Housing Sales Down? Why would you think they'd be up? Seriously.

THIS BLOG WAS UPDATED FOR 30-YEAR NUMBERS IN THE TABLE BELOW.

To all those economists, bankers, policy makers, media types, and NAR folks who are surprised housing sales are down nearly 20%: DUH!

Alex (Trebek), I will take the totally obvious for $1,000, please.

I hear all over the media today that you're all surprised that the housing sales have dropped? REALLY?!?!

Here's why you should HAVE realized that this tax credit (and its spawn) will do NOTHING to increase aggregate sales, only pull them forward.

The home sales drop is a two-fold story: The Stimulus only rearranged sales (pulled them forward), it didn't increase aggregate demand. This was expected and I am proud to say I called it back in June/July (just ask anyone who follows my blogging).

People are fearful to buy, which is understandable. The tax credit pulled up sales, but did little to change aggregate demand due to:

•· Perceived depreciation yet remaining in the market (which I agree with), causing buyers to hesitate

•· Higher unemployment causing people to be cautious

•· Tightening lending standards

•1. Reduced M3 money supply (a large money aggregate indicator) dropped at record rates from July onward, inhibiting bank lending

•2. Banks jacking up interest rates on credit cards, imposing increased minimum payments from 2% to 5% and jacking up interest rates on even A-credit consumers (from 10% to 30% in some cases).

•§ This reduces the potential home purchase pool by reducing the borrowing capacity of all consumers affected with a change to their minimum payment or interest rate. In short, the banks are self-eliminating a segment of highly qualified purchasers along with the risky credit risks.

•§ Additionally, cramming down credit lines drops people's credit scores and turns good risk into poorer risk due to consumers' increased "percentage of credit utilization", even though outstanding balances are relatively static or are going down - as is the national trend.

Banks are cannibalizing their own markets!!!

•3. FHA tightening their lending standards

Secondly, this is the MOST important point: THERE IS LITTLE TO NO LENDING FACILITY IN THE MORTGAGE MARKETPLACE TO ACCOMMODATE THE SELF-EMPLOYED.

•· Self employed people (doctors, lawyers, business owners - all who may be proprietors or S-corps or LLCs) comprise 20.7 million of the 155.1 million workforce, or 13% of the workforce over 16 years of age. The 20.7 million is comprised of:

•1. 10.4 million true self-employed

•2. 10.3 million contract workers

•3. Unless they have a W-2, the only way they will get money from a bank is at gunpoint, ask 99 or 100 lenders.

•· So, there is 13% of the market that is just sidelined. Period.

•1. Find a way to bring them back into the fold and the market demand increases 13%. Even assuming only the top ½ of self-employed income earners qualify for the median (50% of the market) priced home, that's still a 6.5% increase in demand, which would offset the 17% drop stated in the following story in a meaningful way. http://finance.yahoo.com/news/December-home-sales-down-apf-2729493334.html?x=0&.v=6

•· Due to the paucity of jumbo lending, homes above $400k are stalling in the marketplace, at least in Denver.

•1. This precludes the ability to move up, which will stall any housing recovery and put higher end homes at higher risk for being foreclosed, which starts a downward spiral just like subprime, but 4-5 times the financial exposure on each home.

•· Just as an example, comparing home purchases (in Denver) prior to the crisis in 9/08 up until 12/09, (the most recent data I have at hand):

•1. Homes below $200k - Sales up 14%

•2. Homes $200k - $400k - down 13.5%

•3. Homes $400k - $1m - Down 14.25%

•4. Homes over $1m - Down 32.2%

•5. So, all we are getting is a feeding frenzy around the median price point and below. But, there is no natural market expansion into higher priced homes, which creates a sustainable recovery.

So, it was reasonable to believe that the tax credit wouldn't STIMULATE demand, but merely REARRANGE it.

As people expect cars to depreciate right off the lot, The Cash for Clunkers program had a higher probability of sustaining demand.

•· It took inventory out of the system - disposing of used cars (the equivalent of razing a home), so the numerator (demand) goes up and the denominator (available cars) goes down at the same time. For example, using simple fractions: 7/10 is 70% vs the increased demand, smaller supply 8/9 is 89%. Same concept, larger numbers.

•· Most importantly, there is little sense of value retention with a car in the consumers' mind, so the credit is an offset to the loss the buyer knows they will take the second they drive off the lot. It just about breaks ‘em even.

Housing is different.

I believe people - correctly - perceive that homes prices will soften further. (Shadow inventories in Denver nearly double the available inventory on the MLS.)

Personally, I believe there is another 10% depreciation out there in the pipeline (which is somewhat off-topic). The point is that people expect housing to appreciate - even today. It's "ingrained" in the USA's DNA: housing is supposed to appreciate.

But it's not. That's why strategic foreclosures (20% to 25% of foreclosures are now this type) are such a concern - people losing faith in housing having intrinsic, accretive value

So, why is it that housing is soft, despite record low interest rates? People are short sighted and NAR has FAILED MISERABLY IN ITS LEADERSHIP AND INSIGHT INTO THE OPPORTUNITIES THAT ARE OUT THERE.

Here's what would stimulate demand on the margins (given we can't control the economy or Washington policy but once every two years), and, I believe would increasingly drive demand when momentum of the following were implemented:

•1. NAR should be holding banks accountable through tracking how easy they are to work with in a formal Realtor-driven database, that the public can view.

This database should track: 1) Ease of business to facilitate short sales (if applicable) or ease of business for a non-distressed transaction, 2) Quickness, promptness, courtesy and accuracy to close per the terms and timelines of the negotiated contract by the CLIENTS, and 3) Client feedback about their experience with each lender.

As good lenders had their positive behavior reinforced with more business directed via the feedback, those good lenders would pull the poor lenders along -- or cause them to fail and get out of the market's way.

On a personal aside, it always amazes me that there is ONLY ONE CONTRACT PRIOR TO THE CLOSING BETWEEN THE PARTIES: THE REAL ESTATE PURCHASE CONTRACT!!!!! Yet, banks act like it's an inconvenience and annoyance. AMAZING!!!!

•2. A MEANINGFUL CAMPAIGN to educate buyers...more than "homes are affordable" is appropriate. Seriously, what the hell does "homes are affordable" mean to the average Joe and/or Jane?!?!?! It's wimpy and indecisive...and data less.

Let me explain: What policy makers and NAR failed to convey is that buyers will save more from lower interest rates even if they lost another 10% on the value of their home in the short run.

In short, the lower interest rates will save buyers MORE money over a 30 year loan than losing $20k, were the median priced home ($200k) to drop another 10%, or $20k.

Locking in long-term money at historically low rates is the key to making/gaining a larger equity stake in a home!!!

Let me demonstrate what I term for several years now as "The Procrastination Tax" - the tax people pay worrying about the front end purchase price and ignoring the financing envelope in which the home purchase sits.

Let's use a home purchase price of about $200k, near the present median price in Denver. Let's say that prices drop 10%, but rates jump from 5% to 7% when the Fed stops buying mortgages (which 7% is STILL historically low).

Someone who bought but at $200k with a 5% loan and lost $20k in appreciation (but later recouped it) from further market softness, BUT would have saved $92,506 OR $3,084 per year compared to someone who bought the same $200k home with a 7% loan OVER THE LIFE OF THE LOAN!!!!! (see chart below at the end of this blog)

This short term vision for a long-term investment is what I call the Procrastination Tax. Ya' snooze, you lose - even more!!!

Put a calculator on the NAR website for people to calculate their own "PROCRASTINATION TAX". When people see they are losing real money vs paper money (short term valuation), a portion of the more primed, educated, informed, serious buyers will move off the dime. It works for me ALL THE TIME!

The general failure for this to be more promulgated - as opposed to a near maniacal fixation on the price alone - is what is suppressing aggregate demand in a self-fulfilling prophecy, in conjunction with the aforementioned problems.

So, it isn't surprising demand is down. Why would you prior to reading this blog?

Term of Loan - Increased Payments Due to Rate Change from 5%

Loan Size	$100,000	$200,000
				12	36	60	120	360
Interest Rate	Pmt per $100k	Payment Based on $200k Loan	Incremental Monthly Payment	1 Yr	3 Yr	5 Yr	10 Yr	30 Yr
5.00%	$536.82	$1,073.64	$0.00	$0.00	$0.00	$0.00	$0.00	$0.00
5.50%	$567.79	$1,135.58	$61.93	$743.22	$2,229.65	$3,716.09	$7,432.17	$22,296.51
6.00%	$599.55	$1,199.10	$125.46	$1,505.49	$4,516.48	$7,527.47	$15,054.94	$45,164.81
7.00%	$665.30	$1,330.60	$256.96	$3,083.54	$9,250.62	$15,417.70	$30,835.41	$92,506.23
8.00%	$733.76	$1,467.53	$393.89	$4,726.63	$14,179.89	$23,633.15	$47,266.31	$141,798.92
9.00%	$804.62	$1,609.25	$535.60	$6,427.22	$19,281.67	$32,136.12	$64,272.24	$192,816.72
10.00%	$877.57	$1,755.14	$681.50	$8,178.00	$24,534.00	$40,889.99	$81,779.99	$245,339.96

Sources:

10.4 million
Number of self-employed workers.
Source: Statistical Abstract of the United States: 2009, Table 585 <http://www.census.gov/compendia/statab/>

10.3 million
Number of independent contractors.
Source: Statistical Abstract of the United States: 2009, Table 588 <http://www.census.gov/compendia/statab/>