Be Wary of the False Spring in Real Estate

Real estate people are some of the most optimistic people I know. They have to be in order to work a business in which they don’t make a penny without a transaction getting done, and the driving motivation for the consumer is a dream: The American Dream, the Dream of Homeownership, Your Dream Home. Real estate, to some extent, is about dreams, hopes, and visions of white picket fences, kids playing in the backyard, and tasteful interior design reflecting your success in life.

So I generally do not fault real estate agents when they put forth honest opinions that perhaps we have finally hit bottom in this historically ugly housing crash. They’re not being disingenuous; they’re simply optimists.

At the same time, in the current market/environment, I believe a professional has to caveat every positive and be extremely wary of false signals. We’ve already had one false signal when the First Time Homebuyer Tax Credit artificially shifted demand forward, thereby leading some people to claim we’d seen the bottom of the market. Of course, when all that demand dried up, the housing market continued its downward slide.

Jim Walberg, and Ira Serkes, both exemplary professionals with years and years of experience, who know their local markets, and analyze the sales data personally, recently suggested that some markets are turning around. And yes, since every market is different, every market is local, you should call your REALTOR for more information or whatever it is that the NAR commercial says. So please don’t bother commenting/protesting that trends don’t mean anything in your particular local market: I know.

Nonetheless, any reasoned analysis of calling the bottom has to take at least the following factors into account, at the very least as a risk.

Economic Headwinds

Jim Walberg writes, “Affordability is what drives people to buy homes.” Well, yes… and no. Jobs is what drives people to buy homes. No matter how affordable a house might be, when you’re unemployed, you ain’t buying no houses. Period, end of the story.

And this “jobless recovery” shows little sign of turning into a job-creating recovery.

The media is trumpeting that California’s unemployment rate dropped recently from 12.4% to 12.2% based on a government survey of households. But there are reasoned, educated people who think the government stat is incomplete at best, and wildly inaccurate at worst. The under-employed are not counted, nor are the long-term unemployed who have given up looking for a job.

Ominous signs include unexpected drops in durable goods orders, downward revisions to the GDP, and weakened consumer confidence due to world events and high gas and food prices.

And speaking of gas and food prices, I speculated recently that investors were jumping into real estate as a hedge against inflation. The thought was that the smart money might be disregarding the official inflation figures and looking at significant real inflation, so wanted to put their money into real estate that can generate cash flows from rents (which can be raised every year with inflation).

When Jim mentions that there was a 35% increase in cash buyer investors, that fits in with most of what we’ve been hearing in California and across the country. What I don’t know — and I doubt anyone really knows — is whether investor activity would lead to a market recovery. Investors, after all, are not dreaming about homeownership: they’re calculating rents vs. values, and comparing real estate vs. other forms of investment. They’re also inherently a smaller group of buyers. Could they really lead to a recovery? Maybe.

And finally, if price increase is below real inflation, that isn’t a price increase. If sale price rises by 2% in 2011, but real inflation goes to 4%, driven by higher food and gas prices, that’s a drop of 2% in value, not a rise. For local real estate professionals, it might be worth looking at local inflationary figures: gas in California, for example, is over $4 per gallon. Buyers can’t spend the same dollar twice.

For what it’s worth, apparently professional economists are thinking housing will not recover until 2013 or so.

Political Changes

Far more significant for purposes of calling the bottom are pending changes to government policy around housing. Some of what I’ve been tracking both here on 7DS and on Notorious are pretty scary for the housing market. We may be looking at the end of the 30-year fixed rate mortgage product, down payment requirements going way, way up, and the FHA retreating from the residential market in a real significant way, not to mention the possible limitation or elimination of the mortgage interest deduction.

No wonder NAR has started the REALTOR Party Political Survival Initiative.

Any one of those changes means a total reset of expectations. Which makes buying a house now either (a) a great decision, or (b) a horrible mistake. It’s a great decision if you intend to live there for many, many years, without looking at it as an “investment” that you expect to see rise in real value over even 10 years. Get a 30-year mortgage while you still can, is how I look at it; or if paying cash, I look at it as locking in a rent-equivalent in declining value dollars. If it’s a “we’ll live here for seven years, then move up”, then it’s likely a horrible decision if the “new normal” mortgage product ends up being a 10/1 ARM resetting annually with 30% down payment requirements, and a 750 credit score.

False Spring Could Be Good

One thing I do think is that without looking too far into the future, and predicting that house values will rise or fall, if the market is hot right now, this very minute, then that could be a great thing. Given the uncertainties, I would urge urgency on all parties. A buyer who can get a 30-year mortgage at 4.8% with 20% down should jump on it and not dawdle too long. You never know what laws could be coming out of Congress in 2011. A seller who can get a decent price might want to take that, even if it’s 5% below asking; wait any longer, and it could be 25% below what you think your home is worth as buyer demand drops off the cliff after Fannie and Freddie cease operations.

So really, all I’m suggesting is that normally optimistic real estate professionals temper your optimism just a tad. The consumer still remembers all of the horrible advertising from 2006/2007 telling them it was a great time to buy or sell a home. At least with caveats, your readers/clients/prospects won’t think you were selling them a dream for the sake of commissions.

But then again, I tend to be a bit pessimistic, I know. 🙂

-rsh