The Rude Awakening
Wall Street, New York
Monday, October 10, 2006 ------------------------- - NAR cheerleading – breaking down the double talk in
the housing sector,
- Just when will we find the "right price" in this
market?
- How you can trade options like the millionaires, the
market data for the week so far and plenty more...
------------------------- Eric Fry, reporting from Laguna Beach, California... "The right house with the right location and the right
price is going to sell," says Rude reader Dave Hollis. The "right price," we suspect is the key component of this
equation. Which is to say that the vast majority of would-
be home-sellers in this country continue insist on the
"wrong price." Scarce, picky home-buyers pitted against
numerous, incredulous home-sellers sounds like the
beginning of something very painful...not the end of it. Check out the rest of Dave's on-the-ground report, as well
as the bird's-eye view from our own "Mish" Shedlock in the
column below: "Hi Joel, My name is Dave Hollis, I live on the Central Coast in
California. That being: Monterey, Carmel, Pebble Beach,
Pacific Grove, close to Santa Cruz, etc. I work at the
Wells Fargo Bank Branch in Carmel-by-the Sea, thus I have a
good feel for what is going on in this area. Inventory is
well up with several homes that have been on the market 3
to 6 months getting price reductions in all price ranges
which go from $500,000.00 to $32,000,000.00. Realtors are
now pricing these reductions into new listings getting the
sellers to adjust their thinking about valuations. "I have been to several open houses the past month with our
annual open house blitz and have not personally seen a lot
of foot traffic. Buyers are standing on the sidelines, but
as always, the right house with the right location and the
right price is going to sell. Sales have definitely
decreased since the pace at the first of the year. There
are some beautiful established upper end homes now for sale
in Pebble Beach that I NEVER thought I would see on the
market. I have recently had customers who received offers
on their homes from out of state buyers who are offering
15% lower than asking price in the over $1,000,000.00 price
categories. [These opportunistic buyers] are not budging
from their original offers...[But] with interest rates
turning down and homes being priced more reasonably
relative to the market, this may see an increase in some
sales towards year end. Time, of course, will tell the
tale." --- Special ---
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to put this simple strategy to work TODAY ---------------------------- Behold! The Housing Bust!
By Mike "Mish" Shedlock The New York Times is reporting, "Home Prices Drop After
11-Year Ascent": "The median price in August fell to $225,000, down 1.7%
from August 2005. That was the first time since April 1995
that the national median price was lower than the same
month a year before." On that news, I thought it was time to update my comparison
of the U.S. housing bubble to that of Japan's in the '80s
and '90s. The current picture looks like this: 
The red markers and arrows correspond to America's modern
housing bust in relation to Japan's housing bust of the
1990s. The U.S. housing bust is actually much more advanced than
my "Autumn 2006" arrow suggests. That's because many
homebuilders have been reporting "full-price sales," while
giving away hundreds of thousands of dollars in incentives,
new cars, vacations, upgrades, reduced interest rates,
etc., and chalking those expenses up as "advertising
costs." Mammoth price reductions from every national
builder have been going on since the beginning of the year.
Palm Coast Florida Here is a typical example from D.R. Horton: 
The above ad came out on Sept. 23 for the Daytona
Beach/Palm Coast area. The price on the Grand Teton model
was $282,445, but is now $197,445. That is a 30% haircut.
Not only is that a 30% haircut, but it is important that
the entire subdivision was just repriced 30% lower (plus
appliances). Any flipper who paid full price is now 30%
underwater (not counting interest expenses, insurance,
property taxes, etc. Can that flipper sell for $197,445? Of
course not. A realistic price, IF one could find a buyer,
might be $185,000. After all, who wants to by a used house
when a new one is about the same price, includes "free"
appliances, and comes with a warranty? Add in real estate
commissions and that flipper may be down by as much as 50%
or more. Rent it out? Supply of rentals (especially condos)
is exploding. Meanwhile, prices continue to drop. This kind of price action has been going on for over six
months in most of the country to varying degrees. In
addition to the enormous price reductions, there is a
subtler portion of the ad that shows stress on homebuilders
and prices. Right at the bottom of the ad in large type is
the message "Realtors Warmly Welcomed." A year ago,
builders refused to split commissions with Realtors. Now
builders are offering triple commissions to realtors. That
is a dramatic change and right off the bottom line of
builders. More NAR Cheerleading Let's tune back in to more nonsense from our favorite
cheerleader at the National Association of REALTORS. From a
New York Times article: "David Lereah, chief economist of the association, said he
expects prices to continue to fall. 'We do expect an
adjustment in home prices to last several months, as we
work through a buildup in the inventory of homes on the
market,' he said in a written statement. 'This is the price
correction we've been expecting -- with sales stabilizing,
we should go back to positive price growth early next
year.'" There is absolutely no indication of working through any
housing inventory. In fact, inventory is now up to 7.5
months, compared with 7.3 months a month earlier. Those
numbers are from the NAR, so it appears Lereah is not even
following his own reports. Furthermore, builders keep on
building faster than home sales are rising. Thus,
homebuilding continues to add to supply. Real estate owned
by banks due to foreclosures (REOs) are also rising. That
adds to supply. Massive rises in bankruptcies in the Rust
Belt and Colorado are adding to supply. The demographics of
baby boomers retiring will add to supply for years to come.
There is simply no reason to expect either stable prices or
inventory to be worked off in this situation. 
A more realistic assessment was offered by Ian Shepherdson,
chief United States economist at High Frequency Economics:
"With inventory still rising, there is no chance of any
short-term relief" for sellers. "Prices and volumes have a
long way to fall yet." "The collapsing U.S. housing market crossed another
milestone in August," MarketWatch recently reported, "as
the median sales price of existing homes fell for the first
time in 11 years and for just the sixth time in the past 38
years, the National Association of REALTORS said Monday...
"Sales of existing homes fell 0.5% in August to a
seasonally adjusted annual rate of 6.3 million, the
industry group said. It was the lowest sales pace since
January 2004. Sales have fallen five months in a row. Sales
are down 12.6% in the past year... "'Sellers are finally getting it,' said David Lereah, chief
economist for the real estate group. 'The price drop has
stopped the bleeding. Sales have hit bottom.'"
Let me see if I've got this straight: 1. Existing homes fell for the first time in 11 years.
2. Inventories are still rising.
3. Sales have fallen 5 months in a row.
4. Sales are down 12.6% in the past year.
5. "The price drop has stopped the bleeding" ???
Northern Virginia McEnearney Associates posted the "Top 10 Reasons to Be
Optimistic About Northern Virginia's Housing Market." Let's
look at reasons 8-10: "10. The softening of the market. Believe it or not, that's
a good thing. There is no doubt that the market is slower
and softer in every respect when compared to the last
several years. The 20-25% appreciation rates were not
sustainable. And the longer they continued, the harder the
fall would be... "9. The media. OK, this may seem a bit tongue-in-cheek, but
area homeowners should rejoice every time the national
media and even local media predict doom and gloom for area
housing -- because they have so often been wrong. The
relentless drumbeat of negativity seems almost totally
disconnected from reality. Our current favorite: Forbes
predicts that the median price of a home in metro D.C. will
increase only 3% over the next 10 years. Not 3% annually,
mind you. A total of 3%. In the best regional economy in
the country. "8. History. The compounded average annual increase in the
average sales price of a home in the metro D.C. area over
the last 30 years is 7%. (Forbes, are you paying
attention?) 7% is normal; 7% is sustainable. We won't see
that in 2006, but an individual's housing decision should
be a long-term decision. Feel good about owning a home here
-- unless you have to sell right now." Reason No. 10 seems to suggest that home prices are going
to go up because they are now going down. Obviously, that
is silly. Reason No. 9 ignores the fact that the media did nothing
but report good news for years, topped by the cover of TIME
in the summer of 2005: "Why We're Going Gaga Over Real
Estate." As bad as sentiment has gotten, it is nowhere near
the extreme we saw at the top. That cover marked the
secular peak in housing. Besides, places like McEnearney
Associates were bullish when sentiment was bullish, and are
now supposedly bullish because sentiment is bearish. Reason No. 8 proves that the writer of the article does not
understand basic math. I agree with McEnearney Associates
about there being a "disconnect from reality." The first
disconnect is on an unsupported rise up in home prices,
where it was considered "normal" for home prices to rise
four standard deviations above rental prices and wage
growth. Home prices in many places (Florida, California,
D.C., etc.) are up 100% or more in 4-5 years. Obviously,
that is not sustainable, even though flippers bought into
the concept big-time and are now being toasted over it. A
second disconnect is failure to understand reversion to the
mean. To average 7%, we will need to see many years of zero
to negative growth. A third disconnect is that 7% will NOT
be sustainable in a secular downtrend. A fourth disconnect
is that prices tend to overshoot in both directions. The
implication of that statement on the way down should be
obvious to even the math-challenged. (McEnearney, are you
paying attention?) More than likely, we will see prices drop 30-50% over 2-4
years, depending on the bubbliness of the area, then chop
sideways or down (again, depending on the market) between
6-10 years. That is what it will take to average 7% a year,
given the unprecedented four standard deviations above the
mean rise in home prices compared with both wages and rent
since 2000. That may also be the best-case scenario.
I have news for all the real estate wizards, flippers, and
cheerleaders: Sustainable positive price growth is years
away. We are closer to the peak (heading down) than the
trough (about to head back up). [Joel's Note: Mike "Mish" Shedlock is just one of the
maverick writers contributing to Whiskey & Gunpowder, a
free newsletter dedicated to keeping an eye on your
personal freedom and liberty. For their witty insights on
subjects from peak oil to PETA, you can visit their website
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