In Uncategorized on August 30, 2010 at 12:15


Widespread Fear Freezes Housing Market


Published: August 27, 2010

You have to wonder sometimes what they’re smoking over there at the National Association of Realtors.

Lawrence Yun, chief economist of the National Association of Realtors, told analysts on Tuesday that “the pace of a sales recovery could pick up quickly.”

On Tuesday, the self-proclaimed “voice for real estate” released its “existing home sales” figures for July. They were gruesome. Sales were down 27 percent from the previous month, and down 26 percent from a year ago. Annualized, the July sales figures would translate into fewer than 3.9 million homes sold this year — a staggeringly low figure. (The record high occurred in 2005, when more than seven million houses were sold.)

The months-to-sale number was depressingly high; the Realtors group reported that it now takes more than a year to sell a typical house, compared with six months in a normal market. The amount of inventory is high.

Lest we forget, these awful numbers are coming out at a time when the financial incentive to buy could hardly be stronger: the fixed rate on a 30-year mortgage is at an incredibly low 4.36 percent, according to an authoritative survey conducted by Freddie Mac.

Yet here was Lawrence Yun, the association’s chief economist, trying to turn lemons into lemonade: “Given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs,” he said in a news release.

Mr. Yun went on to attribute the weak July numbers to the expiration of the Obama administration’s tax credit for home buyers. They had caused consumers to “rationally” jump into the market during the first half of the year — at the expense of summer sales, he said. The post-tax-credit slump, he predicted, would be over by the fall, and by the end of the year, five million existing homes would be sold. (“To place in perspective, annual sales averaged 4.9 million in the past 20 years,” he said.)

Mr. Yun also predicted that home values would not fall much further, since they were “back in line relative to income.” In other words, the July numbers were a mere blip.

Clearly, Mr. Yun needs to get out a little more often. Specifically, he ought to talk to people on the ground — like mortgage lenders or prospective borrowers. Talking to these people would probably give him a more sober take on the larger meaning of the latest sales numbers for existing homes. Sometimes, you see, lemons really can’t be turned into lemonade.

“In the financial markets, a lack of liquidity immediately leads to falling prices,” said Lou Barnes, the founder of Boulder West Financial Services. (Boulder West was acquired last year by Premier Mortgage Group.) “In the real estate market, something different happens,” he added. “Illiquid real estate markets freeze.” That is what is happening now. For months, the Obama tax credit had been the only grease in the housing market. Now that it is gone, the buying and selling of houses is essentially grinding to a halt.

Why is this happening? Just as the subprime bubble of 2006 and 2007 required one kind of perfect storm — namely, incentives to throw underwriting standards out the window — we are now living through the opposite kind of perfect storm. Essentially, every participant in the housing market has a reason to be afraid. And that fear is paralyzing.

The prospective buyer, for instance, has two good rationales to fear buying a new home. One is the unemployment rate. “A major psychological thing happens with high unemployment,” says Dave Zitting, a veteran mortgage banker and founder of Primary Residential Mortgages. “Those with a job worry about whether they are going to keep that job” — which, in turn, prevents them from taking the plunge on a new home.

The second reason is that, Mr. Yun notwithstanding, most people simply do not believe that housing prices are even close to hitting bottom. “In the Bay Area, a house that was worth $300,000 a decade ago became a million-dollar home,” said Greg Fielding, a real estate broker and blogger. “Now it is listed at $800,000.” That price, he suggested, was still unrealistically high. The seller, meanwhile, doesn’t want to face the fact that his or her home is too richly priced, and won’t sell at a more realistic price — which may well be below his or her mortgage debt.




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