Itz News to Me

I posted the following in a comment over at Megan McArdle’s blog in response to her post “Why I Think the Housing Bubble Has Not Yet Bottomed” :

Investing genius Peter Lynch wrote a wonderful book back in the ’80s called “One Up On Wall Street” which a lot of people evidently need to pick up and read.

He talks about how to know when a market has truly hit bottom, and he says essentially that a market hasn’t hit bottom until the conventional wisdom is to completely give up on it. Only then is the stage truly set for the market to come back. As long as there are still a large enough group of people claiming that “it has hit bottom,” it hasn’t really hit it yet.

[On the flip side, you know a market has hit a top when everyone is convinced that there’s no possible way it can come down. Sound like a good description of the real estate market before the bubble burst? Anyone?]

Even a quick perusal of the comments here bear outs exactly what Lynch was saying. There are still far too many people trying to justify the current pricing of real estate to believe that it truly has hit one. Oh ‘this neighborhood is different’ they say. Sure. That’s what they said in California a few years back. People will always want to move to California. Umm. Yeah. Not so much.

Every self-justifying reason in the world isn’t going to change essential market dynamics - especially in light of the current economic situation:

1) Unemployment is still increasing which means more people are going to lose their homes. The GM and Chrysler bankruptcies - and the attendant daisy chain of layoffs - haven’t even begun to work their way through the system.

2) Banks still hold an incredible amount of foreclosed property inventory which still hasn’t hit the market.

3) There are lots of owners already behind on their mortgages who should be foreclosed upon, but banks aren’t willing or able to take the writedowns on the property so they’re holding off foreclosure until they clear some of their existing OREO inventory.

4) Interest rates are rising because of the obscene level of federal borrowing that the Democratic Congress and Obama administration have necessitated with their feckless spending. That’s going to reduce the amount that the average household can afford to spend on a house by increasing the monthly payments.

5) Oil is still going up which is going to cause more layoffs and take larger portions out of the family budget for heating and transportation costs - again reducing the number of potential buyers and the amount they’re going to be able to pay.

6) The prospect of higher taxes and higher household costs because of new government mandates and spending is inevitable unless the political dynamics change in Washington - which they won’t until at least November 2010.

7) State and local governments are facing budget shortfalls as their revenue declines which is going to lead to either government layoffs or increased taxes - neither of which is a plus for the economy or for housing prices.

8) Continuing declines in prices of homes in outlying areas will continue to have a deflationary impact on prices in the center of urban areas as well. As homes in “Suburbia” become ridiculously cheap, the perceived value of living “downtown” declines as large numbers of potential buyers for urban properties wind up opting for larger homes and more land in the suburbs at significantly lower prices - thereby decreasing the number of buyers willing to bid up the prices on urban properties.

I could go on and on, but the reality is that there isn’t a single reason to believe that the housing market is bottoming. Every single economic indicator points to an increase in financial pain for households across America. Combined with the demographic (Baby Boomers retiring with not enough people to buy the houses they’re trying to downsize out of) and cultural (People are no longer willing or able to finance high-end lifestyles by constantly borrowing against their home equity: “Keeping Up With the Jones’” is no longer the order of the day) changes, only someone with their blinders on or a complete ignorance of economics could believe that we are anywhere close to seeing the end of the housing decline.

I know people will protest: ‘But what about this blip or that blip of economic data?’ That’s exactly what they are: blips on the radar screen and certainly nothing approaching a definable pattern. Markets have been in free fall and need to pause to figurately ‘catch their breath’ every now and again. There has been absolutely zero confirming economic data to show a pattern of a base being established: just an occasional relief from free fall records.

Buy now if you want to. But as a cautionary lesson you should read the LA Times article from a couple of days ago where a young family bought a house in April for $175K because they believed people who told them the bottom was near. A comparable house in the same neighborhood sold in June for $130K. Think about how long it will take that family to earn back that $45K they just lost in the last 60 days and ask yourself if you have that kind of money to throw around. If the answer is no, then you know whether or not buying a house right now is a good idea.

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A Minneapolis man was boarded up inside his house by the folks at Fannie Mae. They thought the house had been vacated after it had been foreclosed upon, but no one bothered to actually check. If this had happened under the Bush administration is there really any doubt that this would have been proof positive that the Bush administration hated poor people?

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For all the scorn and blame that has been heaped on mortgage brokers during the last year, realtors have surprisingly escaped getting their fair share of the blame for the recent unrealistic run-up in real estate prices. I have long contended that they, in fact, are the number one reason that prices ran up as far and as fast as they did. Now they want to put the blame on lenders and brokers and the buyers, but never nor at any time on the real estate agents who are still spending every minute of every hour trying to convince people that *NOW* is the time to buy a house.

Forget the fact that they know prices are declining and will likely continue to do so over the next couple of years. Forget the fact that they know their buyers can’t afford the house they’re showing them. Forget the fact that even in a tough market that they’re unwilling to reduce their commission rates. And that’s where we come to the reason for today’s rant: the monopolistic behavior of the NAR.

You would think that the same market forces which affect most other markets in this country would affect real estate as well, but you would be wrong. Because of the near-monopoly that the NAR and its members exercise over the listing services, those who might compete with them are effectively shut out of the market. They have to pay higher prices for access to the listings, if they’re allowed access at all. Now, a light may be breaking into the darkness, as the NAR has been forced into a settlement with the Department of Justice to allow internet-based agencies to have fair access to those listings.

Given their history of manipulative behavior, I would bet that they’re still going to have to be dragged kicking and screaming into compliance with the agreement over and over again. But it’s a start. Once we can break the NAR strangehold on real estate, we might once again see some rationality in the marketplace.

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