After a decade long housing bull market, it seems that people have come to expect double-digit appreciation on a year over year basis. As fall gently pushes the summer away, we are to expect that housing will operate on a perpetual treadmill of upward growth. You may be surprised that membership for the National Association of Realtors held steady from 1989 to 2001 with approximately 800,000 members. However, from 2002 to 2007 the number of members jumped to approximately 1.4 million. What this means aside from having a realtor bubble, is that nearly 600,000 NAR members have never witnessed a housing bear market while they were part of the industry. How do you like those stats? In addition, from reading housing material put out by the industry, many think that this minor speed bump in the housing party will soon pass. At least that is what they were saying before the market took a massive u-turn on the interstate built by equity. Apparently, the new argument is to blame homebuilders, banks, and discount brokers. You would think there would be some blame toward lax lending standards and mortgages so inherently toxic, that they radiated financial destruction. Or you would think that there would be some responsibility pointed toward the Fed since they essentially inflated this credit bubble with easy momentary policy since 2001. Both these latter reasons get no blame since they are bosom buddies with the housing complex. In fact, one cannot survive without the other as we are seeing in the arena of real life housing here in Southern California. There was a point were many in the industry proclaimed that housing would be able to stand on its own two feet regardless of monetary policy; the logic behind this is that housing was healthy and little of the growth was based on funny mortgages. Let us take a quote from the historical archives of May 2007:

 

“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited,” Bernanke said in May 2007. –Ben Bernanke

Wrong. And this coming from the head of the Fed. Clearly, housing was propped up via the easy money mortgage bonanza. Now that the bubble is popping, I would have thought that many in the industry would admit their mistake, and acknowledge the brutal reality of the current market. What is going on? A phase of psychological denial and blaming those who plan to take the punchbowl away, that is what is going on. This weekend in the LA Times Real Estate section, which is unabashedly pro-housing, we see an article that literally blows me away. It opens with the following paragraph:

“Are you a homeowner who is having trouble selling your house? National housing experts say you can heap some of the blame on those big builders with their much-ballyhooed sales and the banks that have put too many foreclosed homes on the market.”

You can read the article here if you like but I forewarn you, you are entering the cult of pro-housing. Where to begin. First, which “housing experts” are they talking about? You mean Lawrence Yun over at the NAR? From most mainstream articles, it appears that some of the blame is being put on wonderland mortgages but nowhere in this article is any blame assigned to the subprime market. And this is a LA Times article with a circulation to folks here in the Southland; articles like this will only continue to perpetuate the myth that housing always goes up. And by the way, things are not getting better. Countrywide just announced funding fell by a whopping 44 percent from a year ago; they announced that funding dropped last month from $38.1 billion a year ago to $21.2 billion. The subprime mess is mentioned as a tiny footnote even though California ranks at #1 in subprime loans. But why mess with facts when we can just blame random culprits? Another implication of the opening paragraph is that banks are putting foreclosed homes on the market as if they had a choice. Yes, banks love getting foreclosures. Many housing articles in the mainstream media have a hook story. You learn in college through journalistic writing that every good story should have a compelling protagonist. It makes the story personal. So we will hear about Joe or Michelle in relation to an article. It is a template many journalist follow. In the above article, we hear about a person trying to sell their home in Corona and the home has stayed on the market for get this, two years:

“We’ve had some offers,” she said, “just none that I wanted to take. We decided to sell at the wrong moment.” The right moment, she added, may not come for a while, since developers aren’t looking to buy more lots.

Wrong moment is the understatement of the week. The area in which she is selling is over built and of course builders will not be buying any more land to develop. That is the definition of overbuilt! The article tries to levy some blame on homebuilders and their recent campaigns of price cutting to move inventory:

“What Hovnanian did hurt everyone, including the long-term, broader market — which includes them too,” Babb said. She explained: The ability to get loans is based on comps — the sales prices of comparable homes nearby. Now, homes near the ones for which Hovnanian slashed prices will appear inflated by comparison and may make financing more difficult.

Oh boy. The underlying plea here is that homes should be kept at high prices regardless of market fundamentals. There is fear in this writing that any slight move to the downside may destroy this plastic reality that many folks are living in. What about local area incomes? What about conventional mortgages? Doesn’t that hurt the market in the long-term by forcing anyone who wants to buy to swallow the blue pill and except this person’s delusional bubble reality?

“Hovnanian sent a signal to the entire consumer base that things are scary out there.” Babb said.

You mean Hovnanian sent a reality signal to the market? Can’t have that in our surreal real estate reality. So let us blame them since they aren’t drinking the housing Kool-Aid. What Hovnanian did is what any smart business would do. It responded to current market demands. The above seller can learn a few lessons from the big builders but then again, that is why her home is still on the market after two years. This article is boiler plate from the pro-housing bubble camp. In fact, some folks are claiming that now is the greatest time to buy! Baghdad Bob had nothing on these people.

Blame the Homebuilders

Why blame homebuilders? You would think that the industry would be an advocate for perpetually high prices. Unfortunately, builders such as Beazer and Hovnanian have taken a massive beating as demonstrated by their 2006 and 2007 stock prices. They responded to market demands and pressure. If homes don’t sell at $500,000, lower the price to $400,000. And guess what happened? They sold homes! Hard to believe that lowering prices actually makes products move. In fact, some lenders are doing their own financing to speed up the process since the credit crunch has kept some prospective buyers out of the market. You can see why some in the industry may not like this. For one, they cut out the lenders. Second, many times especially in these promotional sales they use their own homegrown agents and keep everything in house. However, the biggest issue many in the housing industry have with builders is their ability to slash prices Wal-Mart style. Whether sellers have psychological delusions of grandeur, they to have the same power to slash prices if they weren’t so caught up in yesteryear prices. Well, most sellers have this leverage if they didn’t buy at bubble prices. Those that did can simply walk away and join the ranks of the record foreclosures and short sales. The major bridge many in the housing industry would like us to cross is that of institutionalizing astronomical housing prices. Unless we go back to banana republic mortgages that bridge is not even going to have the financing for construction.

The Fault is of Banks

Another novel comparison we get in the LA Times article is that rental homes are like rental cars. “Who ever washes a rental car” is the comparison. Aside from the fact that rental cars are normally rented out for a few days, I don’t know many people that rent in middle class neighborhoods that treat their family home like a frat house. In fact, most treat it as their home. Plus, you may be in your rented home for sometime. Here in Los Angeles County, the majority of people rent. Amazingly, I haven’t seen people tagging their living room walls up or leaving sofas on their lawn simply to spite the landlord. In fact, we are seeing a reverse phenomenon. We are seeing some folks who are approaching foreclosure simply abandon the house and let nature take its course. Wild lawns and boarded up windows look worse than a renter in my book. In fact, many owners feel slighted by the mortgage company for putting them into a toxic mortgage.

Welcome party number two to the blame party, the banks. They aren’t blaming banks in the way we blame them for irresponsible lending and pathetic mortgages. No, they actually insinuate that banks are putting on too many foreclosures onto the market, thus depressing prices. Aside from the fact that banks have zero control if buyers default, I’m not sure what they expect banks to do? Banks are not in the business of being landlords. Like builders, they will slash prices to move inventory. In fact, there is now a miniboom in listing foreclosed properties. In order to move this inventory prices will need to be slashed like the builders did. Otherwise the numbers will simply go upward.

Some Good Points

Credit where credit is deserved. The LA Times in their business section has a section that is normally very good. It is in the business section and is called “Money Makeover.” In this they have a financial adviser look at a specific case each week and try to provide guidance and financial advise. I have found the series informative and usually spot on. In the latest edition, which touches upon many issues including health care, we have a homeowner who is in a financial crunch, and one of the pieces of advice is to downsize their home. Great to hear this as opposed to the typical, “you need to move up to another bigger McMansion.”

Some readers have been asking about getting the housing message out. My take is that you should talk to family members and friends if they ask you about the housing market or are planning on buying in overpriced metro areas. I would encourage readers, if you feel compelled to do so, to click on the green share button at the bottom of this post and share some of the articles you find useful on social networking sites such as Digg, Reddit, or Stumbleupon. The word is getting out and it is having an impact on the market. Buyers are now more reluctant to buy into this bubble hype because they realize that yes, we are in a housing bubble and many got their information from third parties or mainstream media articles that are now carrying a more balanced message. If they don’t carry the message, we can always start our own campaign of blame.