Housing downturn only temporary, real estate agents told
Chief economist for NAR, David Lereah, gave a speach to some realtors in upstate New York today. From the AP wire (I don't believe the full speech text is available online yet):
I read this and was curious what 'temporary' means. Luckily David's speech had an answer:
Next I wondered what this kind of analysis this 3 to 6 month prediction could be based on. I don't think the speech had an answer for that though. Any thoughts? Anyone?
The downturn in the nation's housing market, including the Albany, N.Y, region, was necessary and will be temporary for the most part, according to the chief economist for the National Association of Realtors.
I read this and was curious what 'temporary' means. Luckily David's speech had an answer:
He predicted a rebound in the next three to six months in most parts of the country, provided the Federal Reserve doesn't start raising interest rates again. Some areas in the South and West will take longer to recover because the boom of the past five years was much sharper than in New York and other states, he said.
Next I wondered what this kind of analysis this 3 to 6 month prediction could be based on. I don't think the speech had an answer for that though. Any thoughts? Anyone?
5 Comments:
The downturn is going to be a lot longer than 3 to 6 months, and a lot more painful. David is speaking out of his a@@. You'll notice how he doesn't back it up with any facts or data. He either (1) doesn’t know how bad it is, or (2) does know, and like a politician, doesn’t want to scare the crap out of his constituents (the real estate agents). Fortunately, the U.S. housing market is a very mature market with lots of history behind it. The best research on the subject that I’ve found is out of the Dallas Federal Reserve. If you visit: www.dallasfed.org/research/swe/2005/swe0505b.html you’ll get a clearer picture of the problem.
While the entire research piece is just great, the two most important charts in the research piece are Charts 5 and 6. If you extrapolate both charts out using the most recent data, it’s clear to everyone why this housing market isn’t going to correct itself anytime soon. The most recent data that we have on for Chart 5 is from July2006, which has the housing affordability index at a 20-year low of 102.8 (with a similar trajectory to the 1978 market correction). Basically, the combination of rising home values, interest rates, and property taxes have made it more expensive than at any other time in the last 20 years for the median household to afford the median priced house.
With housing no longer affordable, the demand for housing has dried up. This can be seen in many ways, including (1) an all time high level of housing inventory for sale, (2) housing turnover decreasing, and (3) real price appreciation falling off a cliff. If you look closely at Chart 6, you’ll notice that home turnover and real price appreciation tend to move together. It turns out that the two sets of data are 87% correlated (which means that 87% of the movement of one of the data sets can be explained by movement in the other data set). If you look even closer, you’ll see that the home turnover data (teal color) is almost always just above the real home price inflation data.
If you extrapolate this data to the most recent data points, what you’ll see is that real home price inflation (year over year home price inflation minus core inflation) has fallen from 12.3% in 3Q05 to -1.8% (0.9% home price appreciation – 2.7% core inflation) in July of 2006. This takes the dark blue line from about 10 at the right hand side of the chart, down to -2 in a little over a year. To keep the tight correlation between the data, home turnover will fall along with home price inflation. We’ve started to see this in the July data as turnover has fallen from 6.4% turnover to 5.6% turnover. While the July data is the most recent data we have, we’ve heard anecdotal data points about how housing sales and traffic have fallen off a cliff. As the next 6 months of data comes out, we’ll see that housing turnover has indeed fallen off a cliff as well.
Why is this? The biggest reason that home turnover falls off a cliff is that sellers don’t want to fess up to the fact that housing prices have stopped rising (and have actually started to fall in real terms) and don’t lower their asking prices to the new market reality. Buyers on the other hand realize that the market has turned into their favor and don’t need to offer anything close to asking price because there are tons of houses for sale (that aren’t selling) to choose from. These two mindsets create a gap between (1) what the seller thinks his house is worth (usually based on homes that have sold in his neighborhood over the last year…before the bubble burst) and (2) what the buyer wants to pay (the buyer realizes that he is buying into a falling market and sees no reason to pay up to pre-burst prices). In the end, both the buyer and seller wait for the market to come to them. In the meantime (while everyone is waiting), foot traffic dies and no transactions take place. This is basically what we’re currently seeing in most major markets…especially in Florida and California… virtually no traffic and transactions a fraction of what they used to be.
The people who get hurt the most are the real estate companies and their agents. Real estate companies like Century 21, Coldwell Banker, ERA, etc., make their money by taking a certain percentage from each real estate transaction. For the last 5 years, this has been a great business. Home values were rising at double-digit rates, and home turnover reached all time highs. Unfortunately, this same phenomenon kills them on the way down…and like most asset bubbles that burst, the trip down is much faster (and painful) than the way up (like the stock market bubble in the late 1990s). With real home price appreciation of -2%, home turnover will fall from 6.5% turnover to about 3.5% turnover. This drop represents an almost 50% decline in the number of transactions for the Century 21s of the world and their real estate agents. So basically, Century 21’s parent company, Realogy (H), is going to see its sales fall by about half (from the end of 2005) in the next 6 months or so…and each agent is going to see their gross pay fall by the same amount.
For companies like Realogy, a 50% sales decline will cause them to go from earning $1.99 per share to actually losing money. The worst part about all of this is that with housing inventory at an all time high and the housing affordability index at a 20-year low, it is going to take a very long time (at least 18 months, if not 3-4 years) for houses to become affordable again. Using history as our guide, the only other time that the housing market has fallen so far, so fast is the 1978 – 1983 timeframe. As you can see, it took until 1986 (8 years after the 1978 peak) before housing turnover went above it’s mean of 4% … and 30 years before it reached another peak of 6% (2005).
So for all you real estate agents out there, you might want to re-think your profession… and for all the owners of real estate franchises and Realogy stock, you might want to find something else to invest in.
"The people who get hurt the most are the real estate companies and their agents. Real estate companies like Century 21, Coldwell Banker, ERA, etc., make their money by taking a certain percentage from each real estate transaction. For the last 5 years, this has been a great business. "
Nice post. I don't agree with this view that realtors have gotten rich from brokerage business. With so few houses in investory the past few years, and with 5-10 offers being written per listing, the 9 that fail worked plenty hard and get nothing to show.
At the same time, homebuilders rarely cooperated with brokers.
Today, there are few buyers and many sellers making it still hard for agents to make money.
Busy agents made money, no doubt, but not as much as people think.
The commercial markets remain robust, however.
Larry. While it's true that being an agent for a buyer might have been tough the last 5 years since each house had multiple bids, at least there were transactions. Now those same buyer agents are putting in just as much work, and no one is buying (or selling). While real estate agents might have had to put in more work to get a commission from a buyer, they had to do very little work to sell a house (with most homes selling lightning fast). Now they get screwed on both ends. They now have to spend like 6 months to sell a place (that used to take less than 1 month) and they have to spend that same 6 months on the buying end (since buyers are low balling offers and sellers aren't selling).
Also, while I understand where you're coming from, the main point of my posting wasn't to say that real estate agents did or did not work hard, but instead that housing turnover is falling off a cliff, that it isn't going to recover for a least 18 months, and that everyone in the real estate food chain is going to get wacked...from the agents all the way to the investors.
Larry. While it's true that being an agent for a buyer might have been tough the last 5 years since each house had multiple bids, at least there were transactions. Now those same buyer agents are putting in just as much work, and no one is buying (or selling). While real estate agents might have had to put in more work to get a commission from a buyer, they had to do very little work to sell a house (with most homes selling lightning fast). Now they get screwed on both ends. They now have to spend like 6 months to sell a place (that used to take less than 1 month) and they have to spend that same 6 months on the buying end (since buyers are low balling offers and sellers aren't selling).
Also, while I understand where you're coming from, the main point of my posting wasn't to say that real estate agents did or did not work hard, but instead that housing turnover is falling off a cliff, that it isn't going to recover for a least 18 months, and that everyone in the real estate food chain is going to get wacked...from the agents all the way to the investors.
I wonder if the displaced housing builders are now going to help fuel a bubble in commercial real estate. I have seen several reports about very questionable large scale office projects kicking off in both Chicago and Washington DC. Also just caught this snippit from the WSJ:
Architects got very busy in August, portending continued robust nonresidential construction. In August, the Architecture Billings index was 59.5, up sharply from 51.8 in July. A score above 50 indicates revenue growth. A figure below 50 indicates contraction. The index is meant to be a rough leading indicator of construction spending six to nine months in the future. The latest numbers contradict fears that rising interest rates, an overall economic slowdown and high material and construction prices will put a damper on building.
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