Do Rising Prices Have To Do With A Housing Recovery?

In the wake of the housing market crash of 2008, those with a direct interest in the housing industry are bound and determined to to create a housing recovery, even if they have to make it up. I have in front of me at this moment, exhibit “A”: A classic example of manufactured “evidence” that the housing market is in recovery no matter what the fundamentals are.
This is taken directly from the July 2008 issue of Realtor Magazine, the official publication of the National Association of Realtors. In this article, written by NAR Chief Economist Lawrence Yun, The title proclaims “A Year Of Repair Then A Year Of Growth“. Published barely 3 months before the housing collapse and the near collapse of the entire economy, the article cheerfully proclaimed that “…the subprime lending crisis is almost past” “the current pace of home sales at 5 million is the worst in 10 years” and that with the 10 million new jobs the economy has added, sales can be expected to grow to 5.71 million units in 2009″.
© tang90246 - Fotolia.com
© tang90246 – Fotolia.com
This analysis, laughable at best, came directly from the guy who is charged with providing housing market reports every month to a media that is only too happy to report the good news as if it were housing gospel.
Things are much the same today. While home prices have risen in select markets, and will continue to do so, those markets have special characteristics that differentiate them from the national housing market in general. As usual, it’s about the fundamentals, not sets of sales numbers or other miscellaneous data that merely track statistics, but do not address or reveal underlying fundamentals that will be the ultimate arbiters of a housing recovery or demise.
Take for example, the monthly “Pending Home Sales” report. Any agent or investor with a modicum of experience knows that there is no real point in counting “pending” home sales, as if they were an indicator of how many homes are actually selling. In real estate, it ain’t closed until it is closed and the transaction has been funded. But pending homes sales numbers will always be higher and look better than actual sales data.
Perhaps this is why Yun has such a reputation for being wrong about the true condition of the general housing market. I believe that this does agents and brokers a disservice, by giving them a false impression of the housing market, which they then pass along to their customers. In 2007 agents continued to parrot the party line that everything was coming up roses. As a result, millions of home buyers over paid for new homes and watched in horror as their values collapsed in short order. And today, just as with 2008, the NAR never met a housing market that was not good or getting better.
Rising home prices are not an indicator of a fundamental recovery now, just as they were not an indicator of a healthy, expanding housing market in 2006.
Why does the media, inside and outside the real estate industry, blindly believe that rising home prices are a prime indicator of a recovery? Given the obvious facts of Federal Reserve pumping of nearly 1 trillion dollars into the housing market annually, the complete lack of private capital in the secondary mortgage market, and the unprecedented growth of Wall-Street-funded buying of single family homes across the nation, it seems fairly obvious that this market is being supported not by fundamental growth in “end-user” demand, but rather it’s being sustained by artificial means that could turn on a dime, and cause an even bigger drop in home sales and values.
A Fundamentally healthy housing recovery and expansion requires sustained job and income growth. I don’t even think that I have to go to the trouble here to prove that neither one of these is currently strong enough to support a general recovery in the absence of QE and hedge fund cash sales. Just ask some of the millions of Americans who have been out of work for years now, or can only find a part-time job.
The housing markets that are driving rising prices and expansion have unique fundamental characteristics that only apply in select markets.
San Francisco has very unique geographical limitations to growth, combined with a sizzling tech sector that is offering job growth and rising incomes. New York City, and especially Manhattan Island, is another classic example of geographic limitations to growth that fundamentally drive real estate prices upward and prevent the kind of collapse in values that we’ve seen in the majority of U.S. cities. Washington DC along with other nearby cities in Virginia and other areas close to Washington have enjoyed rising incomes and job growth as a direct result of the enormous growth in government and homeland security jobs.
Cities located near oil and energy production are virtually recession proof. Just ask anyone trying to find a home in Williston, North Dakota or Casper Wyoming. This party will last as long as the oil and gas keeps flowing.
On the other hand, Detroit, Michigan’s recent bankruptcy, the largest in US history, was partially the result of a housing market that is dying after years of job losses in the automobile industry. Thousands of homes in Detroit are being bulldozed after going unsold for as little as one dollar. Without real growth in jobs and incomes, a housing market cannot truly recover and begin to expand.
Atlanta, Georgia is another city that is still vibrant, due to a wider base of job opportunities, and a great southern climate, but prices here fell some 35% by 2011. Atlanta is a city with few geographical limitations. During the housing boom metro Atlanta grew into the largest metro area in the nation, with virtually unlimited access to buildable land. Prices remain low here due to the excess inventory that still exists. Wall-Street-Funded investment companies have bought up tens of thousands of single family homes in the metro area, giving the appearance that prices here are rising. But fundamentally, job growth is meager, incomes are below the national average, and the 4000 square miles of suburbs continue to struggle to sell homes at prices that are still well below the 2006 peaks.
There are severe head-winds in the making for the 2014 housing market. The implementation of Obama-care will create yet another financial burden on what’s left of the middle class, via rising costs for insurance and health care for the vast majority who will not qualify for subsidies. This will result in less income to spend on housing, and in 2015 we can look forward to round-one of tax penalties for millions of Americans who cannot afford the costs of the required insurance plans. Those filing tax returns now are discovering that refunds are lower than ever in spite of having paid more in taxes during 2013. I believe that the conversion of full time jobs into part time jobs will also result in an increase in foreclosures by 2015 as many home owners originally qualified for their mortgages based on two full-time incomes. But in the meantime, we can probably count on more “good news” about rising home prices and the housing “recovery”.
I would advise real estate investors to focus on positive cash flow, and not to justify investment decisions based on an assumption that values will go up. Home Builders should keep a close eye on local market fundamentals, not general real estate news.drobinson