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?
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....
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