An "Uh-Oh" at the Top

Brian Hicks

Updated July 10, 2006

Housing Stalls as Fed Continues to Raise

By all accounts, David Lereah is a smart man and he has the resume to prove it. As the chief economist for the National Association of Realtors he serves as its chief spokesman and forecaster. Last month his group issued a particularly interesting statement addressed specifically to the Bernanke Fed.

In it he pleaded that, "This is the time for the Fed to pause on rate hikes because we have some interest sensitive housing markets that have become vulnerable" Knowing the real estate market as he presumably does it is clear that Mr. Lereah is not too proud to beg.

Translated and euphemism aside, his statement to the Fed asking for a change in its rate raising bias amounts to a collective pronouncement of "uh-oh", which is rather stunning given that in his latest book, "Why the Real Estate Boom Will Not Bust-And How You Can Profit From It", released in February of 2006, Mr. Lereah argues against the prospect of a speculative bubble in housing.

But why the sudden change in attitude? What possibly could have led of Mr. Lereah to lamely argue to the Fed that "interest sensitive" markets were suddenly "vulnerable"?

The answer, of course, is where the industry has always found them- in the numbers. As an economist, Mr. Lereah can certainly chart and number crunch with the best of them. He knows that numbers have a story to tell. And over the last five years those numbers have supported not only the thesis of his most recent book but the ultimate conclusion of every realtor that housing never declines. But with the crucial spring season now come and gone, Mr.Lereah's new numbers have sprung a leak and are now pointing not towards a boom in housing but towards a dramatic slowdown in housing that not even a change in Fed bias can stop.


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Take for instance these numbers recently released:

  • According to The National Association of Realtors, pending sales (contracts signed in May) are down 10% year over year for the month of May nationwide.
  • Inventory of existing homes for sales nationwide stood at 3,604,000 units in May 2006 vs. 2,556,000 in May 2005. A stunning 41% increase in inventory year over year.
  • Sales in Northern New Jersey are down in June 20.9% year over year.
  • Sales in Loudon County Va. Are down a stunning 48.19% in June year over year.
  • Foreclosures are on the rise. RealtyTracTM ( ), the leading online marketplace for foreclosure properties, announced in its 2006 Q1 U.S. Foreclosure Market Report, that 323,102 properties nationwide entered some stage of foreclosure in the first quarter of 2006, a 38 percent increase from the previous quarter and a 72 percent year-over-year increase from the first quarter of 2005. It also reported that the nation's quarterly foreclosure rate of one new foreclosure for every 358 U.S. households was higher than in any quarter of last year.

And as stunning as these figures are, they are but a few of the available statistics. But regardless of this fact one thing is becoming clearly evident- the housing boom is over and Mr. Lereah has good reason to be concerned about "vulnerability".

The nation's homebuilders, naturally, have begun to feel the pinch of the shrinking market also. Recent profit warnings from several builders have helped to create vulnerability in builder share price as investors have sold the building industry to levels well off of their boom time highs. NVR, Centex, Pulte, and Toll Brothers, to name just a few, are all sharply lower as a result of the changing market.

Builder confidence has also plummeted along with their share price. The National Association of Home Builders noted in a June 19th report that "Rising rates, deepening affordability issues and the retreat of investors/speculators from the marketplace have prompted single-family home builders to further adjust their perspectives on the new-home market." The report further noted that according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for June, the HMI declined four points from an upwardly revised reading in the previous month to hit 42 for the latest report, its lowest mark since April 1995. Not surprisingly, this decline in the HMI was broad based affecting every region of the country.

In response to these sagging markets builders have recently begun to "sale price" their inventory in sharp contrast to their recent hey days in which they had no problem raising prices on a weekly level. Free upgrades, special financing, and outright reductions are now being used by builders everywhere to lure potential buyers and move inventory.


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But despite their own worries about a slowdown in housing, the new home builders continue to build. Housing starts rebounded from a 13 month to increase in May as builders worked down a back log of unfulfilled orders. And while building permits in general continued to slide, the pace of new home construction rose to a seasonally adjusted rate of 1.957 million units which will undoubtedly add to the ever increasing glut of homes on the market and further weaken home prices in the future as supply will increasingly outstrip demand.

To the new home buyer, of course, this is all good news. As homes now sit on the market longer and the supply of homes increases, buyers begin to benefit. In fact, real estate agents everywhere have begun to report a solid transition from the frantic seller's market of the last couple of years into a more normal buyer's market. A current look at the market further reveals the prices have indeed leveled off and in some areas have actually begun to fall despite the conventional wisdom that "real estate never declines". Clearly the tide of the markets has turned.

But what may be good for buyers is inevitably bad for sellers as the markets begin to digest the sharp decrease in demand. For sellers this can only mean one thing in the long run- falling prices and lost equity. In short a housing nightmare that will leave very few untouched. Sadly, no speculative bubble ends well but in the end they all do.

And while it is unrealistic to expect anything akin to dramatic pop in the housing prices, a substantial decrease in home values is likely over time as the speculative bubble unwinds in the face of changing market conditions.

And while it is hard to foresee the ultimate effect that this loss of housing wealth may have on the overall economy, this much is for certain- the housing boom and its economy boosting affects are by and large over and done with. The party is over. The bust has begun. The Fed chairman couldn't save Mr. Lereah if he wanted to.

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