I’ve been digging through the 44 page State of the Nation’s Housing report put out by the Joint Center for Housing Studies at Harvard University. The report is chock full of excellent data yet once again they miss on a few of their forecasts. I’ll get to the data in the current report later but let us look at what the center director Nicolas Retsinas had to say less than two years ago in September of 2006. The reason it is important to dig deep into this forecasting is that so much credence is placed on these reports from many people in our country.

“September 24, 2006
The Providence Sunday Journal

HOUSING BUST AHEAD.” The headline hints of catastrophe: a dot-com repeat, a bubble bursting, an economic apocalypse. Cassandra, though, can stop wailing: the expected price corrections mark a slowing in the rate of increase — not a precipitous decline. This will not spark a chain reaction that will devastate home owners, builders, and communities. Contradicting another gloomy seer, Chicken Little, the sky is not falling.

Let me alleviate some fears.

Fear One: Prices will plummet.

From the start, the much-vaunted housing “boom” was an uneven phenomenon, driven by a strong demand for housing, coupled with constrained supply, particularly on the two coasts. In much of the nation, housing prices rose modestly; in a few areas, prices did not budge.

In those overheated markets — often fueled by immigration — prices were rising by as much as 20 percent a year. But even with soaring demand and limited supply, that escalation was not sustainable. Even with too-good-to-be-true mortgages, people cannot afford to buy homes that cost five times their income.

So in those overheated markets, moderation is expected. Moderation means that prices will stop rising at meteoric rates: The home owner who expected a double-digit profit after one year will be disappointed. A home will once again be more of a domicile, rather than an investment. In some regions, prices will flatten, rising around the inflation rate, which is the historic average. The fundamentals behind high prices — strong demand (more households will form in the next decade than in the last) and constrained supply — persist.”

How can someone point out so many right things yet be so wrong? First, there is a clear acknowledgment that coastal areas will moderate. There is also an acknowledgment that some people cannot afford homes without “too-good-to-be-true-mortgages” and incomes may be a problem. How is this dispelling the myth or the fear that prices will plummet? A lot of what is said is the exact reason prices have fallen! This is the problem with this type of analysis because nowhere in this explanation is there a reason for why housing prices will not fall. In fact, we are given many reasons for it to decline. And by the way, we now know that across the board this is a national housing bubble bursting. Talk about being massively wrong. Let us see what he has to say about the next fear:

“Fear Two: The economy will collapse.

Housing now represents over 20 percent of the gross domestic product (compared with 18 percent from the manufacturing sector). For most families, the investment in a home constitutes de facto savings: the build-up of equity is in the trillions of dollars. And home owners have tapped into that equity, using their homes as ATM machines for refinancing and home-equity loans.

Consequently, we are “well housed.” Indeed, two bathrooms, air conditioning, garages — the amenities our grandparents called luxuries — are standard.

All this activity has fueled consumer spending.

A Cassandra fear is that as home prices moderate, the moderation will show up in the gross domestic product. Yet, again, moderation is not a free-fall. The housing market will adjust slowly, with fewer sales and starts. History tells us that housing booms are not eternal — that most end — enabling incomes to catch up with prices.

Furthermore, builders have been building to meet demand. In regions where the number of households is growing, so is the need for housing. That demand will not slake. So the incentives for developers remain strong. We will see more construction over the next decade than over the last — and the last decade set a record.”

Again, the fact that he mentions that homes were used as ATMs to fuel the boom is another point for a housing bust and also, an economic slowdown. This is the type of analysis put out by this guy during the housing heyday that it is important to publicly put this stuff out now since I see many citing the 2008 Harvard study as a source to go for. Good data in the report but again, we see conclusions that simply do not make sense. This guy and David Lereah for example were cheerleaders during the housing boom. Only in this case, there is proof that he does understand the exact reasons for why housing would completely bust yet arrives at some conclusion that isn’t backed up with data.

In fact, everything in the report that supposedly wasn’t going to happen occurred exactly as he stated. Housing is collapsing and it is taking the economy down with it. Now you would think that one would acknowledge such bad forecasting but let us look at what is put out this week:

“(INMAN) For now, center director Nicolas Retsinas said mortgage rates have “barely responded” to aggressive easing by the Federal Reserve. While the supply of for-sale vacant units continues to grow, tighter underwriting standards have locked many would-be home buyers out of the market. And with home prices falling in most metropolitan areas, homeowners are remaining on the sidelines, he said.

“At some point demand will bounce back,” Retsinas said in a press release announcing the release of the report. “Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability. It is difficult to judge how far away from these conditions we may be. It will take longer this time to rebound given the unusually high levels of foreclosures and constrained credit markets.”

Bwahaha! I think the majority of the public would categorize a recession as a “bad” economic thing – something that in 2006 was not going to happen. So now, the implication is housing prices collapsing and the oncoming recession are good because they will increase affordability. Wasn’t that fear number 1 and 2 that supposedly were only part of the tin foil hat housing bear crew? Talk about never having to say you were absolutely wrong. Mea culpa not welcome here.

The reason I bring this up is that we are seeing the exact same social phenomenon that occurred during the Great Depression. Folks kept listening to so-called experts even after the market was pummeling people into the ground. The benefit this time is information is quickly and easily disseminated. You can easily verify what people said a few years ago, measure it up to public data, and reach your own conclusions to who is right. This reminds me of mortgage brokers who swindled people into crappy loans who are now “foreclosure specialist” helping people from losing their homes because of, crappy mortgages. Surely you can see the circle stupidity in that? Or what about letting major banks have a say in the mortgage bailout legislation? Are these really the folks we should be looking to for advice on getting out of this ditch? A ditch which was dug out with their own shovel of incompetence.

2008 State of Housing – Los Angeles Style

The overall report is still overly optimistic about housing. After all, this is the same center that completely missed the housing bust. By the way folks, it is busting. We can debate the semantics of it but homes being off 14.1 percent nationwide and 30 percent off in California is a bust in my book. Now unless they quantify a bust by being off by 25 percent nationwide and 50 percent off in California we may be a few years away from that. Given the current trend and what is currently going on in our economy, the above is very likely. So let us take a look at some points in the new 2008 article:

“Although subprime loans and new types of mortgages have been linked to a temporary increase in homeownership, the run-up in homeownership rates predates the proliferation of such loans. In fact, the largest homeownership gains occurred before 2001 when the subprime share was still small and price appreciation was only starting to take off.

Several factors contributed to the surge in homeownership between 1994 and 2000. First, mortgage rates had started to decline in the 1980s and stood at much lower levels by the end of the 1991 recession. Second, the economy had entered a period of unusually vigorous and broad-based growth, with strong increases in incomes across the board. Third, home prices in some markets had fallen in the wake of the 1991 recession, improving affordability for many buyers. Fourth, federal regulators had stepped up pressure on financial institutions to meet the mortgage needs of low-income communities and minority borrowers. And fifth, the prime mortgage market had begun to rely on automated underwriting and statistical models of loan performance, enabling lenders to relax downpayment and debt-to-income requirements while maintaining about the same expected default rates. Lenders were thus able to identify a broader range of borrowers that qualified for prime credit.

The expansion of mortgage credit in the 1990s was therefore accomplished with traditional products and without adding much to risk. The growth in mortgage credit after 2003, in contrast, came largely from gains in much riskier subprime, interest-only, and payment-option loans. These novel mortgage products provided only a temporary lift to homeownership. Indeed, the national homeownership rate peaked in 2004 and has since retreated below its 2003 level.”

Once again we see the same logic that was used in 2006. Many of the reasons given here are exactly why we are facing a housing bust. First, we are told that the homeownership rate increased even before the subprime bonanza. Yet we are then given 5 reasons for the easy lax lending mortgage environment we have lived in. Incomes did not increase strongly during this time. That is why credit eased to keep consumption up! Plus, the technology bust of the early part of the decade wiped out much of that pseudo wealth. The “stepped up pressure” by regulators to increase homeownerships in lower income communities was a big sack of mortgage crap. This is where most of the egregious mortgage fraud occurred and all those housing gains are now gone including many hopes and dreams from people in these areas.

Again we are led to believe by the implication that homeownership rates actually increased for legitimate reasons but this again is false. The next year with the Alt-A pay option ARM implosion we will once again prove this Harvard report wrong. They are still under the impression that this mortgage mess is in the 9^th inning. But immigration will save the day!

“With many housing markets in a tailspin, the underpinnings of long-term demand have come into question. But unless the economy enters a sharp, prolonged recession that dampens immigration or slows household formations, the current housing cycle in and of itself is unlikely to diminish the long-run growth of households.

The propensity for Americans to form households is driven largely by the age distribution of the population, slowly changing social norms, and the pace of immigration. In the decade ahead, the aging of the echo boomers into young adulthood, the longer life expectancies of the baby boomers, and projected annual immigration of 1.2 million all favor an increase in net household formations.

Meanwhile, the impacts of recent social trends are likely to be minimal. Although deferred first marriages, high divorce rates, and low remarriage rates will continue to make single-person households the fastest-growing household type, these trends have started to level off. Assuming that age-specific household formations remain

about constant, changes in the number and age distribution of the adult population should lift household growth from 12.6 million in 1995 -2005 to 14.4 million in 2010-2020.

With their high levels of immigration and high rates of natural increase, Hispanics and Asians will contribute significantly to household growth. Minorities are expected to account for more than two thirds of the net increase in households over the next decade, with the foreign born alone contributing at least one-third of the gains.

Because minorities have lower average incomes and wealth, some have argued that their growing presence in housing markets will be a drag on home prices and rents. But when the minority share of households increased from 20.2 percent in 1990 to 29.2 percent in 2007, rents and house prices still rose ahead of household incomes. While their low incomes may force them to spend less on non-housing items as housing costs rise, minority households will nevertheless provide broad demand support to housing markets in the years ahead.”

Again, great data yet how can they reach such wrong conclusions? First, they tell us that immigration growth from minority groups is going to increase in the future. Yet they also explain that many of these people will be in the lower income brackets. So how does this bode well for higher home prices? If anything, this is a case that there will be a higher demand for affordable housing which is still strongly lacking in this country and is almost non-existent in California. And again, why use the gains of the housing bubble as a comparison measure? If anything, that should be a caveat as to why prices are still inflated.
Americans are also having less children and getting married later. The 1950s picket white fence archetype home is no longer a reality for many. We now live in a dual income society where fuel costs make it highly expensive for most middle class Americans to live out in the boondocks and commute to work. Many are choosing to be single. And as highlighted by the Great Depression, many folks delay getting married and forming households when times are tight. Aside from this Pollyanna view we are in a recession and this psychology pushes people from buying homes.

They also tell us that the baby boomers will be retiring soon in mass numbers. Many will retire to smaller homes or retire out of the country. This will only add more inventory to an oversaturated market. Keep in mind that the first baby boomers are already retiring just in lieu with the massive rise in foreclosures and over abundance of housing inventory. Good data yet most of the implications point to less households forming in the sense that people will not buy a home. That is until prices come in line with incomes.

Let us end with another section in the report:

“With credit markets in such disarray, the for-sale housing inventory at record levels, and only small declines in interest rates, emerging from today’s housing slump could take some time. Although demand fundamentals should support average annual completions

of more than 1.9 million units over the next decade (including single-family and multifamily units plus manufactured homes), the housing market must first work off the one million or more excess units that were vacant and for sale or temporarily taken off the market at the beginning of 2008. This could trim underlying demand to an average of 1.8 million new units annually in the decade ahead.

If the economy slips into a severe recession, the prolonged contraction could drive down the sustainable level of housing demand by slowing the loss of older units, forcing more households to double up, and reducing sales of second homes. But in the case of a mild

downturn, which most economists expect, the fundamentals of demand are likely to drive a strong rebound in housing once prices bottom out and the economy begins to recover.”

Oh! Have to throw in that little caveat eh? Well most economists didn’t see this housing bubble coming and most economists don’t work for Harvard.

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