Housing Experts Change Their Tune on Housing Bubble

It was only a few weeks back that I suggested home shoppers not believe everything they hear from the oft-quoted, so-called Experts regarding the housing market. There was a pretty straightforward reason. Despite much evidence to the contrary, the people with a vested interest in continuing to see prices rise -- like the outgoing Fed chief, Alan Greenspan -- kept telling the soundbite-seeking press that there was no "bubble." Regional bubblets, maybe. Well, not even bubblets. Areas of higher enthusiasm, really. Everything was just fine. Nothing to see here. Not then, anyway. Not way back in ... July.

In that fabled long, long ago, another oft-quoted Expert on the State of Housing, David Lereah, chief economist from the National Association of Realtors (NAR), described the drop in existing-home sales as follows: "This is a big number any way you slice it, and housing is continuing to stimulate the overall economy."

He then went on to preach the gospel of homeowner wealth, on his way to reassuring everyone that although prices might no longer climb at double-digit rates, they surely wouldn't fall. As he put it, "This is spreading the wealth of housing returns, with a natural easing of appreciation in areas following a period of extraordinary price growth." Easing of appreciation. Whew. We can handle that, right?

Heck, as recently as the end of last month, our soon-to-be Fed chief, Ben S. Bernanke, still denied the existence of a housing bubble, attributing the 25% inflation in home prices over the past two years (in the face of stagnating wages and rising inflation) to "strong economic fundamentals." Maybe he just didn't want to start his tenure as America's top economic policy maker by sounding like a Negative Nelly.

What a difference a few weeks can make. Now, even the NAR guy whose job it is to reassure you that all is well, that it's a good idea to get on out there and pay up for a home -- thereby earning his constituency a continuing stream of fat, 6% fees -- even this guy is starting to change his tune.

This week, NAR economist Lereah told The Wall Street Journal that "the air is coming out of the balloons." The balloons that didn't exist a few weeks back? I guess. In fairness, he could hardly say otherwise.

After all, recent earnings calls from homebuilders like Centex (NYSE: CTX) and Toll Brothers (NYSE: TOL) have made it perfectly clear that the heady days of yore are no longer guaranteed, even as D.R. Horton (NYSE: DHI) and Beazer Homes (NYSE: BZH) have held the "all is well" line, despite evidence that things may not be quite as rosy as reported.

Dare we ask, "Why didn't all you Wise Experts say something about this six months ago?" Dare we? Perhaps we daren't. After all, this chain of events has been pretty tough to figure. Only real experts could have seen this sort of thing coming.

By real experts, I mean anyone with eyeballs, common sense, a memory longer than 10 years, or just a mastery of seventh-grade algebra. Anyone, in short, who isn't panicking to get into a home and doesn't depend on our new national pastime -- home-swapping -- for income or professional reputation.

I think that even my teacher wife's greenest math students are expert enough to have seen where this has been heading. Even junior high schoolers can work the equation and see what happens when prices have risen to the point that the only way a large percentage of buyers can purchase is by signing on for gimmick-depressed payments -- excuse me, "affordable, interest-only ARMs."

Even Booger Bob -- the kid who picks his ear with the sharp end of his mechanical pencil and wipes the residue on the soles of his shoes -- even ear-pickin', wax-flickin' Booger Bob could have told you that once the interest rates creep upward, and/or real wages stagnate, and/or "core inflation" begins to bite buyers in the tuckus, putting a lid on monthly "affordability," the only variable left to move, if you want that home to move, is the home price itself. And it's gotta move down, eventually. And if it doesn't move down, well, people stop buying, right?

It's not hard for me to notice the evidence of decreasing demand for the dream home in my own (rented for a reason) backyard. The late 1950s and '60s, 700-square-foot, shag and Formica junkers in the neighborhood across the road from me had been fetching up to $500,000 a piece, up from about $350,000 a year and a half ago. These days, they sit on the market for weeks or months, just like the $680,000 townhomes closer by, the ones hemmed in by a multicolored moat of shiny Acuras, BMWs, and SUVs, which, oddly enough, seem to host an increasing number of hardware-store "for sale" placards in their rear windows.

And there are more and more of these signs of the times. I count them up every time I take the dog to the park and ponder while he brings me tennis balls.

And I wonder how many of the signs that come down do so because the property was sold, or because the listing agent told the sellers to take it off the market, a common tactic to refresh the sale. Remember, part of the magic of the recent fairy-tale housing market has been creating a sense of urgency, of need, of demand. No one wants a house that's been for sale for two months!

Houses that spend too much time on the auction block are as appealing as afternoon tea with the poor old cat lady who lives next door. (It's that kind of neighborhood.) Take 'er off the market for a while, then put it back on. That way, prospective buyers think that it's only been available for a week or two, and maybe, just maybe, we can get them to sign a contract.

That's a big change from a year ago, when, if you wanted to take part in the American Dream and start "building equity," you were forced to put a bid on these things the day they were listed, with no inspection, no home guarantee, and an automatic escalation clause to boot. I actually took part in one of these fiascos a while back, and not a day goes by that I don't thank the stars that there was some poor shlub out there who threw caution further to the wind than we did, and bid the house up more than 15% over the asking price, knocking us out of the running, and knocking us back to our senses.

How this will all shake out further down the economic food chain, I'm not going to hazard a guess. I'm not an Expert. I'm not privy to such Deep Thoughts. Most of the Experts, or at least the ones talking to the press, seem to claim that (or hope that?) a "soft landing" is on the way. I'd like to believe in that. It sounds so comforting, and I do keep a lot of my investment dollars in retail stocks.

For that reason, I hope that any impending financial pinch won't put the kibosh on spending at places like Tiffany (NYSE: TIF) or Target (NYSE: TGT). Soft or not, it seems likely to put a dent into the earnings of companies that have been doing bang-up business in the (until now) easy money arena of mortgage writing, such as H&R Block (NYSE: HRB).

But I'm not so sure the Experts are on the ball with this "soft landing" stuff, either. In addition to warnings from some homebuilders that next year's results aren't going to be as peachy keen as originally thought, the just-released new home start numbers for October show that they may just have been understating the difference. These show a 5.6% drop, double what the very Wise Experts were predicting. Is our landing already getting less soft?

Maybe we should ask the experts at the Fed, or the National Association of Realtors, and everywhere else, "Just what is it that happens to home prices when the free money becomes less free, and that panicky run to 'get into the market, no matter what it costs,' comes grinding to a halt?" "What happens when the 'wealth of housing returns' goes flat, or even negative?" "Will housing continue 'stimulating the economy?' "

But maybe the final question should be, "Why didn't you talk more about this a few months ago?"

Seth Jayson is one of the more generous commentors on the real estate bubble. He actually pulls his punches and instead of hard right crosses he just slaps the 'experts' gently. For really rock 'em, sock 'em action check out this comment and hit the internal links. Other editorials likewise reflect growing anger and frustration with the experts who are supposed to keep watch on the U.S. economy. (Want to Learn More?) But it is not for me to worry. Helicopter Ben claims he is planning to dump loads of freshly printed greenbacks from helicopters onto the economy to keep it humming along. Was this merely reckless banter by the new Fed designate or is the chief watch dog of our economy dreaming of sand castles in the air?

Nobody listens to me, anyway. I'm just a geezer living in bubble land Oregon.

He then went on to preach the gospel of homeowner wealth, on his way to reassuring everyone that although prices might no longer climb at double-digit rates, they surely wouldn't fall.

Home equity is not wealth. It is an imaginary number.

I've been slapped a few times myself.

Little do these people understand that greatly increasing property values not only limits the number and lifestyle of those that buy them, but also puts MORE money in the hands of the government. Just wait 'til the property tax bills start showing up.

Then try and sell that overpriced shack for a profit.

CA geezer.

Sure it is, it's just that its value fluctuates based on the whims and senitments of others (i.e., buyers). I'm not an expert in any way but it seems to me that the intrinsic value of real estate changes just like any other comodity.

The housing bubble is regional, California, Florida, and the Northeast. Where I live in Colorado Springs our prices have been flat to 2-3% in the past 5 years. They say this is one area that might climb significantly next year due to more miltary folks coming in, and also due to people fleeing high prices in other areas. I've also heard the same about Texas, some midwest states, and other mountain states.

What's bad for some states may be good for others. We'll see...

"Home equity is not wealth......"

PLEASE tell that to all the fly by night suspicious companies who stuff my mailbox weekly with offers. Retired on a fixed income, I bought my first home in 20 years here in Northern AZ with a VA home loan for 82K. And in the past year the value has gone up in this fast growing area. Within a week of closing the junk mail from these loan people and local realtors who scream offers at me began to arrive. While I would like to borrow enough money for about 10k in home improvements, I am VERY wary. I would rather live with my old fence, gravel driveway and cranky air conditioner then find myself at anyones mercy. Mom didn't raise no fool.

geez a voice of reason. anyone that thinks that the bubble does not create solutions does not see how builders are not building smaller houses than they built 5 years ago, but charging more. Soon they will build different again and charge less. Supply and demand in housing is no different than in cars.

I saw the handwriting on the wall. We bought a condo in southern CA in 1998. It appreciated over 300% in 7 years. If that isn't a bubble, then bubble doesn't exist. We sold this year, turned chimerical equity into REAL money and paid cash for a house in San Antonio area. We are completely debt free - and that is the best place to be - I am a slave to no one. We can live on less than $20k/year. Thank you California - I'll miss ya - NOT! No state income tax here in TX, and no liberal whacko legislature legislature either -- although the illegal problem is almost as bad here as in Calif.

There is no bubble here, that's for sure. Houses appreciate about 4%/year - about the pace of the CPI. It's the smartest move I ever made. Now, I can afford to be VERY choosy where I work.

I posted this on another housing thread--
http://www.freerepublic.com/focus/f-news/1524305/posts:

We moved to northern CA (2 hrs north of SF) from TX in 2001, and had a house built there--2000 sq ft, nothing to write home about, okay house--when my husband first checked it out in late 2000, it was $285K--a month or so later when he went back to buy it, it was $325!--we sold the house (in one day, by word of mouth) for almost $400K in Aug 2003, and this past week he learned the house is for sale again for, get this--$585,000!!! I couldn't believe it. That little house was NOT worth over half a million dollars, believe me. :-O
And out in the 'boonies' to boot!

From what I understand, a lot of times the houses are not bought to be lived in, just bought to be sold for a profit and a quick turnaround (like one day!). I'm with Greenspan on this one, I just don't think the market can continue to uphold these kinds of outrageous prices. It's jaw-dropping incredible that it's gone on as long as it has.

Little do these people understand that greatly increasing property values not only limits the number and lifestyle of those that buy them, but also puts MORE money in the hands of the government.

I'm sorry, who are "these people" and what do we do about them exactly?

Guess you are living one of those Californicated cracker box houses that are about $ 300,000 over priced? What are you going to do when the wind gets sucked out of your sails? The U.S. government is going to rain greenbacks on the economy here and print 'redbacks' for use overseas. Result will both inflation of commodity prices and deflation in asset prices. In the meantime, America's auto maker GM is BK. Recession is just around the corner. But in the meantime, buy a new SUV, remodel your kitchen, pay off your credit cards, put on a new roof, and use your home like as ATM machine. Why not, it's only fake money, anyway. Fiet money is just green paper.

As for myself, I'm a retired geezer. Thinking about buying foreclosures in a couple of years and going expat to party in the sun.

On top of that, home building permits are down over 7%...in the 4th quarter of the year....oh the agony.

I still would like to know how long you get to keep claiming "bubble" about a cyclical business, before you no longer can claim "I Told you so"? 1 year ? 2 years ? 5 years ?

I wonder how this is going to affect the rental home industry? Rents are insane right now. One prospective landlord even told me that we would be paying her mortgage!

I recently learned that my ex refinanced his 3 yr old home, which is located in a cram-packed tract, with a postage stamp lot. Hehehe...

OTOH, my bf's dad, who is in his 70's, did a reverse mortgage on his home. It's locked in at the over inflated price : ) His father is a shrewd businessman, and sees the writing on the wall.

The plan for us is to sit tight for a couple of years, and wait for the foreclosures.

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