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Analyzing why "It's a great time to buy or sell a home!"

Yesterday, we discussed the $40M NAR ad campaign, "It's a great time to buy or sell a home!"

On the way home, I actually saw the full page ad in the Personal section of the WSJ; (Unfortunately for the NAR, the section's front page article was "The New Word in Home Sales: 'Canceled')

I read the ad as a typical consumer would . . .  then I reread the ad critically.

When I was finished, it occured to me that EVERY SINGLE STATEMENT IN THE AD IS MATERIALLY FALSE OR MISLEADING. The nicest thing I can say about any of the points is that they are incomplete.

To wit:

 

NAR Advertising Claim	Reality
Interest Rates Near Record Lows Today’s interest rates are comparable to 40-year lows, offering homebuyers a once-in-a-lifetime opportunity.	Interest Rates WERE at record lows in 2003 when the Fed Funds Rate was 1%; Since then, rates have climbed 425 basis points (4.25%); Mortgages were as lows as 5.125%; They recently were over 7%.
Large Inventory Won’t Last There are currently 3.75 million homes for sale. We have had a record inventory of homes on the market in recent months, offering consumers the greatest choice in decades.	Slowing Sales and Overbuilding are the reasons for the inventory buildup; Year-to-date sales are down 16.5%. Economics 101 tells us that increased supply means decreased prices. Large selection also means selling your current home has become more difficult;
Prices Overall Have Stabilized Contracts for home sales in August are up 4.3 percent1 and the outlook is for home prices to increase next year.	Home prices have experienced their first price drop in a decade; As unit sales continue to slump, the  Median Price Keeps Falling; This is no basis for assuming any price stabilization has occured.
Positive Outlook Former Federal Reserve Chair Alan Greenspan recently said that housing prospects are looking up. “Most of the negatives in housing are probably behind us. The fourth quarter should be reasonably good,  certainly better than the third quarter.” According to industry estimates, 2006 will be the third-best year on record for home sales.	Is this the same former Fed Chief  Greenspan who advised getting variable APRs at the precise low in interest rates? As to the "record sales," its more informative to look at the current trends, rather than the raw numbers (population growth will create meaningless "record numbers").
Real Estate is a Great Investment Homeownership is a safe, secure way to build long-term wealth. The national median price of homes bought ten years ago has increased 88 percent. The number of US households is expected to increase 15 percent during the next decade, creating a continued high demand for housing.	Actually, it performs about half as well as stocks do over the long run. Up 88% over the past 10 years is far above the historical norm -- mean reversion is very likely.    (But you gotta live somewhere, right?)
Don’t Delay Now is a great time to buy or sell a home.	If you delay, you run the risk of paying less for a new home. In all my experience trading, I cannot recall ever coming across any item that it was a great time to buy and sell something simulataneously. Perhaps the NAR is a fully hedged Long/Short fund .  . .

>

Gee, no wonder so many real estate agents have a sketchy reputation; The bullshit is a professional hazard, from their Professional Association on down . . . 

>

Sources:
The New Word in Home Sales: 'Canceled'
Buyers Back Out of Deals In Record Numbers; A $30,000 Deposit, Lost
JUNE FLETCHER and RUTH SIMON
WSJ, November 3, 2006; Page W1
http://online.wsj.com/article/SB116252244421212232.html

Saturday, November 04, 2006 | 07:38 AM | Permalink | Comments (119) | TrackBack (1)
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Comments

About a month ago I called a very smart, successful realtor to ask how the market was and whether prices were coming down. (I live in the northeast.)

Her Queen-of-Spin answer was wonderful. "Prices aren't coming down -- but it's a good time for buyers: they have many more houses to choose from."

I'll bet they do. And counting!

Posted by: ~ Nona | Nov 4, 2006 10:10:56 AM

Stating the obvious, but try this:

"It's a great time to buy or sell 1000 shares of Dell."

Posted by: MTHood | Nov 4, 2006 10:29:19 AM

Is this the same former Fed Chief Greenspan who advised getting variable APRs at the precise low in interest rates?

This is one of those internet myths. The testimony makes it clear that Greenspan was talking about past outcomes where indeed variable rate mortgages allowed people to get into homes and saved billions. [OMG, I just disagreed with our brilliant and well spoken host. I shall now slink away and do pennance.]

Posted by: Robert Cote | Nov 4, 2006 10:35:40 AM

The thing about real estate is that it really is a sure bet. Buying a home, even at a short term top, will always be profitable for the average homeowner who needs a place to live and raise a family.

Nobody needs stocks, but everyone needs a place to live.

I think the first big mistake that Barry is making along with a lot of the commentators here is confusing the buying and selling of real estate with stock market investing. They are so different that you lose credibility when you talk as if they were the same.

The second mistake is forgetting the impact of population growth. We've grown by 100 million new Americans just in the last 20 years. So comparisons to how the real estate market reacted even ten years ago is not entirely relevant to what this much larger population seeking home ownership will to today.

Posted by: ken | Nov 4, 2006 11:49:32 AM

Sorry Robert. He was suggesting that more borrowers should take loans other than 30 yr fixed.

Greenspan;
"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," Greenspan said.

This was correctly interpreted by all that he was advocating ARMs and IOs.

Yes, he tried to put it in a historical context, but he was commenting about the present housing market, not idle conjecture about the past.

Posted by: edhopper | Nov 4, 2006 11:54:13 AM

Ken: Trolling eh?

"buying..event at a short term top...always profitable".

Do you mind explaining that to the class of 2005 buyers in South Florida, the Wash DC area, Arizona, San Diego, etc. etc.

Let me give you a couple of anecdotal examples:

1. DC Area: Friend. 26. Single. Bought in Sep-2005 in Loudoun County a townhome for $420K. At the time, very confident in his prudent investment decision.

Now -- townhomes on the same block are NOT selling at $350K. Add in a years worth of inflation, the 5% transaction costs and friend is looking at nearly negative $100K in equity.

2. Marin County, CA: Friend. 35. Married. Bought in July-04 a home for $800K. Now needs to relocate for a job. Can't sell home to cover his costs. Stuck.

These are first hand stories. Many, many, many people are going to learn that leverage is a bitch when it goes against you.

Posted by: Mr. Beach | Nov 4, 2006 1:02:39 PM

Thanks for this service Barry. (And IMO correct service on AG and not soon-to-be-improved service by Robert's no doubt well intended correction.)
A public service.
One that is intended not to shore up your positions whatever they may be, but to shore up the public's positions against those of the RE interests. [You know we trust you.]
Do we expect the NAR to do the same?
Do we expect any professional association to put their interests behind, (ie, not in front,) [ie, at their expense] those of the public's (ie, their clients) [ie, those from whom they extract fees...so they can continue breathing and drinking while the public continues their charity (their bleeding --all for this noble cause)?
In times of genuine distress (ie not this time) [ie when we have a public that is bleeding profusely] do the professionals become less so?
Given that the public's burden (that bleeding) is articulated and communicated by the professional press/media now (to an unprecedented extent IMO) I don't expect to see articles like this (Barry's correction) outside the blogsphere where professionals have no such monopoly (so far) on this communication.
Thank you. And Robert too.

Posted by: calmo | Nov 4, 2006 1:12:03 PM

Barry said, "The bullshit is a professional hazard, from their Professional Association on down . . . "

Is there a profession or professional association or a leadership position in any organization within the USA that hasn't been infected by grifters, con-artists, liars, cheats and thieves along with their inept and incompetent cronies?

Posted by: Peter Pavlog | Nov 4, 2006 1:34:25 PM

Mr. Beach, even in good times if you sell a house within a year or so of buying it chances are you will lose money. The average transaction costs with real estate are very large, around 10% or more round trip regardless of when you buy and sell.

It is only the exceptional period when you can make money within a year of buying real estate. Every real estate investor knows this. (I am 55 years old and flipping real estate has only worked in a few of those years.) For somone buying for a place to live and raise a family it shouldn't matter that prices fall a bit, they will always recover and go even higher. Always.

Posted by: ken | Nov 4, 2006 1:35:03 PM

"Buying a home, even at a short term top, will always be profitable for the average homeowner who needs a place to live and raise a family."

Always? OK. This is too easy, but how about:

Case #1 -- Job loss. Have to sell 1 year after purchase. Still profitable?
Case #2 -- Divorce. Have to sell. Always profitable?
Case #3 – New and better job in another city. Have to sell. But the good news is, you always sell at a profit.

Now if you had provided the caveat that the family must stay in the house for 20, 30, 40 years, OK, then history says it’s a good bet to be profitable.

But what prompts a statement like this? “. . . will always be profitable . . .” When you wrote that, what were you thinking? Did you really believe that is true?

Posted by: MTHood | Nov 4, 2006 1:47:51 PM

Really Ken? Tell that to the people who bought in the Houston area in the early 80's oil boom. Tell that to folks in Japan who bought in the late 80's before the crash (still waiting for prices to recover after 20 years!)
I know people here in the NYC area who have only recovered there late 80's price because of this housing bubble. As the bubble collapses, they will be underwater again.
How long a period do you consider for prices to recover, shouldn't it be while your still alive?

Posted by: edhopper | Nov 4, 2006 1:49:21 PM

regarding this comment:

The thing about real estate is that it really is a sure bet. Buying a home, even at a short term top, will always be profitable for the average homeowner who needs a place to live and raise a family.

Well, in the end, yes, if you buy a house, the value of that house will eventually be higher. But when? 2 years later? 5 years later? 10? Many people who bought at the peak in the California bust last time around (89-90-ish) didn't get back to breakeven until the mid-to-late 1990s. Do you think the people who bought before the bust, then had to move due to job loss (the likelihood of which is rapidly increasing due to the fallout from the real estate bust), divorce, the birth of a new child, a sick relative who needs tending to, and so on and so forth, felt like they got a sure bet? I doubt it. And how many had their financial and/or personal lives ruined because they got in over their heads and couldn't sell for enough to cover their loans?

What you say is TECHNICALLY true. If you buy a house for $300,000 today, it'll eventually cost more. But by that same token of logic, the Nasdaq will eventually make it back to 5,000 again. But I bet that doesn't make investors who loaded up on tech stocks in early 2000 (because tech stocks really are a "sure thing") feel much better.

Lastly, as for whether it's a good time to buy real estate right now, what's the rush? There are more homes on the market, both new and existing, than at any time in recorded U.S. history (though yes, you could technically argue we're down a few thousand units from the late summer peak). Interest rates aren't really going anywhere. There are more and more motivated sellers hitting the market every day, with no sign of a let up. Prices are falling at the fastest YOY rates in almost four decades. I mean, am I the only one who sees no reason to hurry? I should also add that in vast swaths of the country, it is dramatically cheaper to rent than own, even after factoring in tax breaks and the slight drop in prices to date.

The bottom line: EVERY single past real estate downturn, whether locally, regionally, or nationally (in an extreme case like Japan), took a long, long time to play out (years, not months). The real estate market only started peaking last June-August (depending on location). That puts us just over the one year mark. My best guess for a market trough is sometime in 2008, with further price declines from here ranging anywhere from 10% to 30% (depending on property type, location, stuch flipper percentage of overall market, etc.)

Just my two cents on this fine weekend.
http://interestrateroundup.blogspot.com/

Posted by: Mike_in_Fl | Nov 4, 2006 2:12:04 PM

Leaving aside short-term fluctuations, Shiller's research indicates that real house prices have gained about 1% per year over the long term. Offsetting that is the cost of financing (whether or not the money is actually borrowed, because there is opportunity cost on equity funds). The long-term real return on long Treasuries is about 3%, so one can assume the real cost of mortgage financing is somewhere in the 5% range.

So as a long-term proposition, a house loses about 4% per year in real terms (ignoring maintenance, taxes, insurance and so forth). That's not profitable.

Because of the Fed's manipulations, the real cost of mortgage financing has been negative in recent years. Of course, it made sense to borrow to the hilt in those conditions. But now it is likely that the pendulum will swing back to favor the lenders rather than the borrowers.

Posted by: libertas | Nov 4, 2006 2:18:50 PM

From my perspective (escrow office co-owner with spouse) in closing refi and purchase deals is that many borrowers do treat real estate like the stock market. Unfortunately, for those who need to make a change and sell for whatever reason, they find their thesis of selling property super fast is super wrong.

There are a few folks we work with on a semi-regular basis who are, for a lack of a better term, shell-shocked about how long their current residences have been on the market. Sadly, one is carrying $1.6 million in 100% financed loans between the residence they are selling and the one that they just closed on at month end in October. More sad, these folks should know better. But then again they havn't worked in a declining market. Come to think about it, probably 50% of LO's and agents working over the last three years or so, have never experienced a tough market. 2007 will be quite fascinating to see play out.

There is no better view in real estate that being in escrow. We see it ALL.

Posted by: Tim | Nov 4, 2006 2:20:26 PM

To Ken:

The problem with your buy at any price and hold reasoning is that most people do not have the job security or stability to be assured of the income to make the storm-weathering payments. If you have to move to maintain your career or if you lose your job, you are pretty much bankrupt.

In contrast renting can provide a cheap alternative; I've heard it seeral times that in this latest housing bubble that renting was actually much cheaper. If you can wait a while then you will find housing prices at their best in the heart of the next downturn.

Posted by: Paul Jones | Nov 4, 2006 2:34:37 PM

Ok, it is not my purpose to argue with you guys. The fact is that real estate is a limited resource and we have added 100 million new Americans just in the last 20 years. Talking about how far prices fell in the eighties or in Japan is completely irrelevant. Anyone who invests in real estate knows that. Real estate has made more people wealthy than any other asset class I have ever seen, and I have seen them all.

I think too many people here use a stock trading mindset when it comes to evaluating real estate. It is almost you think of it like a momentum stock and wait for prices to rise to make new highs before you are willing to concede that real estate always makes money.

Some have commented that my analysis requires a long term outlook. Well, yeah. We are talking about real estate which has always required (with a few short years of exception to prove the rule) a longer term outlook. Anyone who buys real estate in order to flip it quickly has only ever had a few short years in the last fifty to do that safely. There is always the exception, that is what real estate so interesting.

Posted by: ken | Nov 4, 2006 2:47:39 PM

"I think the first big mistake that Barry is making along with a lot of the commentators here is confusing the buying and selling of real estate with stock market investing."------
"Anyone who invests in real estate knows that.... Real estate has made more people wealthy than any other asset class I have ever seen"

You seem a bit contradictory there ken....

THIS cycle has seen RE morph into a speculative commodity more than ever before. Does it really make any difference if it is gold or tulips or land in Florida or...? The rates went down/the RE ballgame moved into Barry's court bigtime imo....

Posted by: brion | Nov 4, 2006 3:03:14 PM

"I think the first big mistake that Barry is making along with a lot of the commentators here is confusing the buying and selling of real estate with stock market investing. They are so different that you lose credibility when you talk as if they were the same. "

RE and stocks are so different? Last time i checked, any asset should be and can be valued as the present value of its future expected cash flows. Let's not forget the highly variable costs that come along with home ownership, maintenance, property taxes, 6% broker commissions, interst on a mortgage etc.

Posted by: Mark | Nov 4, 2006 3:08:09 PM

Yes, residential owener-occupied housing and stocks are very different, for two big, big reasons. One, the government heavily subsidizes owner-occupied real estate, while taxing your stock-market profits. Two, as has been noted, you can't live in a stock certificate, but your home effectively throws off an untaxed monthly yield, just in housing rather than cash. If you tried to purchase a security in the market that threw off a yield, the government would tax it. Moreover, when you move, the government doesn't tax your first half-million in capital gains; try that with your portfolio and see where you end up.

These government subsidies are so ginormous that they utterly distort the rent-vs-own calculation. Last summer at the market peak I modelled it here in San Francisco. Purchasing an equivalent to my rent-controlled apartment would have cost me 3-4x the monthly payment on the mortgage alone, plus condo/TIC fees, plus maintenance, plus insurance. Yet, once I modelled all those tax breaks and ran some simulations, even at 1% real returns vs perhaps 4% real returns to my portfolio, owning wins out about 1/3rd of the time.

So, on the one hand, Shiller is 100% right. The historical inflation-adjusted return to residential housing in the US is a low 1%. There is no strong argument that it will change; we can always build more housing stock, and indeed have done so. Just check out vacancy rates either for-sale-only (ken may not want to look at that one) or for-rent and total. Stock and even bond returns are likely to continue to be much higher, probably in the 2-4% real range over time.

And yet despite being farcically misinformed, Ken is almost right. When the government subsidizes the hell out of owner-occupied housing, while taxing all other investment alternatives, it is difficult for anyone with any sort of income not to do as well or better owning, living with flat or even down residential markets, and raking in that government subsidy month after month after month.

It sucks if you want to move, though. Anyone who is not settled for sure might be in trouble, as the anecdotes above indicate.

Can you tell that I rent, and that despite having a great place and great landlord and very fair rent considering the location that I want my freaking subsidies, too?

Ugh. It's enough to make a fella vote Republican, if that party didn't just talk a mean game while writing ever bigger checks to farmers and homeowners.

Posted by: wcw | Nov 4, 2006 3:30:46 PM

The fact is that real estate is a limited resource and we have added 100 million new Americans just in the last 20 years.

If you took every house, tore it down and put a five story building up where the house is, you could, in theory, increase the livable space by fivefold. I know that absurd example won't happen but I like to use it when people drop the equally absurd myth that RE is limited. We can still build up(and down for that matter) and as long as bankers are printing money and loaning it out to us suckers, we still will.

Posted by: DavidB | Nov 4, 2006 3:42:45 PM

"but your home effectively throws off an untaxed monthly yield, just in housing rather than cash. "

huh? please explain this

cap gains on RE are tax free after 2 yrs in a primary residence, so flippers can forget this "benefit". also, did you bother to adjust RE returns for leverage? can't compare an unleveraged stock/bond portfolio to the returns on a leveraged RE investment-

Posted by: Mark | Nov 4, 2006 3:45:53 PM

Ken,

Just a quick question: Do you really want to stick with the term "always"?

As in:

- "real estate always makes money”

- “Buying a home, even at a short term top, will always be profitable”

I’m just curious about what’s going on in your mind.

Do you generally see the world in absolutes – “always” and “never”? Or is it just real estate?

Posted by: MTHood | Nov 4, 2006 3:47:25 PM

These government subsidies are so ginormous that they utterly distort the rent-vs-own calculation.

Somebody has to support the bankers

Last summer at the market peak I modelled it here in San Francisco. Purchasing an equivalent to my rent-controlled apartment would have cost me 3-4x the monthly payment on the mortgage alone, plus condo/TIC fees, plus maintenance, plus insurance.

Obviously your rent is too low then

Posted by: DavidB | Nov 4, 2006 3:50:12 PM

"The fact is that real estate is a limited resource and we have added 100 million new Americans just in the last 20 years. Talking about how far prices fell in the eighties or in Japan is completely irrelevant. "

No it's not. In fact, it's completely relevant.

It's a supply/demand issue. Right now, and for the foreseeable future, supply far exceeds demand, which is no different than the early 90's, or the early 80's, or Japan. The *reason* for the excess supply may be different, but so what? The result is the same.

Right now, people either don't want, or can't afford, to buy. Prices must fall.

So, why should the decision to buy a house be any different, at this point in time, from the decision to buy a stock? If I can save a ton of money by renting, then the ONLY reason to buy a house is simply "because I'm willing to pay a premium for owning a home NOW".

Posted by: winjr | Nov 4, 2006 4:06:05 PM

Mark:
- homeownership rates are 69%. Taxes matter
- if you sell your house, invest the proceeds, and pay rent out of your income, the government is still taking 35% of it. If you own, your equivalent rent is untaxed. That is a de-facto subsidy.
- the real-return data I cited are unlevered.

DavidB
- CR has a nice Volcker quote on that subject, "Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security."
- vacancy decontrol and the fallout from the tech bubble tend to undercut your hypothesis. Real SF rents are down over five years for solid, Econ-101 reasons.

Posted by: wcw | Nov 4, 2006 4:11:34 PM

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