Aug
17
2007
July RMLS Market Action
By Charles Turner
RMLS Market Action for July just hit my inbox. Nothing really shocking in my opinion; inventory is up yet again (though not quite as high as in January).
I maintain that you can’t put a lot of stock in the 12 month appreciation numbers as you are still factoring in some high months from the beginning of that cycle. The most recent months have been tougher than any of the proceeding months.
There’s other real estate news that shouldn’t be ignored: $11.5 BILLION to bail out Countrywide Financial. It’s front page news of the Oregonian Biz section.
Charles: That $11.5 Billion wasn’t a bail-out for CountryWide. It was the amount that they drew from their line of credit banks just to keep the doors open. I suggest you read this article on Minyanville yesterday. The very succinctly describe CountryWide’s position at this point and it aint pretty. This is the largest mortgage lender in the US. They did 1 out of 5 mortgages made in the US last year. The Fed’s actions today may have, in fact, been aimed at specifically helping CountryWide stay afloat. Oh, and Countrywide also has a Banking side and now there’s a run on CFC bank. Can’t say as I blame people: if I had any money in there I’d pull it ASAP.
BTW: in regards to the inventory numbers: Housingtracker shows inventory up over 40% in the last 6 months. Inventory much higher than in January.
Charles-
“Nothing really shocking in my opinion; inventory is up yet again (though not quite as high as in January).”
The quantity of inventory (actual number) in this area is far greater than in January. The “Inventory in Months” (looking at the current number of homes versus the historic number of sales) needs much more analysis.
First of all, note that the July 2007 amount of 5.7 is the second highest figure (second only to 6.2 of January 2007). Next note that January 2007 was the high point. In other words, you have compared this month to the highest month in recent history.
Very roughly speaking (maybe I could demonstrate this in terms of statistical variance), the “Inventory in Months” doubled from 2005 to 2006, and then doubled again from 2006 to 2007. I fully recognize that I may be rounding on the “high side,” so maybe 1.5 is a better factor than 2.0? In any event, if my net worth went up like the “Inventory in Months” has over the last two years, I would be very happy!
Let’s look at this situation further. Not only has both actual inventory and inventory in months increased, but asking prices have decreased. Finally, the number of able buyers seems to be decreasing, as the extension of credit isn’t what it has been.
The only reason that I think that the inventory in months is lower for July 2007 than in January 2007 is that the asking prices were lower in July 2007 than in January 2007.
I mentioned before that if the Fed did not cut the Federal Funds Rate that destruction of wealth in the housing sector would continue. I stand by this position.
I know the Fed cut the discount rate, but given the totality of the situation, it is my own opinion that housing prices will continue to erode.
One last comment: I have been driving around examining some construction projects. I cannot say for sure, but it seems that there has been a big slowdown on planned communities. I am guessing, but I really don’t have sufficient evidence to support individual claims, that contractors are having liquidity problems. This could, in part, be part of the lending landscape. That is it could be that the lenders are putting such great restrictions on the projects (such as requiring more units to be sold before further funding) that the construction must match sales, which have slowed. My observations and conclusions could be wrong–maybe everything is going great for them. I’d like to hear what others have noticed in this area.
In any event, this illustrates the risk of buying into a development that is not fully developed. I don’t know what happens if the developer cuts the project short–when a person buys into an association they accept the credit risk associated with the other owners, and if the development is not completed, then what?
I had a friend who purchased a property in a small association. While he had sufficient funds, there were four foreclosures in a short period of time. This essentially placed the association at a big disadvantage, as the banks do not have the same interest as owner occupied homes. In fact, banks don’t have the same interest in the properties as landlords, but it’s a little closer.
In any event, I wonder what responsibility the existing owners have in a failed development. What about construction liens? What happens to property values in a partially constructed planned community? How does one recover from such? Generally speaking this is a business risk, so insurance is not available.
Oh, I see. It’s inventory in months that’s supposedly lower than in January. Well, January isn’t exactly the most brisk month for home sales. Also, that 5.7 estimate is a ‘rear-view mirror’ number. In raw numbers inventory is much higher than it was in January. However, even ignoring the current credit tightening problems for a minute, sales generally start to slow in August anyway, correct? (Gotta be moved into that new house by the end of August so the kiddies can start @ their new school in early September). So we’re in that period where the sales rate normally begins to slow and yet we’ve still got a huge inventory sitting out there (in raw numbers). Now go back and add in the new wave of tightening by lenders that started around August 1 (and is continuing) and you’ve gotta figure that that 5.7 is more like 6.something… At least. Oh, and there’s the FSBOs too.
I mentioned before that if the Fed did not cut the Federal Funds Rate that destruction of wealth in the housing sector would continue. I stand by this position.
I would differ with this slightly: Even if the Fed cuts here, the destruction of wealth overall will continue and it will get back to the housing sector. Cutting the federal funds rate here will sink the dollar from it’s already weak levels. That will lead to inflation (think higher oil prices due to the dollar not being worth as much) which will in turn lead to more trouble in the bond markets which will in turn lead to higher rates overall. We’d get to the same destination, just by a different route.
TiP-
Good observation! The Inventory in months does seem to peak in January. From the data given, January 2005 was a local maximum (taking a six month window). January 2006 was a peak (six month window = +/- three months). January 2007 was also a peak.
If the past is any indicator of the future, what does this suggest about future Inventory in Months? I am sure there is a relevant range, but given the upward trend, it’ll be interesting to see what January 2008 brings!
TiP-
Higher oil prices might be deflationary, as all the increases in oil prices has not resulted in inflation.
What seems to be happening is that higher oil prices take discretionary spending dollars away, so demand for goods is reduced, so inflation is not a risk. What I see is that high energy prices takes money away from consumers. Thus as gas prices increase, people decrease spending, which avoids demand-pull inflation. Ultimately, I view the increase in energy prices as deflationary, rather than inflationary, and I think recent history supports this. The housing credit problem further dampens the ability to spend–again deflationary. In fact, it is my opinion that we have near zero inflation, and a cut in the Federal Funds Rate would not change that.
The alternative is that higher oil prices will result in increased costs, and everyone will increase prices because of this. This is not what has happened. Cost-push inflation has not taken hold, as we have not seen the extra expense related to increased energy costs in the final selling price.
Do you see higher prices because of the increase in energy cost? Do you hear people complain about how the pump is sucking them dry, or do they simply increase their prices? Where is the inflation?
After thinking about my observation regarding planned community construction, I did a quick news search. Here is an example of a development gone wrong:
“Larry Shiffman said the luxury condo project with its slickly produced advertisements looked like a good investment two years ago. Now he’s resigned that his $168,000 deposit is gone.”
http://www.lvrj.com/business/9192337.html
If sales remained hot, then these problems would not be present. It seems that so often buyers think they are entering a risk-free deal, yet when something goes wrong, they want to point the finger at someone else–I am sure there are many more to come.
Drove past another new “Price Reduced” sticker today, on a a sign in front of a condo that’s been languishing on the market for MONTHS. Actually there are 3 for sale in the same complex of 20 condos.
And did anyone else notice that the real estate agent ads in the Willy Week and other free papers is getting more shrill and desperate?
Man, this is going to end so badly for Portland real estate prices. Condos will be destroyed. If you bought in the last 3 to 4 years you won’t be able to sell one for what you paid for a decade or more.
I’m now predicting a SFH drop of 30% and a condo drop of 40-50% before the dust settles. And we’re only getting started.
My family just recently moved from California (Northern, near Sacramento). It took us about 1.3 years to sell our house on and off. We moved up here so wife could stay home with kids (Cheaper cost of living etc.)
With our house taking SO long to sell, we rented a townhouse instead of buying. Now I am afraid that in a year (July 08) when our lease is up that the market will still be in a negative pattern? To buy then or not to buy? How low will it go? Is it realistic that we do not buy in the next couple of years until the market rebounds, or at least levels out?
Thx, obviously a lot of smart RE people here, I’d value any thoughts!
S.Joye
S Joye-
Are you happy renting? If so, why would you want to buy?
S Joye:
July 08 is a year out. By then we should have a pretty good idea of which way things are headed. Generally, though, housing downturns tend to last a few years. In the meantime try to save up for a good down payment.
Interesting article about how appraisers in Oregon are being pressured by mortgage brokers and or realtors to come in with higher numbers. Seems like a good sign that things are overpriced even here. (no! Cant’ be! Say it isn’t so!)
Where is the word Realtor used once in the story? I’ve read it twice and find it directed 100% towards mortgage brokers.
Have we ever taken issue with an appraisal? Yes. It it just another (educated) opinion of value.
Charles: you’re correct. No mention of Realtor in that particular article. I’ve seen some national articles on the same topic that mentioned pressure from both.
TiP-
Not all real estate agents/brokers are Realtors. It has been my own personal observation that Realtors are generally professional. Most of the problems seem to be with agents/brokers that are not a NAR member.
Could you cite something that suggests that there is a significant problem with Realtors? Of course there will be the one bad Realtor from time-to-time, but I really doubt the NAR would put up with widespread problems, but I could be wrong…
JP: I just did a quick google search and found this one:
http://www.therealdeal.net/issues/MARCH_2007/1172673335.php
A new survey of the national appraisal industry found that 90 percent of appraisers reported that mortgage brokers, realty agents, lenders and even consumers have pressured them to raise property valuations to enable deals to go through.
…
“You’ve got a situation where sales are down so everybody in the deal needs it to go through” at the contract price — the mortgage broker, the Realtor, the lender, and even individual sellers, he said.
TiP-
First note that “the Realtor” was left out of the direct quotes, and seems to be used to mean “real estate agent,” rather than indication of NAR membership. It is so often the case that “Realtor” is used without regard to the NAR membership. In fact, I had one person suggest that all real estate agents could be called “Realtors.” It’s simply not the case, and Realtors are bound by the NAR code of ethics. I am not suggesting that all Realtors actually follow the code of ethics, but the majority of the problems are not with Realtors, and I challenge you to find some real evidence of such rather than just loose use or confusion of terms.
I also note that there is a question of what does it mean to “pressure” someone? If an agent simply suggests an amount, does that mean that I am pressured?
In any event, until I get better evidence, especially from someone who clearly understands what it means to be a member of the NAR, I will continue to exclude Realtors.
Finally, I would not disagree that there are many bad deals, and the agents and brokers are generally not Realtors. In other words, I recognize that there may be “pressure” (whatever it means), but not from Realtors.
Charles-
Maybe you could post about what NAR membership means to you and others? Also, how often and by whom do you find abuses/misuses of the trademarked term REALTOR?
TiP-
I note that the article uses the term “realty agent” four times, but Realtor only once. I really do think that the term “Realtor” was a slip, and should have been “realty agent.”
I also note that the article states, “Mortgage brokers represent the biggest problem, said Hummel.”
My my, the splitting of hairs to deflect blame. Are you people for real?
If you fix plumbing and are not a licenced plumber, are you a plumber? Do licensed plumbers have a gripe if someone calling themselves a plumber has not met the training to be a plumber? Yes.
Real estate agent does not equal Realtor.
Realtor or real estate agent does not equal mortgage broker.
I’d expect that if your job requires specific training in order to earn a title (though the barriers to call one’s self a Realtor are too low), you’d take at least some pride in that and not consider it splitting hairs.
Charles-
The term “plumber” is just a plain and ordinary English word. This is much different from a trademarked term, such as Realtor, and as such, I think your analogy fails. That is an unlicensed person who works with pipes or aquaducts is a plumber, and in some cases, such as municipal work, they do not need a license.
In part the underlying issue is recognition of IP rights.
In any event, I cannot find any widespead problems with those individuals who can rightfully claim to be a Realtor because of the appropriate association with the NAR. There are plenty of poor “agents,” but in general, those people are not Realtors.
I think Naysayer’s comment shows just how clueless people are about the situation.
Finally, I must say there are many trademarked terms that slowly are adopted into the language. For example, Xerox is generally accepted to mean copy, but it is a brand name. Dumpster is often used to mean a container to place garbage in without regard to the Dempsey Dumpster Company. Adobe Corporation has problems with the term “Photoshop.”
I think Naysayer’s comment shows just how clueless people are about the situation.
JP: I have to say that I tend to agree with Naysayer’s sentiments about this topic. Here we have Rome burning and people want to discuss the differences between a Real Estate Agent and a Realtor(TM).
Now, I understand that all Realtors(TM) are Real Estate Agents, but not all Real Estate Agents are Realtors(TM). I suspect that all Real Estate Agents have to have some sort of state license, whereas all Realtors(TM) (who also belong to the generic classification “Real Estate Agent”) need another level of certification from the NAR (a private entity). Still all Realtors(TM) are instances of the Platonic Form known as “Real Estate Agent”.
As for the trademarking issue, I will try to remember to use the proper IP designation (TM) after the term “Realtor”(TM). And Adobe has requested that all instances of “Photoshop” also be followed by (TM).
I guess what I’m trying to say is that when the great unwashed masses are motivated to gather in large numbers on the streets with pitchforks over all of this, they’re not going to care about the distinction between “Real Estate Agent” and “Realtor”(TM).
The people who work directly with the buyer, the ones who talked them into toxic loans or convinced them they could buy a 500K house on a 30K salary could be called Clamdips and they’d still be culpable parties to the mess we’re in now. A mess that is only going to get worse. Much worse.
Naysayer-
“The people who work directly with the buyer…”
Let’s not forget that real estate agents are, in general, seller agents. We have discussed dual agency as well as buyer agents.
There are two problems here:
1. Consumers who took loans that they knew could not be paid back.
2. Lenders who lent funds to consumers who knew that the funds would never be paid back.
As a seller, should I refuse to sell to a buyer because he makes too little money? Should my agent discourage the sale? By the way, when I sell something I rarely ask the buyer for a set of financial statements so that I can determine if his or her financial condition is to my liking. If you think a seller, or a seller’s agent, should make that call, then we are worlds apart.
Hopefully we can agree that the majority of the problem is with the two parties identified above, and not with the seller’s agent.
Yes, when I offer crack to the kid down the street it’s not my fault he buys it.
The majority of the problem rests with greedy people drawn to this whole industry whose only concern was making money and not looking out for his fellow man. Yes, I know, a quaint notion but one most wish would return. Altruism existed in greater amounts in my lifetime and let me tell you, things were much better. What we have now is a cesspool culture of greed and rabid self-interest.
I tend to agree that the distinction between Realtors and real estate agents and real estate brokers is moot (at least for this conversation). The distinction between the above and mortgage brokers does need to be made.
Keep in mind that we will not do dual agency so there should always be two agents involved in the transaction. Buyers come to us either with our without a mortgage broker. As Realtors, we do not deal with financing (in California you often see one person as mortgage broker and real estate agent but not here). Yes, we have a couple of MBs that we have worked with successfully with before that we refer clients to but I don’t know a broker that shares the results of a finance application with their client’s Realtor. If the expert and the client agree that they are good to go the resulting pre-approval letter is what we go with. If the pre-approval is from Joe Schmoe Loans, we might recommned a second opinion. We work with the given price range of the client.
Where I think a seller’s agent might have some issues is if the accepted an offer using Joe Schmoe and asked no questions or there was no pre-approval provided. Though that might be a fairly unique situation.
I suppose I have to make the personal distinction between myself and the clamdips because I don’t think that I am one of.
The majority of the problem rests with greedy people drawn to this whole industry whose only concern was making money and not looking out for his fellow man.
Naysayer: I would suggest that the potential for greed is always with us. I would also suggest that the Federal Reserve lowered rates to such an extent (and left them there too long) that it greatly increased the moral hazard.
To some extent, this is just the natural progression of an economic cycle which in itself is just an outgrowth of human nature: you start with the emphasis on hard work and savings but eventually you end up at the mania phase where people are willing to take all kinds of crazy risks they wouldn’t have earlier. Then you end up with the inevitable downturn which teaches people to be frugal and save again – rinse, lather, repeat… The fact that this normally takes more than a generation is telling: we’ve got short memories.
Altruism existed in greater amounts in my lifetime and let me tell you, things were much better
I’m not sure there really is any such thing as pure altruism…
JP: yes consumers and lenders were complicit. I would say that it was the mortgage brokers who are probably more culpable than most. However, let’s not forget all of the NAR cheerleading as this bubble filled up. “Never been a better time to buy” (even at these prices!) “Buy now or you’ll be priced out forever!” (an economically ignorant statement at best – if the majority of potential buyers become priced out of the market, well, the market won’t work anymore until prices fall back to levels where people can afford to buy again). So yes, I believe the Real Estate Agents (and even some Realtors(TM)) were complicit as well.
Plenty of blame to go around, really. I would also add that the fact that we don’t give any financial education in highschool is also a reason why the vast majority of consumers were so willing to go along with all of this. I think a bit of basic economics coupled with some personal finance education would have helped…. As it is now, the vast majority of folks out there seem to be utterly ignorant of these things.
Naysayer-
“Yes, when I offer crack to the kid down the street it’s not my fault he buys it.”
Since when was offering to sell real estate, for any price, illegal? Is asking a “high” price unethical? What’s too high?
TiP-
“However, let’s not forget all of the NAR cheerleading as this bubble filled up. “Never been a better time to buy” (even at these prices!) “Buy now or you’ll be priced out forever!”
Well I do agree that the agents keep suggesting that it’s time to buy, no matter what the price, but isn’t that what the seller pays for? That being said, I fully recognize that there are ethical considerations in marketing…
Also, I agree that lack of buyer education is a major problem.
Unless things get better soon, I predict the problems will linger for at least two years. With all of the ARM adjustments, problems could linger on for as much as five years. I generally don’t make predictions more than five years out.
In some way it does not matter why we are here today, the question is where are we going…
We’re going back to 2001 prices. But getting there is going to hurt lots of people. But don’t despair. The richest among us will be fine. That’s how America works.
I’m a bit late to the party. I see the blame thread is in full swing.
JP said…
“Where is the inflation?”
Housing and Food. The things that are basic needs. Although, I agree with you that higher oil prices might be deflationary on that plasma televisions. The working class is getting squeezed right now by inflation in the basic necessities. The rich folks that run this country like to take food, housing, and energy out of “Core Inflation” calling it “temporary price shocks”. Go tell that to someone who can’t afford to feed their family.
As for the Realtor(tm) and the Real Estate Agent arguments, there are bad apples in both packs. Both on the seller’s and buyer’s side of the contract.
There is lots of blame to be spread around, but it looks like the fed is going to try to inflate their way out of this one. Considering the growing wealth gap and oncoming recession, I’m not sure it is going to work.
A clarification to my previous post.
After re-reading what I said about housing not being included in inflation, let me be clear. I meant the “true cost” of housing. The method BLS uses for determining housing costs are derived from rental equivalence. So, basically, no matter what you pay for a home, in reference to inflation it only counts towards what you would be able to rent it for. If your mortgage payment is $3500 a month and the house would only rent for $1200 a month, the BLS uses the $1200 number. Thus hiding the true cost of housing.
Ralph-
The core rate is very low, but as you correctly point out, it excludes energy, housing and food. Furthermore, you are right that the “rental equivalence” is used, which does not directly consider changes in market value of the property.
There is one other area that we should talk about, and that’s health care. The rate of inflation in health care is over 4%, and relative to all the other core components, that’s quite high. But, you also correctly point out that some things have come down in cost. Electronics is a great example, and another example is textiles.
Because food and energy, and to some degree health care, are a large percentage of the total expenses of those who earn a lower income, the impact on that group has been much bigger. This, in part, is why I see it as net deflationary. The lower income earners no longer have as much discretionary funds, and thus the limited funds are valued more, rather than less. Also, those with higher incomes are enjoying lower prices.
It might be interesting to take a look at what’s happening with the Gini coefficient. It would be my guess that for the United States the Gini coefficient is increasing (positive first derivative). We have also discussed education. In the Portland, Oregon area the education level is quite high, with over 40% of the population holding at least a 4-year degree. (The base population is always an issue in this area. The exact percentage will depend on what you think is a reasonable starting point. With a starting point of 25 years, the percentage is closer to 50.) It’s about the same for the Seattle area, and I suspect that is one reason why the housing prices have held better in these two markets as contrasted to the rest of the United States.
In the end, the government’s representative “basket of goods” is often not very representative of any one person’s purchasing behavior, but it is the best data we have.
JP said..
The lower income earners no longer have as much discretionary funds, and thus the limited funds are valued more, rather than less. Also, those with higher incomes are enjoying lower prices.
Exactly. It is all a matter of perspective. Considering the BLS salary data for the Portland Metro area, I suspect the majority of people living in Portland would probably consider the current situation as inflationary due to the lack of disposable income. If you are lucky enough to outpace the median salary and have good job security, a fire sale is about to begin.
If you have Gini coefficient data for the Portland Metro area I would love to see it. I have the same suspicion as you.
JP: I still would think that higher oil prices are, at least initially, inflationary, especially since oil goes into so many of our products (and then there’s transportation of all those products).
The other thing that’s happening is that because of environmental and supply concerns we’re diverting a big chunk of the corn crop to ethanol production now. We’ve already seen that raise the price of tottillas in Mexico by IIRC 60% – for most of us that isn’t significant, but in a country like Mexico where lots of people are barely surviving that’s very significant. Certainly we’re already seeing food inflation running in the 6 to 7% range this year and this is largely driven by the corn-ethanol madness (making ethanol out of corn is not good for the environment, and we don’t really get any net energy gain from it either – it’s a boondogle that wouldn’t be profitable if it were not for huge subsidies/tax breaks from the Federal Government… but I digress).
Peak Oil figures in here somewhere: from here onward we may see some periods of time where the price of oil falls, but the general trend now is for it to go up. Add in currency devaluation (caused by interest rate cuts) and that only makes it worse.
You didn’t post the number of closed sales vs. a year ago. Can you do so?
Thanks!
Tom: You’re asking a realtor to admit that the party is over. Not going to happen. BUY NOW OR BE LOCKED OUT FOREVER!