The housing report that mattered

[This post originally appeared here three years ago on September 27th, 2006, just when people were beginning to smack themselves on the forehead in a collective Homer Simpson moment felt around the world. ]

To some, Monday's report from the NAR (National Association of Realtors) containing news of declining home prices was barely noticed. To others it was quite an event. In some parts of the country, home prices have been declining since the peak last fall, in certain areas quite dramatically. In other parts of the country, prices are still rising, albeit moderately.

But now that the national figure for the year-over-year change in median home price has gone negative, this seems to be some sort of seminal event. The network evening news gave this an unexpected amount of attention, as did many local and online news organizations.

Even a day or two later, many people are still talking about it, and with prices of new homes dropping by a similar amount as seen in today's report, even after the thousands of dollars in incentives for each sale, more headlines about home prices are sure to be offered.

It's enough to give you the jitters.

At least that's what the LA Times thought was happening - here's yesterday's front page:

[The lady in the photo above was attending a hearing about the King/Drew Medical Center and likely has nothing to do with the housing story which led in yesterday's paper. However, it is possible that she heard about the latest report on home prices and, when combined with the news of the hospital funding cut, this may help to explain her apparent displeasure.]

So was Monday just a slow news day or did the LA Times really feel that news of a two percent year-over-year decline in the median price for existing homes merits this attention? Page one coverage of this sort is certainly not going to embolden potential buyers who have been trying to decide whether to pull the trigger or wait and see.

If the headline wasn't bad enough, look what followed:

Housing prices decline nationally for the first time since 1995,
inventory sets a record

Tom Petruno filed the story, citing two major concerns about a continuation of current housing trends - concerns that have been heard over and over for the last two or three years by anyone paying close attention:

1. The impact of a housing slowdown on employment
2. The impact of housing wealth on consumer spending

This is a fine discussion of the issues containing a good number of statistics and quotes from economists and market analysts. The important points include the possibility of losing ten or twenty percent of the ten million real estate related jobs, many of which have been created in just the last few years. Add to this the withering of the $600 billion per year in extracted home equity that has supported consumer spending, and the potential for a broad economic impact is clear.

Omitted from the LA Times article were the all-important potential impacts on both the traditional mortgage lending industry and the new world of structured finance. The failure of home prices to rise further will also fail to be a cure-all for distressed homeowners squeezed by rising interest rates and soaring energy costs.

It would appear that non-traditional mortgage products are about to be stress-tested.

So Much for the Bernanke Put

Word of falling real estate prices on a national level prompted a quick search of the internet that quickly produced the sought after comments on the subject of housing prices by Fed Chairman Ben Bernanke. One of the great things about blogs is that when excerpts from the mainstream media are provided they stick around even after the original report disappears. This is a good example of how this can be handy.

From the fine blog of Calculated Risk comes this tidbit from last year where then-White House economic advisor Ben Bernanke offered his thoughts on the price of real estate.

Friday July 29, 2005

Bernanke: House Prices Unlikely to Decline
Bernanke was on CNBC today. From Reuters:

Top White House economic adviser Ben Bernanke said on Friday strong U.S. housing prices reflect a healthy economy and he doubts there will be a national decline in prices.

"House prices have gone up a lot," Bernanke said in an interview on CNBC television. "It seems pretty clear, though, that there are a lot of strong fundamentals underlying that.

"The economy is strong. Jobs have been strong, incomes have been strong, mortgage rates have been very low," the chairman of the White House Council of Economic Advisers said.

The pace of housing prices may slow at some point, Bernanke said, but they are unlikely to drop on a national basis.

"We've never had a decline in housing prices on a nationwide basis," he said, "What I think is more likely is that house prices will slow, maybe stabilize ... I don't think it's going to drive the economy too far from its full-employment path, though."

Is it too early to start talking about the "Bernanke Put"?

The resurrection of this quote is certainly not a good indication of Mr. Bernanke's ability to predict the future - the timing of this assurance is particularly embarrassing. Graphically, with a little help from the Northern Trust, the situation looks like this:
Ironically, it has been almost exactly one year from when the Fed chief's prediction was offered. The report of two days ago, in which median home prices were seen to be declining on a year-over-year basis, was the very first full-year reporting period where Mr. Bernanke's assurances could have been put to the test and, unfortunately, the new Fed Chairman's advice looks to be as bad as the old Fed Chairman's.

Loathing David Lereah

Speaking of bad advice, after looking closely at some of the recent comments offered up by David Lereah, chief economist at the NAR, it is now clear why so many bloggers and commenters direct such vitriol his way.

It is similarly unclear why the mainstream media continues to ask him for his thoughts.

The headline from Monday's NAR report was "Existing-Home Sales Holding At A Sustainable Pace". Obviously much of the mainstream media chose a headline that was not nearly as optimistic as the one from the realtors group. Some degree of rosiness should be expected in their outlook, after all, they are the trade industry group with a duty to promote their industry.

But carefully reading the news release should cause the vitriol to begin to stir in almost anyone.

David Lereah, NAR’s chief economist, said home sales appear to be leveling out. “After a stronger-than-expected drop in July, the fairly even sales numbers in August tell us the market is at a more sustainable pace,” he said. “It keeps us on track to see the third highest sales year on record, but we do expect an adjustment in home prices to last several months as we work through a build up in the inventory of homes on the market.”

The national median existing-home price for all housing types was $225,000 in August, down 1.7 percent from August 2005 when the median was $229,000. The median is a typical market price where half of the homes sold for more and half sold for less. “This is the price correction we’ve been expecting – with sales stabilizing, we should go back to positive price growth early next year,” Lereah said.

Total housing inventory levels rose 1.5 percent at the end of August to 3.92 million existing homes available for sale, which represents a 7.5-month supply at the current sales pace – the highest supply since April 1993.

Later that day, he was quoted by Bloomberg saying this:

"We've been anticipating a price correction and now it's here. The price drop has stopped the bleeding for housing sales. We think the housing market has now hit bottom.''

What about the current set of data justifies any of these views? Again with some chart-help from the Northern Trust, it is clear that the rising inventory shown below has begun to affect the sales prices in the previous chart, but the minor flattening in the last month's report shouldn't be interpreted as an "all-clear".
The spin coming from Mr. Lereah really is infuriating.

A "stronger-than-expected drop in July" when referring to the nearly 300,000 fewer homes that were sold between June and July this summer. Who uses the word strong when referring to a decline? As in, the stock market fell strongly today? What kind of nonsense is that?

And the "fairly even number of sales in August" is a sign of a more sustainable pace? The monthly decline in sales have been 50,000 in June, 290,000 in July, and now 30,000 in August. But the latest month's report indicates "existing-sales holding"?

After more than half a decade of soaring home prices, the price adjustment is expected to last just "several months"? Based on the slight change in trajectory on the unsold inventory chart that now stands at a thirteen year high?

This man should be stopped.

But worst of all is the assurance from the Bloomberg story that "the housing market has now hit bottom". Again, based on what?

It's no wonder that blogs like this, post pictures like the one below about Mr. Lereah.