NAR on "Temporary" Housing Problems

I almost miss David Lereah. He was the former chief economist for the National Association of Realtors [NAR], and author of many fabulous books on how to lose all your money in Real Estate (as well as Tech/Telecom/Internet stocks). Since Housing peaked in August 2005, we could always count on Lereah for some utterly ridiculous economic absurdity, explaining why the Housing numbers really weren't that bad, and why the-bottom-was-in !

Sheer, delightful idiocy.

It was great theater. Each month the NAR could be counted on for denial, cheerleading, and blind stupidity. When the NAR ended up with a new, somewhat less-hallucinogenic chief economist, I was actually a bit disappointed.

Well, cheer up kids! At least a little of the ole psilocybin may be back in the NAR drinking water. This month, they served up the following delightful headline:

August Existing-Home Sales Fall on Temporary Mortgage Problems

And ya know, these problems ARE "temporary." Thanks to the entropy of the universe, eventually all real estate will disappear as the universe eventually succumbs to its own mortality (heat death). So if you want to be technical about it, all problems are temporary. Thank you, Lawrence Yun, for that bit of existential insight.

Where was I? Oh, yes, real estate.

What did this month's NAR report have to say?

• Mortgage availability problems peaked in August (How they know this, I cannot say. But if they said it, well, there's a chance it's true: A very, very small chance).

• There were unusual disruptions in the mortgage market (Really? I must have missed 'em).

• We saw a fairly high number of postponed or canceled sales. (I guess this must be a fairly new phenomenon).

• Lower sales contributed to a buildup of unsold inventory (duh).

• The NAR expects similar results for home sales in September.

So while the NAR cannot help themselves but spin the data somewhat -- a flack is a flack is a flack -- they are nowhere near Baghdad Bob's levels.

Of course, most sober commentators who reviewed the data were much more circumspect. Our own response to last week's utterly dreadful Housing data points were of that ilk:

• Wheeee! New Homes Sales, Prices in Freefall

• Continuation of Negative Annual Returns in Housing

• Warnings of a Housing Crisis (in Real Time)

But to really get a sense of how poor the data was, check out what Floyd Norris wrote in the NYT Saturday:

"With sales of both new and existing homes down, more homes are now on the market than ever before — almost 4.5 million, a figure that is nearly double the number in early 2005, when prices were rising and home builders were reporting high profits.

And many of those homes have been on the market for a while. Of the 178,000 completed new homes that were available for sale at the end of July, fewer than 15 percent found buyers in August. That was the lowest rate in more than a decade.

In late 2006, it appeared that the housing market had stabilized after falling, with new homes selling at a seasonally adjusted annual rate of about one million, and investors bid up the price of home builder stocks.

But with all the bad news, those prices have fallen to new lows. The pace of new-home sales in August was just 795,000, a seven-year low."

But the money shot is the accompanying graphic: (click to enlarge)

graphic courtesy of the NYT

By late 2008, or even 2009, we should see Housing more "normalized." But between now and then, we should expect to see prices drop more, until much of the huge inventory build gets worked off. For those of you who put more faith into futures markets than I do, note that prices aren't shown bottoming until 2010.

Temporary? I guess if your definition of temporary is a few years, well then yeah -- it's temporary. But so is everything else . . .

Sources:
August Existing-Home Sales Fall on Temporary Mortgage Problems
NAR September 25, 2007
http://www.realtor.org/press_room/news_releases/2007/ehs_aug07_sales_fall_temporary.html

For Housing, the Summer of the Unsold
FLOYD NORRIS
NYT, September 29, 2007
http://www.nytimes.com/2007/09/29/business/29chart.html

Comments

[DuffBeer]

Barry,
Thanks for pointing this out . I have been in real estate for over 22 years and have never seen such a dismal market. I comment as I see them from my market place in the south ,southwest areas of Chicago. The down trend started for me in aug 04 and has progressively dropped off. Sure I have made a living nothing like those mega brokers but I WAS doing ok. These NAR numbers are wacked !! No one tracks dead deals. I do personally because it will tell expose a trend,a trend that is not good for anyone. SUB PRIME to me equaled lots of dead deals and foreclosures to follow. That is exactly what occurred. It will take awhile to work out of this mess.
Today buyers are non-exisistent , sellers are in denial about pricing,appraisers penciles no longer just fill in the number, new builders sales managers talk to and send brochures to local real estate agents, broker owner's continue to send in stats without dead deals,
NAR tries to sweeten up those sour numbers and what will the real estate TAX MAN do now.

I have only done a third of my normal business I do each year and I have been very successful. It is clean out time. Many so called agents will be gone .I hope the mortgage side gets a big flush tooooo.
DuffBeer aka Dave Bigos

[beallsy]

Dave,
I am also a realtor going on 31 years. I have never seen a market like this. And NAR stats are wrong. I showed 5 houses today and 4 of them were short sales. It is heart breaking to observe this.

I started advising my clients in 2005 to refrain from buying. The market, as you know, is cyclic. Proven and can't be disputed.

What I am having a hard time understanding is why these mortgage companies are willing to modify interest rates. I know people who were in 3/1 ARMS, always made their payments on time over 36 months and are now faceing 50% payment increases.

They can't refi out of them because they are upside down or their LTV is to high. Their only choice is to walk.

I have researched this issue for over 3 months. Unfortunatley I have a lot of time on my hands. This is what I have found out:

AHM for example:
Loans originated - securitized in pools, mortgage back securities.
Sold for 110%, or higher - YSP that was paid to the broker is added in prior sale - all loan pools have Mortgage insurance, MI - they are covered up to 35% of the original balance on each loan - value added result credit enhancement -

Loans default, 90 days - AHM buys back at what is called the Hair cut price (big discount) - forecloses on loan - MI company reimburses them up to 35% of original loan balance for losses.
They are guaranteed back interest, even the 90 days worth the invester lost - they get reimbursed all payments while house is empty while chargeing over 8.5%.

MI companies require reports sent to them stating borrowers efforts, intentions, etc. Mortgage company protrays borrower in the light of not wanting to make payments, not wanting to maintain loan and keep their property, etc. NO ONE sees these reports except the foreclosure dept. of the mortgage company and the MI company. MI company has to approve foreclosure prior to its onset, and is based on the reports.

Most MI companies insist on favorable workouts for the borrower prior to approval of claim. Most lenders will not comply because it isn't as profitable to them as a foreclosure.

AHM, for example, promised the investors that they would do a 90 day work out with their borrowers in default to avoid foreclosure.
Here is an example of their workout.
$4500- new payment borrower cannot make - increased from $3000-. They offer to split the payment up by 3 parts and add 1/3 to the next 3 months. So the next three payments will be $6000- and credit still dinged every month.
An impossible situation for a borrower of which they are aware.
They report to the MI company that the borrower is being uncooperative with their proposed workout.

All they have to is modify rates to market rates and stop this whole mess. And they won't because of promises they made to their investors. And they restrict the borrowers access to the investor of their loan, and will not disclose the MI company prohibiting the borrower the opportunity to work with them directly. And the policys written on the pools do not itemize the individual loans, so it is impossible for borrowers to find out if their loan is insured because only the pool amount and name is listed.
The MI companies want to speak with borrowers - I have called quit of few of them.

Sadly, everyone looses except the mortgage company. The investors lose and the borrowers lose. And they lose a lot.

Triad, MGIC, etc. are all taking hits because of this, and their investors are losing their shirts, resuting in class actions coming down the pike against some of the MI companies on behalf of their investors.

Thank heavens that I have always worked with reputable mortgage bankers and brokers. My clients have avoided this mess.

Now employees of AHM are coming out exposing the cutting and pasteing of loan documents that occurred so the loans could be insured, creating value and sold with credit enhancements.

This will all be coming out soon - Bernanke is finally getting a clue, dahhh -

What a mess - and guess who wins again??

[long timerealtor]

I, too, have been in this business a long time as a Realtor -- 26 years -- and I've never seen a down-turn such as this. Sure, one can call it a buyer's market but with buyers few and far between in Palm Beach County, Fl that is not an apt description. Our inventory continues to grow daily and the few sales I and my colleagues have made have been a hefty 30 and in some cases 50% down from the high of two years ago.

Yes, NAR's fugures are wacked! I participate in a new "study" from NAR asking participants to rate their market, mortgage conditions, etc. I'm just wondering what they will do, if anything, with this "study." Will they ever release it?

[Jimbo]

Barry's comments are always informative and entertaining but this one is a real gem. I am a lay person with regard to real estate but I have been saying to myself for about two years that housing construction was unrealistic, and to make matters worse, poorly planned and shoddily built.

[Tony Rand]

Once again, Barry, you have brought a smile to my face on this wonderful and beautiful Sunday evening in Southern Orange County (California). As with DuffBeer, I have also been employed in the housing market for 22 years. Not in real estate sales, but in mortgage banking (specifically in compliance, credit, due diligence, loss mitigation and the secondary market). I am disappointed with why this market is in the mess it's in versus just being in a normal market cycle. The unfortunate "why" is greed, pure and simple.

Back in 1998, the last cycle that was due (without being negatively influenced by the market moves we've seen since 2001), was also influenced by liquidity issues (in ours and other markets - problems with Russian and other currencies - erratic movements in the mortgage backed securities markets - erratic downward movement of the fed funds rate - erratic upward movement of the 10-Year Treasury - etc.), caused several corrections in the market even though they were temporary.

Because the fed overreacted and the Treasury market was up and down (daily) with erratic emotional trading, the housing recession was postponed until sometime between the second half of 2000 and the first half of 2002. In fact, in the beginning of the second quarter of 2001, we started to see an impending recession of all markets, especially in the housing sector. Unfortunately, a multitude of events took place from the fed (then still under Greenspan) which followed the 2000 dot.com meltdown and/that precipitated a majority of the problems we're seeing today.

The markets again attempted to correct themselves in 2003, all to no avail. Wall Street was still receiving a huge demand for bonds; specifically adjustable rate mortgage backed securities. This demand, which started out on a USA economic level slowly bled into a global demand. Part of this was from the slow flattening of the global economic markets (including employment).

The demand for bonds was so incredibly strong, that anything and everything was being purchased (as for the mortgages needed to fill those fixed income securities). Because the housing market was not able to meet the full demand of the institutional investors in play, the loosening of credit standards that began in 2001 (to fill those demands), carried forward into 2003 with an even greater force than ever before in the history of the housing market.

All of this was driven, of course, by greed. Wall Street was making a TON of money, as were the rating agencies and GSE's that were backing, guaranteeing and/or certifying the liquidity of the bonds being issued. Being the terrible thing that it is (I'm speaking of greed), the market continued to fill the demand with further/additional loosening of credit standards to the point that mortgage loans soon became known as easy to acquire or "easy money". Fraud then spilled into the market from the greed that was driven from the secondary market - mortgage market (Wall Street driven and controlled). Fraud and greed, when combined are both a toxic and terminal combination...as we know they are to be today.

The models that I've been running show that the housing market will not flatten (a.k.a. bottom out) until some time in 2009. The commentary and supporting graphics you've supplied show that this will not happen until 2010. I will in no way shape or form (without proper supporting evidence) disagree or challenge the data supplied in this article; because at the end of the day, we've never seen this type of market before and we may never again see it -- this of course causes other/additional problems.

What I'm looking for, as an employee of the market, as well as being a United States Citizen trying to survive in this market, is consistency and honor. Both of these traits used to exist in our market, but they've been missing for some time now. Because of this, I've had to find other ways to feed my family and provide assistance to those that cannot afford to feed their families.

The saddest part of all of this comes from the delayed economic number that we get from all of the agencies which do not fully disclose the severity of this (or any other) problem that is so reliant upon the accuracy of that data.

In closing, I again thank you for calling a spade a spade...and for calling onto the carpet, the NAR and its continued false claims that "everything is okay...all is normal...all will prevail".

Most certainly, the biggest idiots are those that actually believe those statements (my apologies to all of the NAR and Realtor based members that "want" to believe these reports.

Best regards and keep the "truth" coming!

T. Rand