September 02, 2006

Could We Kindly Not Panic?

RECENTLY, I read a tiresome and annoying screed on the housing market from FORTUNE magazine, in which writer Shawn Tully "dispels four myths" about housing prices. Mr Tully's article is so smarmy and annoying it makes one wonder if Mr Tully has been involuntarily renting all these years, and is now finally poised to deliver the mother of I-told-you-so's. I mean, just look at what the man has to say.

Mr Tully writes:

Americans wanted to believe, and they did. Now, the giant popping noise you're hearing is the sound of yesterday's myths exploding like balloons pumped up with too much hot air.

The newest sign that the myth-makers were spectacularly wrong is the data on existing home sales for July. Nationwide, median prices rose .9 percent.

But even that meager number masks the real story. Prices actually fell where housing is most vulnerable, in the bubble markets in the West and Northeast. In the Northeast, they dropped 2.1 percent from July of 2005, at the same time prices nationwide rose around 3 percent, meaning that houses lost over 5 percent of their value adjusted for inflation.

Homeowners just saw their wealth shrink, by a lot. The numbers will only get worse. It's time to examine the clich├ęs that the "experts" - chiefly analysts and economists from realtors and mortgage associations - used to convince Americans that what they're seeing now could never happen. Here are the four great housing myths - and why they never made much sense in the first place.

What's with the scolding and the yelling and the beating about the head? So prices went down five percent in real terms -- which is arguably fudging, since no one thinks in real terms about their house, not even finance people. Especially not finance people, who don't generally borrow against their home. Besides, no one adjusted the numbers for inflation when prices were going up, so you can't do that on the downside.

Anyway. Housing prices went down a nominal two percent in the hot markets, Mr Tully said. Well, here's my official reaction -- Ooooooooooooooooh. TWO PERCENT. My God, it's just like 1987 all over again! For an article entitled "Getting Real About the Real-Estate Bubble," I'm not convinced this is all that helpful. Neither, for that matter, are the four supposed myths which Mr Tully sets about demolishing.

The first myth is: "As long as job growth is strong, prices can't go down." I can't believe for a moment people would think such a thing, given that prices were so high in markets with strong job growth. But apparently Mr Tully thinks THAT's the No. 1 myth on the list.

The second myth Mr Tully writes about is: "The builders learned their lesson in the last downturn. They won't swamp the market with new houses when the market turns." Let's look at what he has to say in depth here. Mr Tully writes:

You might call this the OPEC theory of homebuilders. The idea was that the builders wouldn't take a chance by building lots of unsold, "spec" units that could clog the market in a downturn. They had supposedly absorbed hard-won discipline from their excessive building in past downturns.

Well, it hasn't turned out that way. Builders are still pouring out near-record numbers of new homes as sales decline, assuring a further fall in prices. "Buyers" are walking away from deposits on houses that were supposedly pre-sold, forcing developers to throw them back on the market at a discount.

The problem is that even now, margins on new homes are still pretty good, though well below the levels of a year ago. As a result, builders will just keep building until those big margins evaporate. High prices are sewing the seeds of their own demise. They always do.

Kids! Mr Tully's just discovered the principles of supply and demand, and how they always end up at a point known as equilibrium. Of course the builders are going to build as long as they can make money. That's what they do. But here, though, Mr Tully is looking in the wrong place. It ain't the builders Mr Tully should concern himself with -- it's the people financing the builders. Were Mr Tully to go to some of these new developments, he would perhaps find they're being built in phases -- or even one building at a time -- for a perfectly good reason: that's what the banks will allow.

The other so-called myths are pretty pathetic. We won't get into them, as it wasn't exactly heavy lifting for Mr Tully to knock these paper tigers over. I suppose my question is whether Mr Tully's article is a harbinger of things to come. Will we be inundated with whiny, petulant articles about the coming collapse of the housing market, and the resulting panic that will follow? One would hope not, but I'm not optimistic.

Posted by Benjamin Kepple at September 2, 2006 09:19 AM | TrackBack
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