blah, blah...trees can grow to the moon. prove me wrong!

    if you think bubbleheads are idiots, why hang out here?

    go buy some condos in florida, they seem to have run out of greater fools...

  37. I will state it once again. I am NOT predicting doom. There will be NO DEPRESSION in the coming few years. There will be a gloomy recession in the coming few years.

  38. I took a look at Anon 10:56 data sets. Yes, those sets do include illegals and Yes, the rate of increase for housing units is greater than the increase in population.

    However, that analysis has two flaws. One, the data is from the Current Population Survey, which involves actually interviewing people. If you remeber back a few years ago to the 2000 Census, there was a lot of reporting about how illegals were reluctant to be interviewed by anyone from the Federal Government and were undercounted. The data does include illegals, just not necessarily all of them.

    The other flaw is that the housing units survey includes all housing units, including vacation homes and second homes.

    I don't have any numbers for vacation home construction in the last five years, but I bet it's a big chunk of the 6.9 million units added. And I bet it won't be hard to find accurate info on that either.

    Housing construction simply has not kept up with demand. That explains some of the recent price increases, and that also explains why some of the "bubble non-believers" won't join in.

  39. Is a "gloomy recession" different than a sunny recession?

  40. I think the Census Bureau numbers are highly credible,
    even if not 100% accurate. Any sample of that size cannot
    be 100% accurate.

    You are right that the demand for housing has been strong.
    Mainly because people have been snatching up homes for
    investment purposes.

    The demand for housing is different from the "need" for

    This link will tell you how much vacant housing has the US been

    The Bubble is exhausting as we speak. Most of these
    vacant houses will be put up for sale, once the owners find out
    it is no longer profitable to hold on to a second home.

    The Home Builders will be more aggressive with price cuts to move
    their own inventory. Existing home owners will have to follow.
    That downward spiral has already started this year. And will unwind
    for a long long time.

  41. fritz - you get a better tan during a sunny recession...but you're still out of work

    NOVA Fence Sitter

  42. David,

    OT -
    After reading several Bubble blogs, I drove around Lakewood (CA)checking out homes. Entered one open house and found the realtor (empty house). 821 Sq ft,2Bd 1Ba, Single car garage, stainless steel Kitchen sink.$521K. Agent asked me to make an offer after 2 minutes.

    I saw another realtor drive up to an empty house in his Mercedes SUV. Never trust a realtor that drives a Mercedes SUV.

    This morning the wife was curious about homes in Westminster -
    2500 Sq ft,5Bd 3ba,$839K reduced to $824K. Nearby house 2000 Sq ft, 3Bd 2ba, remodeled $745K. Marketing sheet says "(owners are agents)". Upside - Kitchen w/granite countertop !! LOL.

  43. rebar,
    now you know that of the 125M houses in the US, 16M (12.8%) are vacant. Which is alarming by any standard.

    Here is the empirical evidence you asked for

  44. "This morning the wife was curious"

    Never trust a man who refers to the most important person in his life as "the wife"

  45. Zip Realty Inventory -

    Greater Los Angeles Area :
    Total 95,304 Reduced(30,662)32%

    LA County-37,440 (10,680)28.5%
    Riverside-22,799 (8,277)36%
    Orange County-14,824 (5,315)35.8%
    SanBernandino-14,370 (4,252)29%
    Ventura- 5,871 (2,138)36%

    Does anyone have Y-O-Y inventory for these counties ?

    Can someone post this on the Ben Jones Housing Bubble Blog ?


  46. We have had real estate bubble because we have had credit bubble. Is that really hard to see?

    It has been a Ponzi scheme. This pyramid has been growing as long as new money was coming, the bigger the pyramid gets the more people get their attention to it and participte. Consequently more money goes to the bottom of pyramid, it will grow & grow. But when new money stops coming in, then the entire pyramid collapses.

    I think that is what we have.

  47. "Affluent buyers losing homes"


    "What's startling isn't just the higher numbers, but who they represent - the affluent, not just the down and out.

    These are the ones with a bigger ability to get money - the executives, businessmen and professionals - buying more than they can possibly afford," said Brad Geisen, president and CEO of in Boca Raton, Fla. "They were banking on price appreciation continuing to go up fast, and pulling their money out in time."

    End quote

    But dont worry. Thats all in other places like California and Florida and Milwaukee.

    Nah, not in DC. DC is different.

  48. Listen to this, it is 59 minutes and it worth every minute of it.

  49. Fritz said “Can someone post evidence that would support their contention that the real estate market will drop 20% or more? Not anecdotes. Not conjecture and speculation. Actual empircal evidence.”

    Well, you can only provide empirical evidence for scientific events or phenomenon. Economics is not a science, consequently you can not have empirical evidence to predict future.

    We can only observe facts and deduce what may be happening in the future.

    These are facts that we may observe of current real estate market.
    1) Prices have been bid higher and higher during last 5 years because of flood of cheap credit (low rates) & loose lending practices, not because of real demant for houses,
    2) Consumers are pushed to their limit and they can not borrow any higher than what they already have and no new money will coming to the real estate market. Previous post talked about Ponzi pyramid, which is right no money will coming to the bottom of this pyramid any more.
    3) Inventories are growing rapidly, prices have not come down much yet, but they will. Right now sellers are in denial stage, after six month they will worry and one month later they will panic.
    4) Many people bought properties that they barley afford with teaser rates, just imagine what will happen to them when their loans reset.

    Conclusion: Very high probability of price reduction and market stagnation for years.

  50. Sarah in Arlington said: "In third world countries, you have famines."

    This is an appalling statement. You are saying that people suffer famines because they cannot afford food. FOOD ISN"T AVAILABLE. PERIOD. That is why people starve to death en masse.

    Remember Somolia? Look into it.


  51. Humm...

  52. You are citing Wikipedia?! Bad move, especially since Wikipedia is consistently in the national news for being inaccurate.

    Now, here is a quote from the United States Department of State. (they rate slightly above Wikipedia on matters of geopolitical importance)

    “The principal cause of famine in the last several decades has been a collapse of production, usually caused by war or drought or some kind of locust infestation, where the crop collapses."

    My Uncle Rico owns a bridge that connects Manhattan to Brooklyn. He's looking to sell it. Are you interested?


  53. If people truly considered housing a 100% investment, a 20% decline nationally would not be out of the question. But because many people are living in their houses simply to....well, live in their houses....then I don't see that kind of collapse happening. Most likely there will be a slight decline of prices since some people will have to sell and there will be little to no price support otherwise, but sellers will generally not sell unless offers are close to the comps in the area.

    In other words, I think there will be a long period of market stagnation along the coasts, with business as usual in between. This will likely bring a recession as there will be little support for consumer spending, other than what people can save each month by working at their jobs. The only way to avoid a recession is for business spending to remain robust, which will depend in large part on doing business internationally.

  54. Remember those old SNL skits where Martin Short would place that nervous, defensive attorney named Nathan Thurm? He was this really greasy guy who was holding a cigarette with the ash part getting longer and longer on his cigarette, while making all of these defensive statements about what he said or did not say.

    I'm thinking that David Lereah will start acting more and more like the Nathan Thurm character in the next 12 months.

  55. Sarah in DC (MSA),

    At the beginning of this month, the week before the immigration rally, a rumor that ICE was conduction random sweeps went through the commercial construction sites in Arlington. About 3/4 of the workers did not show up on the Thursday before the rally. We can assumme that they are illegals. These workers make on average $20/hr (Check out for construction cost data, including hourly wages) and most of them have been working overtime for years (Housing boom, remember?). These people have household incomes well into 6 figures, because, as you said, lots of them live together. Not only do they send money home, but they pay $400,000+ for crappy little ranchers in South Arlington.

    And they live in crappy apartments as well (Probably saving up cash for one of those houses). The point is they are occupying housing units and eliminating housing choices for people like you, forcing you to consider buying a $300,000 condo with an IO ARM or hoping that price will fall to put those same condos into reach without an exotic financial instrument.

    And, because they are illegal, they avoid participating in Census activities and tend to be undercounted. If I remember correctly, Congress passed a law expressly forbidding the Census Bureau from making statistical adjustments to reflect that undercount.

    One way or anther, or both ways, illegals are contributing to the demand for housing, pushing prices up.

  56. rebar,
    First you say they live in crappy apartments. And then you say they are
    eliminating your housing choices.
    Are you in the market for what you call crappy homes?

    And then you also say they buy ranchers.
    Are you wanting to buy ranchers?
    I have'nt heard of any bubble like prices for them.

  57. Well, by Rebar's logic: illegal immigrants provide cheap labor for construction, so should help increase the supply of houses at lower costs and thus help shift prices down. Given that, as Rebar, says, they often live in large groups, this effect is probably much larger than the increase in demand illegal immigrants cause.

  58. OK supernova, after your enlightening post, I started to run the numbers again. But alas, I only have local data from 2003. So, in my quest for local data from the ‘80’s I realized, in all your scenarios you’re still counting on those “cheese hotdogs” from never never land of “all things being equal”

    But guess what, all things are not equal. If all things were equal, we would not have an INCRESE in foreclosures. Now I have no polling data, but if all things were equal, I believe these folks would not ruin their credit in this “lucrative” housing market. They would have found another way out if possible.

    A large number of exotic home loans in ‘05 for folks that must keep up with the Jones’s and just get in the market. When those loans adjust, things will not be equal for those people.

    A large number of speculators purchasing homes that are not primary residents. What’s the data now? I think it was 34% of buyers in ’05 have negative equity in their homes? That does not sound equal to me, be it 1980 or 2006. Here you’ve got this whale, and you can not sell it without bringing cash to the table. Rent it out like the other folks in the same situation? I don’t think these folks have the logistical backing to go into price fixing. A few folks will go negative cash flow to just get it occupied. It will not equal out.

    And on a personal note, I’ve seen a 115% local increase YOY of inventory. For me, it’s reached critical mass. Why would I pay anything close to asking price when I’ve got so many homes to choose from? Why hurry and place a bid. I’ve got time, the sellers do not. OK, some sellers do. But it only takes a small percentage that must sell to go thermo with this mass. My next comps will not be houses that have sold, but houses just like the one I’m bidding on that have been on the market 180+ days.