Now They Tell Us

A week ago roughly I commented on the resurgent housing market (link), interpreting it as the return of home buyers, who really need housing, after a seven-year period of slumping. Today comes a rather startling news story; I saw it in the New York Times. It turns out that most of the home purchases have been made by investment houses acting, evidently, to “create” confidence. If that’s what they were doing, this news should dampen whatever confidence was there. “Nationwide,” NYT writes, “68 percent of the damaged homes sold in April went to investors, and only 19 percent to first time home buyers, according to Campbell Housing-Pulse.” That word, “damaged,” refers to impacted in price by the housing slump. Most of the houses bought by investment houses are being rented—awaiting higher prices yet when, presumably, they will be unloaded. Can news be trusted any longer? Every story about the economy’s turn-around (“At last!”) by media commentators cited the surge in home purchases—and that surge was interpreted as a shift in “consumer” confidence—rather than as Wall Street manipulation.

It Ain’t Over Yet

The housing market started to plummet as soon as the 2005 was over—and then, measured in the value of business done, it plummeted like one of those cars falling off the collapsing bridge. Here is a chart from an earlier posting. In effect we’ve had a period of seven years and five months in which the housing market was dead in the water, and ship taking water on top of that. Obviously time enough had passed so that natural demand for housing would begin to build up sooner or later. And now we have reports that housing is up. Not surprisingly, these figures are over-hyped. Consumer confidence is also showing gains, although these are not dramatic—and have been fluctuating up and down. But suddenly everything is all right again?

Don’t think so. The housing market must be viewed narrowly—and pragmatically. Much as the automobile market. Those two categories are basic. Sooner or later people must buy a house, must replace the car. And these two areas will therefore respond to actual need. But when we look at the economy as a whole, it is still treading water. In the most recent monthly employment reports, all of the gains were in the Services sectors. Construction lost jobs, Manufacturing showed zero gains, Mining and Logging lost jobs too. The real economy is still stirring in uneasy sleep.

The upsurge of optimism is a function of unreasoning exaggeration. Our media does not simply report the news—with proper additions of the relevant context. It behaves, instead, like a megaphone with a mind of its own. The message is “Housing sales are picking up, home values are on the increase.” What we hear is something else: “Great news. America is confident again and the bonanza will soon resume.” But it isn’t over yet. The fat lady is still in the dressing room. It will be a while until she rolls on the stage and starts to sing.

A Decade in Housing

One way of looking at the housing bubble is to see how much economic activity it first stimulated and how much of it we then lost. In this industry the U.S. Bureau of the Census avoids words like “shipments”—homes are not exactly shipped. The Bureau talks instead of “Value of Business Done.” Herewith then a graphic that shows this value from 1997 through the year 2000.

The big kid on the block is the single-family home, a category that also includes townhouses of the kind that, while they touch, a full wall separates the two residences from roof to the lowest basement, if any; the little brother is multi-unit residential construction; it includes apartment houses, condos, and the like.

The Bureau only reports on these two sectors in Economic Census years (they end in 2 or 7). I’ve rendered values for those years in black—and then, to get a proper curve, I’ve extrapolated the other points using percentage changes to housing starts—which are reported every year, indeed every month.

Interesting picture, this one. The multi-unit sector shows how the single-family sector would have performed had the bubble never come. The pattern is visible in the upper curve from 1997 through 2001. Then the speculation suddenly set in. Single-family rose like a rocket. Of added interest here is that the construction industry itself—if not yet the whole world, knew that things were badly off. The bubble here peaks three years before it bursts, in the financial sector, in 2008. The dark fairy suddenly swooped down in 2005—and the industry had to give it all back again—and more.

Now we constantly hear the innovators, progressives, and the cool asking, when others are leery of going upstairs, never mind all the way, “Hey, what century is this, doll? Hey, this is the twenty! first!”  The idiots, alas, are always saying that. Before the dot.com bubble people thought that fundamental economic laws had been suspended inside the dizzying heights of cyberspace. Not so.

Whatever the century, we may be dead certain. Somebody will try to get something for nothing. Both those who seductively whisper and those who yield to temptation must eventually—pay up. Here’s how it looked in housing. And the sobriety will last until this bubble sinks from memory and some other crazy “innovation” takes somebody to the cleaners. Next time.

Housing Crisis: Up Close and Personal

Acquaintances of ours decided to refinance their home. Now, mind you, this is a prosperous couple, both employed, in good jobs, never any financial problems. The house is wonderfully located. When you hear that famous real estate slogan—Location, Location, Location—in their case the answer for their residence is Yes, Yes, Yes!! So what happened? Interest rates are way down—and therefore they applied for a new loan to take advantage of that and to refinance their property. They are experienced. The last time they did this, the bank wanted to lend them much more than they had asked for. But at that time they had said, “No, thanks.” This time the bank refused to lend. Why? Here is a graphic that tell us why:

In a single sentence, the appraised value of their home had declined substantially in the recent four-year period as shown. This is not a made up example. Everything you see is based on actual records—although the dark blue bars are calculated to show everything in constant dollars.

How could this have happened? Well, appraised valuation is based on the actual selling price of other residences in the same area. Appraisers must base their judgment of hard numbers, and those numbers come from recent actual sales. In that area, as in most others, the houses that move are foreclosed residences being sold at distressed below rock-bottom pricing. Hence their house is now not only way below the price they paid for it—its current value is now even lower than the mortgage still left on it. They’ve lost not only the totality of their equity but, as you can see from the 2011 bars, they owe payments for a substantial bit of nothing.

Fancy-dancy talk about the Market and Bubbles and such does not void the judgment that not only our friends but literally millions of homeowners have been defrauded by their government—which, in the name of free markets and the wisdom of our financiers, has allowed fraud and speculation to spread unchecked. Yes. This house might not have appreciated as much absent this fraudulent background. But the value of this residence wouldn’t have dropped out of sight as it has.

Fortunately for them, they don’t have to move. They can wait. And things will gradually turn around. But listening to them talk, this experience has certainly put a chill on their general purchasing behavior. I see that as the inverse of the so-called “wealth effect”—which makes people confident because their property is appreciating. To be sure, the bars will start creeping up again. Slowly, slowly. But there are lots of people out there who must move. As for you, reader, don’t immediately go for the blue, brown, red, beige, or green box where your mortgage stuff is filed—or folders, or piles. It might not be good for your health. Ask your doctor first—as the unending ads never stop telling us…