Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)
"Positive Housing News Keeps Rolling In," exclaimed the headline of a July 24, 2012,Wall Street Journal story by Steven Russolillo. The author found much to praise. One gloomy Gus could not help but conclude otherwise. Old Gus holds the house market at bay, one reason being the great unknown of what will happen to house prices when Fannie and Freddie are no more. The GSEs (Government Sponsored Enterprises) are still a massive presence in the home mortgage market. Their full faith is due to the implicit U.S. government guarantee.
It is not so controversial anymore to contend that someday the U.S. government will run into a wall. (Whether it is a lack of will or presence of mind that leads to this conclusion is not material here.) What is difficult to imagine (in gloomy Gus’s imagination) is the price of houses when the FNM, FRE, GNM support for home mortgages withers. As long as we are imagining, what will happen to college enrollments when Sallie Mae decays?
Russolillo’s summary notes: "Most of the housing news lately has been positive, so [the July 19] news of a 5.4% drop in June’s existing home sales was a bit of a surprise." Maybe Russolillo should have left it at that. He goes on: "One reason for the drop: Sales are sluggish in the lower end of the market due to a scant supply of homes for sale in many parts of the country. That’s because fewer new foreclosures have been listed for sale over the past year and investors have snapped up the bulk of the current stock."
Taken as is, this is good news for house prices. It does not require much general observation though, to look askance at such evidence. The evidence walks down the street, is spoken by cashiers, and shuttles through the food banks. Observation is not trusted, even by those who observe, in a world that only trusts quantification, of which there is oodles. Only a smidgen will invade your time here.
For instance, on July 13, 2012, reporting for AOL Real Estate, Teke Wiggin wrote about the REO market. That is, "Real Estate Owned" by the lender. Wiggin discovered, "as many as 90 percent of REOs are withheld from sale, according to estimates recently provided to AOL Real Estate by two analytics firms. It’s a testament to lenders’ fears that flooding the market with foreclosed homes could wreak havoc on their balance sheets and present a danger to the housing market as a whole." (And to Fannie Mae, "which owned 114,000 foreclosed homes as of March 31, [2012]…. "[I]n the first quarter of 2012, it was unable to market 48% of its REO inventory…")
Releasing house inventory would not only wreak havoc on bank balance sheets but also damage the impregnability of beloved homebuilders. One of Russolillo’s Positive Housing News capsules notes: "The improvement in the housing market has been reflected in homebuilder stocks. PulteGroup is up 67% this year and is the second-best performer in the S&P 500. Lennar is up 54%, D.R. Horton has risen 48%, Hovnanian is up 74% and Ryland Group has gained 67%."
Having paid no attention to homebuilder stocks (around 2005, they seemed to be drawing the fanaticism accorded technology stocks, so remain off limits to this gloomy Gus), no comment on this rather spectacular rise will be offered.
Not to leave the reader empty-handed, Russolillo’s Good News includes a high-five recommendation to buy house stocks: "Goldman Sachs turned bullish on home builders. In a client note, the investment bank raised its ratings on several of the nation’s largest home builders, a signal for investors to give them a second look even after their sharp rallies this year." Caveat emptor or carpe diem, depending on your disposition.
The title of Wiggin’s story: "’Shadow REO’: As Many as 90% of Foreclosed Properties Held Off the Market," is confirmed by Realty Trac, which "recently found that just 15 percent of REOs in the Washington, D.C., area were for sale, a statistic that is representative of nationwide numbers."
Wiggin’s story rings truer than Russolillo’s. That is, just where would the money come from to boost house sales and prices? One source is foreigners who are buying up houses. Another is investors buying vast tracts of forlorn houses which they plan to rent. Another is insiders at homebuilding companies cashing out their stock options who might want to splurge. For the most part though, Americans do not have the money to resurrect houses.
Americans need some money, maybe not much, but some, to buy a house now. They can still borrow more than they need on credit cards and student loans (a scandal that will be compared to subprime and home equity cash outs), but their "real" income is falling. It has been for years. The Great Depression did offer a sunny side often overlooked: prices fell. That could be a good thing if they fell more than incomes. Today, salaries fall short of rising prices. (The front-month corn, wheat, and soy price index (in the U.S.) is now 5% above the previous all-time high of 2008).
Confirmation of the Dreary Depression spills out: A good number of second-quarter, corporate financial statements have shown steady or rising earnings with slowing or falling revenue growth. Many of these efficiencies (the ability to register acceptable earnings with lower sales) have come from cost cutting, with job layoffs leading the cuts.
According to the July 18, 2012, King Report, more Americans signed up for disability in the second quarter of 2012 (246,000) than found jobs (225,000). The Congressional Budget Office reports that household income fell 12% from 2007 through 2009, with income among the top one percent falling by one-third. (As usual, the most heated political discussion should be in the past tense. When liabilities are subtracted from assets of the top one-percent, the insolvency rate will leave the IRS bereft of whatever higher tax rates are supposed to produce.)
Russolillo’s Bad News about existing house sales does not quote the economist from the National Association of Realtors. This is Good News for the consuming public; Bad News for the aficionado of media-made authorities who mislead the public. The NAR economist is the traditional house organ for house sales inventory acceleration. It would be impossible to fill the void left when David Lereah resigned in 2007. He was as quotable as usual in 2005 when he chided dowdy Americans: "If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years. It’s as if you had 500,000 dollar bills stuffed into your mattress."
Lereah was honored by Time magazine in its list of "25 People to Blame for the Financial Crisis." He now heads Reecon Advisors, Inc. a real estate and advisory firm that publishes Real Estate Economy Watch. Caveat emptor, carpe diem….
Still, inquiring minds want to know how the post-Lereah NAR economist positioned the Bad News. One Lawrence Yun holds the post, and from the looks of things, he is not nearly as interesting, though still thoroughly preposterous. From the NAR press release on the Bad News reported by Russolillo: "Despite the frictions related to obtaining mortgages, buyer interest remains solid. But inventory continues to shrink and that is limiting buying opportunities. This, in turn, is pushing up home prices in many markets." Caveat emptor,carpe diem….
Frederick Sheehan writes a blog at www.aucontrarian.com