History Always Finds Her Man

by Dan Denning

The U.S. housing market isn’t my beat any longer (although if it precipitates a recession in the United States and then the globe, I guess it IS my beat, even from Australia). But I love how history always finds her man, the man to personify all the mistakes and stupidities of financial folly. For the housing bubble, that man is indisputably David Lereah, the chief economist for the National Association of Realtors.

The story of the housing bust would play out just fine without Lereah lifting his voice. The facts are what they are. Over the next 18 months, $2.6 trillion in ARMs will adjust…and many speculators, flippers, and first-time buyers will face rising payments and falling market values. Ouch.

Lereah’s narration to the events just makes the whole thing at least a little comic (and believe me, I know it’s not funny at all to people who are facing foreclosure…I know more than few of them personally and they are almost all asking me what went wrong.) While I try and answer them, I can at least laugh at Lereah.

We learned on Monday that median sales prices on existing homes fell 1.7% in the last twelve months. It was the second largest decline in prices in the 30-years data have been kept and only the sixth recorded year-over-year decline in the last 38 years. We suspect it won’t be the last.

What did Lereah have to say?

“The price correction is a welcome development.”

It is? To whom?

‘The price drop has stopped the bleeding,…sales have hit bottom,” he said. “Sellers are finally getting it.”

Here it pays to be even more suspicious. Back in 1999 at the height of the Internet bubble there were two kinds of investors. Those who “got it” and those who didn’t “get it.” I never got it back then, and I’m not sure I get it now. Lereah is telling us that sellers have recognized that in order to sell their homes they will have to accept a smaller gain, or even a loss?

Lereah says, “I am confident the housing sector is picking up,” He also said that he expects prices to fall for the rest of the year. And here’s where we don’t get it again. He says falling prices will help sales from falling even further.

“If that’s so, we’ll have achieved a soft landing,” Lereah said

Step right up! Get your foreclosed home at bargain prices. Buy it with no-money down and historically low interest rates. We’ll throw in a flat screen TV, a gas-guzzling car, and we’ll cut the price for you.

Wait. That was last year’s show. If falling prices and huge incentives aren’t already drawing buyers into the housing market, what will? The prospect of a quick gains and a flip? That’s history too.

Compelling investment value? Not yet. Maybe after another 20% decline. But even then, we may never see another bubble in housing like the one we watched the last few years. Future housing gains will be the plodding, steady kind that come in the absence of easy credit.

In Shakespeare’s plays the fool is often the wisest character. Under the guise of buffoonery, he is allowed to speak the one thing that people in authority loathe to hear: the truth. But his wisdom is mistaken for wit by those in power, who usually don’t have the wit to understand they are being ridiculed. David Lereah isn’t a fool. He’s a moron. Or, as the Fool says to King Lear in Act One, Scene Four.

Have more than thou showest,

Speak less than thou knowest,

Lend less than thou owest,

Ride more than thou goest.

Editor’s Note: There were probably hundreds of thousands of bad loans written when the sun was shining on this market that will only be exposed once the storm clouds fully gather. This process has only just begun and delinquencies and defaults will cast a pall over the industry. Fixed income investors will flee the subprime lending market in a hurry, fully pricing in the risks of lending where the collateral is overinflated and many borrowers have been less than truthful about income and assets.