NAR: Don't Worry, Housing Prosperity Just Around Corner

Off topic, but I can't help but note the similarities between the dotcom-crash rhetoric/predictions back in 2000 and the housing-crash rhetoric/predictions in the last 12 months. 

Those of you who had the misfortune to live through the dotcom crash will recall that I and other analysts correctly predicted that there would be a slowdown and shakeout, but drastically underestimated its severity and duration.  All the way down, we kept revising forecasts (read: cutting estimates) to previously inconceivable levels, and each time we cut them, we reiterated our expectation that the inevitable trough and upturn was about six months away.  It wasn't until two years after the shakeout began, when half of online advertising revenue had evaporated and more than 75% of the companies in the sector had keeled over that the downturn finally ended... And by that time, most of us were so demoralized that we'd stopped predicting that there would ever be an upturn.

Housing obviously won't experience as deep a correction as the dotcoms did, but I haven't heard a single persuasive argument explaining why this downturn won't look like every previous housing downturn: i.e., will last a lot longer and drop much farther than most people think--until price/rent and price/income ratios return to or below their long-term trend.  Instead, all I hear are arguments like this one, which are based not on long-term historical trends, but on short-term bubble-year pricing and price trends (arguments I am very familiar with, having made similar ones in late 2000 and early 2001):

WASHINGTON -- The National Association of Realtors again lowered its U.S. housing market forecast for this year, saying the market remains "soft." In its latest forecast for the real estate market, NAR projected that existing home sales will fall 4.6% this year to 6.18 million, compared with its previous forecast of a 2.9% decline. New home sales are expected to plummet even further. The NAR said new home sales are likely to fall 18.2% to 860,000, compared with the prior forecast of a 17.8% drop. While near-term prospects for housing remain fairly grim, NAR said sales should pick up toward the end of the year.

"Overall housing levels are historically strong, but sales remain sluggish compared to the recent boom," said Lawrence Yun, NAR senior economist, in a statement. "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year," Yun added. Existing home sales are projected to rise 3.7% in 2008, to 6.41 million, according to NAR's forecast.

Comments

[musingsofatrader]

They've been saying that every month for the past 6 months. But it's their job since they are the cheerleading arm of the housing industry.
Nobody's paying attention to them. Therefore they can't hurt anyone, can they?

[Rich]

"Housing obviously won't experience as deep a correction as the dotcoms did..."

Sir John Templeton who was around in the Thirties observed ALL markets correct the amount they are leveraged. (Shakespeare said Neither a borrower or a lender be, and Deuteronomy observed ALL property returns to its rightful owner every 7 and 49 years.)

[Henry Blodget]

Agreed, but I expect (hope) that we're not going to see 75% of houses go to zero.

[Chip]

housing isn't as liquid as stock. you can't make one 5 second click and sell a house and move into another. people have jobs, kids in school, etc...and at the end of the day we all have to live somewhere and with the mortgage interest deduction renting is much less effective use of cash than owning...so yes, are we in valuation bubble in a few markets (florida, arizona, metro dc, boston, etc) but no we are not going to see the bloodbath in housing we saw in stocks in 2000

[Freddy Fung]

But there is so much more leverage in the mortgage market than the equity markets. A sustained downturn in the real estate market will impact jobs so that people won't have jobs, can't afford their mortgages etc...

[Still Inside]

I agree with Henry that there are a lot of parallels between now and 1999. One of the things I remember hearing back then is, "the stock market has always gone up since 1950, so it's going to keep going up forever no matter how high it gets, even if there is a temporary dip in the short term" ("short term" is still here seven years later of course). People say the same thing about houses: "it's a good long term investment". And it always is (except when it's not).

The one thing that almost all of the NAR-inspired studies do NOT talk about is pricing. They all seem to conclude, in effect, that "sales volume is going to drop drastically but pricing levels will remain stable or even increase".

Wtf? Did I miss a meeting? Did somebody repeal the law of supply and demand?

If prices have thus far stayed stable and sales have decreased, then that means that current prices are sitting on an erroding cliff ready to collapse from below. Period.

NAR's behavior leads me to believe that the market is driven more by speculation than by real need or desire. The thing that the insiders are trying the hardest to hide is that prices are going to FALL and that buying a house is no longer a sure thing--and in fact a house could bankrupt you as sure as your investment in Pets.com back in 1999 did.

Once every last dum-dum that doesn't read the newspapers learns that they can LOSE BIG TIME if they buy a house right now, THEN you'll in fact see the real carnage.

Then the market will return to fundamentals: purchase price vs. renting; affordability for the given job market; general supply vs. demand [side note: a) the USA is population net-breakeven without immigration; b) congress is busy trying to build a wall around our country right now to stop all immigration; c) zero population growth = zero real estate value growth (in aggregate) ].

Meanwhile local busybody city councils with their nazi zoning laws have miscalculated: while slamming the door on new construction temporarily drives pricing levels of existing construction sky high, but the market eventually figures out long-term structural solutions. In this case, jobs, new construction, new businesses and civilization in general move elsewhere, leaving a very beautifully zoned utopia rust belt behind. Once civilization moves out it virtually never moves back. (Btw, ever wonder why OPEC doesn't just raise the price of oil to $500 per barrel? Same reason).

On the plus side the USA is still a safe haven to park international money and this alone can prop this whole thing up for some amount of time. Exactly how long is anybody's guess. I wouldn't want to be holding the bag the day they left though.

SI

[john]

Enjoy reading your blog. If anything it's a good time for the savvy investor to come in and scoop up some good properties. It's amazing how things can get so out of hand, as everyone jumps into a market, whether it's the Internet or real estate.

[Thomas]

Henry,
I think the crowd has this wrong (again). I think housing is doing fine. Notice that sales of existing homes is expected to increase by 3.7%. What does this tell me? It tells me that the new home builders are curtailing construction and sales because they all remember the 80's real-estate debacle. Existing homes however appear to have solid demand. I predict a soft landing for the real-estate market.

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