NAR's Lawrence Yun Continues to Mislead on Housing

NAR Chief Economist Lawrence Yun continues to prove he's lost in the woods. I'm sure most of you who have followed the real estate market recall his long list of ridiculous predictions. Do you remember when he claimed house prices would rebound in 2007? His quotes continue to supply stand-up comedians with new material.

One could reasonably argue that Yun is committing consumer fraud by trying to entice people to buy into a market that is poised to fall further. I suppose he thinks his ridiculous predictions will restore confidence in the real estate market. If in fact his role is to spread optimism, the NAR should be legally required to post an appropriate disclaimer stating their real purpose.

Despite what Yun states, more affordable mortgages won't solve this mess. It's a bubble that must deflate. If it does not deflate fully now, it will down the road with much bigger consequences. Mr. Yun, if you're going to try to remain optimistic throughout the crisis, at least do it within reason.

Excerpt:

A National Association of Realtors study shows house sales remained soft in March, but the organization is forecasting sales will begin to improve over the summer.

I wouldn't bet on it.

The median new-home price is estimated to fall 3.7 percent to $238,000 in 2008, then rise 5.4 percent in 2009 to $250,900.

Wrong

NAR said the 30-year fixed-rate mortgage is likely to increase gradually to 6.2 percent by the end of the year, and then average 6.3 percent in 2009.

What he is not telling you is that the period after 2009-2010 is critical since most ARMs will have reset by then and inflation will be sky-high. Stating that mortgage rates will be contained through 2009 is trivial. Why won't he tell us what will happen after 2010? Does he not realize that rates are set to soar or is he afraid to tell the truth?

Below are just a few of my forecasts for the real estate bubble made in 2006. Thus far, I have had no reason to change these estimates. Like all of my forecasts, these were made with the hope that no revisions would be needed, unlike the "experts" who continue to revise their estimates each day, dragging Americans further into the abyss with their reckless guidance.

• Home Prices: from the peak in 2006, home prices will decline to pre-1999 levels.
• Commercial real estate market will also suffer
• Prime Mortgage foreclosures: the next trend in the housing correction will be a crisis in prime mortgages due to the weakness in the economy
• Rental Market: set to heat up, good investment opportunities
• Mortgage rates: will head north of 8% after 2010, and soar into double digits thereafter. This will cause home prices to sink further.
• Most likely, the housing correction will last many years. While it may show signs of improvement by 2009 or 2010, this will be temporary. When millions of baby boomers scale down to condos and retirement communities over the next several years, the market will be flooded with existing home inventory.

I'm not claiming my forecasts will always be right. But I make them with the intent to position investors ahead of the curve rather than behind it.

Finally, in my opinion, the banking crisis is far from over despite what you hear from the "experts." In order for America to mount a real recovery, consumers need real wage growth; something they have not had since 1999. They need affordable gasoline, healthcare and food prices - something they have not had for several years. Consumers also need job stability - something that continues to fade.

Only after these things have been provided will Americans be fit to purchase a home responsibly. Financial irresponsibility is something all too familiar to Washington. And most consumers have learned well from them. I suppose Washington thinks they'll be able to borrow from foreign nations indefinitely. Well guess what? Those days are fading fast. See my May 5 article ("Stay Clear of Traditional Asset Classes") for more on the real estate and banking crisis.

Disclosure: None

Comments

[tj214:]

You don't consider some other very important demograhic facts. The Boomers Babies are entering the home buying stage of their lives and there are more of them then there are Boomers.

Another thing to consider as is the constant transfer of wealth that is occurring and will likely excel as Boomers age. This will give their kids the resources necessary to buy homes.

The average age of a Hispanic head of household in this country is now in the upper 30's. Prime home buying age.

2008 May 13 08:23 AM

[Smalltownba...:]

Just like everyone else you paint with a broad brush. All markets did not experience hyperinflation of home values, in fact most of the market saw more normal appreciation. All markets are not seeing values crashing down but 0-10% will be the norm across most of the Nation. The crisis in Prime lending which you predict will not happen There will be limited failures due to fraudulent stated income loans and homeowners who have overextended themselves in other areas. In reality those are always with us. A property that is overpriced for a homeowner is significantly overpriced for an investor so I am not sure where your comment regarding rental property comes from. GSE's are now placing serious limits on the number of investment properties you can finance for one individual so this prediction is only good if you have cash. The housing price correction in some markets is largely over, in some markets is half way through, in some markets is just beginning and in some markets will never happen so overall the predictions made by everyone are true in certain areas. I would suggest shifting focus to opportunities instead of predicting doom and gloom. I guess it is comforting to you to know that your doom and gloom predictions will be well received by the losers.

2008 May 13 08:34 AM

[niterider:]

tcornelison is either related to yun or , is a real estate agent. This housing crisis is the worst since the depression. Check out the CASE SHILLER INDEX . People who try to mislead like Yun and the previous comment ( tcornelison ) , you are the LOSERS, shame on you !

2008 May 13 09:14 AM

[tl:]

Rental market to heat up? I don't see it. Maybe temporarily, as rental properties are converted to condos in some cities. But all the extra inventory will ultimately lead to a softening rental market as many of the new condos are converted back into rentals.

Please explain why you see the rental market heating up.

2008 May 13 10:02 AM

[tl:]

The Boomer Baby argument is tired. It's the same argument that the homebuilders used to convince themselves and their investors to build -- as it turned out -- too many homes. Judging by the stock prices over all the homebuilders, the Boomer Babies aren't going to save the housing market.

2008 May 13 10:04 AM

[Malkiel:]

Real estate doom and gloom now has its "fanboys" just like Apple computers and Linux software, people who are determined to make their bias stick through sheer force of will. Mr. Cornelison is right, the majority of America's markets are now reasonably priced, so there isn't a rational reason to expect further deep collapse nationwide--except for the troubling detail that the lending market can't seem to reconstruct itself due to a collapse of confidence. Investors are not yet willing to buy mortgages from brokers again and mortgage insurers are slapping arbitrary conditions like 20% down payments on certain classes of mortgages (especially, for unknown reasons, condominiums) which take first-time buyers out of the equation.

While Mr. Yun is an easy target, I didn't see any analysis justifying some of Mike's predictions, especially where interest rates would be in 3 years. More sophisticated analysts elsewhere on SeekingAlpha have given detailed arguments as to why ARMS resets may have already done their worst. The point about the long-term effect of inventory is worth further discussion, especially if mortgage originators really do tighten their standards on a permanent basis. Given the behavior of credit card companies since the late 80's, where profit trumps sound practice at every turn, I wouldn't expect the mortgage market to stay "reformed" for very long...

2008 May 13 10:29 AM

[Lilguy:]

[Comment edited for abusive language. Commenter put on notice] I do accept the NAR data as essentially accurate within its methodological assumptions, and make my own judgments about what it means.

For me, I don't look for house prices to stabilize before at least next year, maybe 2010, as the huge market overhang continues. I don't think house prices will reach their 2005 peaks for 7-10 years weakened, of course, by inflation in the meantime.

2008 May 13 11:07 AM

[Tom Lindmark:]

Good article and good comments. I particularly like the back and forth concerning the Boomers. Here's a link to an article I posted a while back on the Boomers and it also contains a link to a further story- blog.metro-real-estate...

2008 May 13 11:39 AM

[darcydancer:]

For the overhang to disappear, there needs to be a reasonable level of transaction velocity. How will this come about? Ask any now or soon to be unemployed mortgage broker about the prospects.
The rental market will do anything but heat up. Homes that can't sell get leased.

2008 May 13 01:23 PM

[johnthebear:]

Agree that the housing bust will last much longer than most "experts" think likely.

I believe commercial real estate will be hurt bad as capitalization rates rise along with interest rates tied to inflation and reduced lending capacity of banks and other lenders. Rising vacancies will also cut into previous dreams of appreciation.

2008 May 13 01:57 PM

[WAKEUP:]

Down. That's the only direction that exists, as far as house-prices are concerned. Everybody will gradually realize that. Median price will drop to under $100,000.

2008 May 13 01:57 PM

[ed auerbach:]

There's a lot of money out there! $ 3.5 Trillion in money markets. Who knows how much in IRA's, 401ks, Pension funds, etc. People are still working and they will buy and spend. We are still the engine of the world. Don't bet against America. We still supply everything BRIC needs. I said trillion!!

2008 May 13 02:41 PM

[hwbyrne:]

I don't see house prices reaching the 1999 level or $100K median price. The bubble didn't start accelerating until 2004, so I don't see prices or median going below the 2003/4 level. I think that is significant because prices doubled or more from 2003 to the peek in 2006/7. Thus, I would not buy any property in a bubble area unless it was down to 1/2 of its peak value. I also don't see the bottom happening until the middle of 2009. In 1991/2 the bubble areas dropped to 0.5-0.6 of their peak values of 1989/90 and didn't recover to their previous highs until 1999/2000. This bubble is about the same as the previous bubble, so I don't see prices back to their highs until 2013-2015. Also, the opportunity for rental investment is fuzzy, since many home owners under threat are offering rooms for rent at discount prices. It is unclear if the consumer will take advantage of that opportunity. Personally, I do not think the average consumer would feel comfortable renting a room in a house with the owner there. This philosophy is just an extension of the reason why so many commuters travel to work alone in their cars. Everone values their privacy too much to share their space with strangers or acquantances. Thus, I tend to agree with the author that there may be an opportunity for rental investments, but with a bit more caution. Finally, many have correctly pointed out that there is a large percentage of the USA that never experienced the real estate bubble, and are therefore exempt from the current correction. Final observation: during the last real estate bubble, most people lost their interest in real estate in the 1990's and turned to the stock market. This created the stock market bubble which drove the NASDAQ to nearly 5000. After the stock market bubble burst in 2000/2001, real estate began to spread its fever in 2003. If 9/11 had not happend perhaps the real estate fever would have occured sooner than 2003. Lesson: this cycle between real estate and the stock market seems to repeat. I would like others oppinion on this topic.

2008 May 13 02:55 PM

[Eagle-Chief:]

Mike - good points you make. You are correct, this is a BUBBLE that needs to deflate & lower interest rates WILL NOT correct the issue. The situation is very different today - banks are not thowing "money" at everyone who walks throught their doors, which is how the bubble started in ther first place. The opposite is true. It is much more difficult to obtain a loan. This trending away from easy money will have a price-lowering affect on homes. Also, affordability is still a HUGE factor. I too, believe that this will be a multi-year correction. (The guy above who says that most markets are "reasonably priced" is quite misinformed. Sure, maybe if you want to live in Oklahoma - go for it dude). Look around, housing is not cheap. Housing will continue its downward spiral until houses are not unaffordable luxuries created by the largest asset bubble in history.

2008 May 13 03:24 PM

[Michael Riley:]

in my neighbor hood prices have not fallen much because turnover has dried up......supply is at a 20 year high and buyers are in control but there are very few...no panic sales...yet...i think this will take years to clean out at current prices...if prices go down 50% or so , then we can clear out the sellers.

2008 May 13 04:42 PM

[Global Warm...:]

The two extremes: things are much better than you think and the sky is falling.
The prices are going to come down/ be weak until supply equals demand. This will happen when the overhang of people needing or wanting to sell their homes is cleared by people who have a chance to buy more now more affordable homes. The Fed is doing all it can to create easy money for people to buy homes by making mortgages more affordable and increasing inflation which will drive up the value in dollars of real assets like homes.

Are home prices weak - yes
Will home prices keep dropping - maybe
Will home prices fall to 1999 levels - not with current Fed policy

Probably a good time to start looking at the builders again, especially the strongly capitalized ones.

2008 May 13 07:05 PM

[puts4doe:]

The housing market pre 1996 never had a big drop. In 1996, capital gains treatment on residential homes was eliminated and people quit selling because they had to pay capital gains tax on their gain. We had the worst drop in housing values in the history of real estate. In 1996, capital gains treatment was restored, and guess what??.. We had the biggest gain in housing values for the next 8 years. EVeryone talks about how much has been lost in equity in the last 2 years, but no one mentions the fact that many homes are up nearly 1000% since 1996. Yes, we are due for an adjustment, but too many things are better now than they were in the early 1990s.. Interest rates are near all time lows.. Employment is high and there are LOTS of investors ready to pick up "deals" on real estate now, which was not true in the 1990s.
The biggest falacy is saying housing is in toilet nationwide. There are still areas where people are wanting to live that will weather this market easier than some other areas. Southern California for one. The thing that is hurting the market the most in my mind is the liberal media doing anything they can do to make President Bush look bad, so they tell us horror stories about the real estate market and scare a lot of people away from buying.. Just my humble opinion, but look at the facts... pre 2006... Housing was at an all time high and going strong.. unemployment was at an all time low.. Buyer confidence was pretty good.. The democrats took over congress and look where we are now.. They are calling for change with this next election... You already got your change.. Do you like it?????

2008 May 13 08:13 PM

[Dublin:]

There are 18 million EMPTY houses in the US at present. Will there be an influx of foreigners buying these houses? And what about the current glut of 650,000 foreclosures...which no one is buying?

www.bloomberg.com/apps...

2008 May 14 01:56 AM

[Dublin:]

And what about the 18 million EMPTY houses in the US? And the 650,000 foreclosures which no one is buying? Perhaps there will be an influx of foreigners any day now...where will they get mortgages?

www.bloomberg.com/apps...

2008 May 14 01:59 AM

[Skeptical Ben:]

Lawrence Yun is a hoot. However, I think the author is a little too pessimistic. When I told anyone that would listen in 2005 & 2006 that Southern California SFH real estate would drop 25% in price, people said "No way" -- now it's down around 22%, but most of the drop was the last quarter of 2007. This makes me think in spite of foreclosures, short sales and all the rest, that the recovery won't take 10 years like I originally thought, because who could forsee a drop that large, that fast? I just bought a $700 k house and I did it with an interest only 10 years fixed @ 6.25%. Even if value goes down another 10%, within those 10 years inflationary forces alone will lift housing prices. Builders has stopped building new homes, and when they resume they will find the cost of construction higher as everything has gone up. Carpeting: 50% in 3 years. Lumber, copper piping and wiring, all higher. Remember the 70s, or ask your parents, but I remember these factors, weight them all. And don't ignore demographics -- look what population is projected for California.

2008 May 14 04:09 AM

[Alec:]

Obviously many of you have no solid information to make your predictions on. They just seem like a logical conclusion to you, and you put it in print. The reality is, from someone in the mortgage business for the past 16 years:

After the subprime arm resets comes the option arms resets. From what I've found, this portfolio of loans is larger than the subprime portfolio was. As with the subprime arms, payments are going to adjust out of reach for many who are upside down, unable to sell and unable to refinance. Can you say FORECLOSURE?

After that comes the FNMA/FHLMC 30 year fixed interest only. This is the prime loan category that some brainiac said would have a melt down. As a mortgage professional, I think this will be the biggest melt down of all. This is an enormous portfolio of loans that are interest only for the first 10 years and then convert to a 20 year fixed mortgage. That will raise the payments 30-40%, even though the rate stays the same. These borrowers got in with 0 down and a 65 debt ratio. They definitely cannot afford the increase, and will not be able to refinance or sell. Can you spell FORECLOSURE?

Don't forget, everything is getting more expensive and pay checks aren't going up. That expense has to be absorbed somewhere. I already have customers who commute from the suburbs of Phoenix who are paying more for gas than for their mortgages (2 commuters in the household).

And, by the way, rates really don't have anywhere to go but up. For those of you who think that won't have a dramatic effect on prices, wake up.

2008 May 14 09:53 AM

[Whodidthunkit:]

Why does everyone keep talking about a recovery? We just started the correction! And recovery from a correction? Lol...that makes no sense.

2008 May 14 02:41 PM

[Just Say Whoa!:]

by Boomers = 76 million American children born between 1945 and 1964.

Generation Y = Millennials = 76 million

When the early baby boomers bought houses, the prices were dirt cheap.

Most Millennials can't afford to buy houses--BECAUSE THE PRICE OF HOUSING HAS INCREASED FASTER THAN WAGES.

Unless the prices come way, way down--THERE WILL BE NET *SELLING*, NOT BUYING GOING ON FOR THE NEXT 30 YEARS.

"In the next two decades, as millions of aging baby boomers put their homes on the market, they'll put downward pressure on prices...There are already more sellers than buyers in six states: Connecticut, New York (excluding Manhattan), North Dakota, Pennsylvania, West Virginia and Hawaii. The trend first hits areas with cold weather and traffic congestion, which tend to drive retirees away."
www.usatoday.com/money...

2008 May 14 07:40 PM

[Tom Lindmark:]

Specialperson,
There will be intergenerational transfers of wealth that will help the millenials. Also don't forget immigration. It will make up a lot for the Boomers leaving the market.
As for your example concerning sellers outnumbering buyers in certain states, some of those states are simply seeing declining populations as people of all ages chase better economic opportunities elsewhere.

2008 May 14 08:29 PM

[Sing Expat:]

Awesome give and take. I agree with everyone! Heh heh.

Let's ignore emotional arguments and patriotic justifications for the market doing this or that. Look at economics.

House prices are historically high versus income. So, unless someone can prove there is a new paradigm and not a bubble, prices must drop until they are in line with historical norms. Historically, median price is about 3 times median wage, meaning that the median price should return to about $140,000.

I would also argue that we are in severe housing crisis with massive oversupply and "buyers" without any savings. Low Fed funds rates are not showing up in mortgages; the low rates are in fact designed simply to restore profits to the banks (yield curve). Boomer Babies have no money to make downpayments. Prices are rocketing up while wages are stagnant.

Are there market segments and geographic locations which are "immune"? No doubt, but even the top end is getting slammed in some places. And the NAR chestnut about location, specifically someone mentioned Southern California, is a joke. Look at house prices in SoCal, Vegas, and Florida. Death spiral! And NYC? Sure, all the foreigners will save NY real estate. As Borat says, "Not!"

Frankly, house prices should be lower. It's better for everyone. Lower taxes, lower insurance, cheaper to buy. Who cares if you sell and move on? Your next home will be cheaper still.

Is there anyone dumb enough to suggest that free housing would be bad? Would you turn down Bill Gates if he offered you his house for free because houses SHOULD be expensive?

2008 May 15 01:02 AM

[Sing Expat:]

Boomers and Boomer Babies are broke. Mortgage rates are still high and no one is lending more than 80% any more. House price to income ratios are far too high. Housing inventory is at record levels.

Lower house prices are good. Yes, good. You don't think so? So, then you won't accept a free mansion if I offered you one? Idiot.

2008 May 15 01:05 AM

[hwbyrne:]

I doubt if anyone is reading these comments any longer, but I have to add my final opinion. Many have added some great comments and references to some good articles and facts. I appreciate those inputs very much. I'm lucky to have a great house in an area that is still appreciating in value, yet I work 3000 miles away from that property here in Washington DC. I'm glad the property values are coming down here because I want to buy a second property. I have found many great deals on forclosures, and I can buy with 0% down and even have the bank pay for the closing costs, etc. This is a great time to buy, but we still have at least a year before there is any sense of a bottom to the market. It will be interesting to see if the prediction of the baby boomers movement will effect the market.

2008 May 15 06:35 PM

[User 184619:]

House price has a long way to fall, I would say it needs to drop another 70% or more from present level

2008 May 15 10:37 PM

[User 184619:]

The banks have no money and don't lend, how can the people buy? I predict the falling speed of the home price will accelerate in next 2 yrs

2008 May 15 10:43 PM

[johnthebear:]

You may find it interesting, a comment in London:

"This is the first housing recession that resulted from the inability to get a house financed,

rather than due to high unemployment or high interest rates."

House prices tripled in England in the last 10 years, much like many markets here in the US.

Like the US, they have fired a lot of people working in the home finance area that pushed the paper needed to close the loans. Many thousands of these fine people who had nothing to do with the loan approval process are now walking the street looking for a job. These people are needed to make the mortgage business function, but there are no lenders willing to hire. Lending standards are higher now, appraisals will get more close looks and many appraisers will likewise go without.

Does not look good for the next few years as unemployment rises and vacancies rise in commercial property.

I feel sorry for those losing their homes and jobs. I wish I could see a light at the end of the tunnel... instead I can only see the train coming my way and I wonder how to protect my meager retirement benefits. The state pension plan I rely on has been playing the same game as the banks, playing the spreads on interest rates and buying over priced commercial real estate. I hope the folks in my state will agree to a tax increase to cover the unfunded liability of the pension plans. Then there is social security. Sure wish I had control of my investments in SS rather than have the idiots in Washington manage my future. Too bad grand kids, the dems have really fixed it for us and they have no idea how stupid they are and the American public is even worse.

2008 May 23 12:30 AM

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2008 Jun 08 11:52 AM

[tex97239:]

tj214, tcornelison and Malkiel are misguided fools. Baby-boomers have been active housing market participants for years; there is simply no reason to believe that they represent any sort of new buying momentum at the present time.

Cornelison and Malkiel sound like shills for the real estate industry. Anyone who thinks housing is reasonably priced in many markets is either ignorant of the facts or chooses to ignore them. By most reasonable estimates at least 60% of the working, adult population of the country cannot afford to purchase a home in the community where they live. Many who did purchase used sub prime loans as a means to obtain the home they cannot afford. Now they find themselves among the millions who will be unable to refinance the ARM's used to purchase the homes in the first place. Their ability to obtain traditional mortgage financing is non-existent and always was; hence the explosion in sub prime lending. No, unfortunately Mr. Stathis is right on the money and the blood-bath he is predicting has the potential to destroy the US economy; in another twenty years the streets America may well look those of Mexico City or any other Third World oligarchy

2008 Jul 14 04:17 PM