When the Going Gets Tough, the NAR Advertises

Includes: IYR, XHB
by: Andrew Corn

Wednesday's 50 basis point drop in rates will no doubt positively influence housing. One of the many questions for investors is if its "safe to go back in the water" with homebuilders, mortgage companies and the other service providers in the housing value chain. Can anyone really call a bottom?

The swift and drastic reduction of interest rates over the last two weeks will undoubtedly bring mortgage rates back near historical lows (I am calling my bank today). Refis are already up as I have previously posted, and financing a new home is becoming more attractive. One of the issues that remains for buyers is valuation. For potential buyers of homes, new or "previously owned" is seeking where each market is bottoming out. What is the fair valuation for the land and the the structure on it? Do I want to plant roots there or rent the place out?

Looking at the public markets, there are a few ETFs for homebuilders and proxies for the mortgage market. Are we anywhere near a bottom?

The National Association of Realtors [NAR] has an agenda and it is only a partially hidden one. Shall we call it the 7% solution? That is the percentage most realtors receive when a home is sold regardless of price. And the higher the price, the greater fee for the realtor. NAR's fancy web site www.HousingMarketFacts.com is supported by a $40 million ad campaign makes one feel foolish for not buying a home or two this week. The site illustrates how the average home doubles in value over a period of ten years, and website (which features the aforementioned home equity calculator). Can you turn an initial investment of $20,000 into $124,600 in a span of ten years? According to the NAR home equity calculator, a $20,000 down payment on a home will return that amount.

Those of us awake enough to read the newspaper (on- or off-line) know that in 2007, the median home price fell for the first time in over four decades in the U.S.

NAR has responded quickly, creating a set of new advertisements (yes, with a $40 million budget) championing the lucrative investment potential of purchasing a home. True, over the long-term, a home may be a good investment. But, a lack of liquidity and market conditions can destroy a life long dream if one is force to sell or even scheduled to sell in negative market conditions. We all know there is a market (but no exchange) for homes, and the inventory is growing along with the anxiety of realtors. Assuming that owning a home will be someone's retirement, well, we all know what happens when we ass-u-me.

Realtors stand to make money by encouraging people to buy homes, and especially at higher prices. And who wouldn't want to run out and buy a home based on the claim in one of the commercials or on the web site that 60% of homeowner wealth is derived from homeowner equity?

Pouring a bucket of facts on the ads, homeownership is anything but a "guaranteed golden-ticket" to wealth in our current economic state. Let's call 2007/2008 bad timing. In addition to the overbuilt and overheated South Florida and California markets, home prices across the country are expected to decline by as much as 10% in 2008. We may be headed into a recession; a time in which being able to pay that mortgage, in order to acquire the wealth that NAR suggests your home may build, for many people may be challenging.

Forgetting about the NAR's slanted data, the friendly credit terms designed to stimulate our current economy (thanks again Uncle Ben for Wednesday's rate cute) can create opportunities for the savvy potential home owner or investor. Opportunities abound for those with good credit history to refinance their mortgages at a better rate. Even with the hard-hitting subprime mortgage issues, lower rate borrowing opportunities abound for those who are qualified. As for my opinion of the ads, purchasing a home if you want to make a life in it and can afford the down payment and monthly carrying costs, all of them can create a wonderful home.

But, it is not a guaranteed ticket to prosperity.

When viewing the ads, keep in mind the conflict of interest and agenda of realtors. They receive their commission regardless of whether the homeowner achieves mass capital appreciation over time, or is foreclosed.

Disclosure: Mr. Corn does not own any ETFs or stocks of homebuilders or mortgage companies. This post was originally drafted by Clear intern James Baker, winner of the Clear Next Generation ETF contest.