NAR Propaganda
March 23, 2008 – 8:45 am
The National Associate of Realtors wants you to know that “buying a house this year” would be a “good move, both for your family and [for] building your long-term wealth.” To spread this message, they’re running commercials on CBS during the NCAA Final Four Tournament. They’re pushing people to their new website: housingmarketfacts.com. You can see the new commercials there….just follow the “watch TV commercials” link on the lower right side of the page.
I’ll assume my readers are smart enough to know that the National Association of Realtors is a biased source. Their constituent realtors only get paid when real estate transactions close. But to give you some color on these guys, here are a couple of books written by their former Chief Propagandist, er, Economist David Lereah.
From 2005:
The whole title reads: “Are you Missing the Real Estate Boom? Why home values and other real estate investments will climb through the end of the decade, and how to profit from them.”
From 2006 (published even as the housing bubble started to burst):
The sequel’s title reads: Why the Real Estate Boom will not Bust–And How You Can Profit From It. How to build wealth in today’s expanding real estate market.”
Lereah is no longer with the NAR.
With this in mind, let’s consider the claims in their commercials and on their website. [Fair warning: there's a creepy spokeswoman that hovers to the left on the home page. You can mute her, but she'll keep smiling at you on an endless loop. Anyone remember the hologram of Princess Leah in the first Star Wars movie?]
- “Buyer opportunities have NEVER been better.” I wonder if the NAR has considered the excess inventory of new and existing homes on the market. With housing supply still FAR outweighing housing demand, prices will continue to fall. Even the CEOs of Fannie and Freddie said house prices still have farther to fall. So if you’re planning to buy a house, it makes sense to wait a year, when you’ll be able to get another 10, 20 or 30% off the asking price.
- “Family conditions often outweigh market conditions.” I don’t doubt that owning property can be good for a family, but with house prices falling fast, I think market conditions BECOME family conditions. To the extent that you risk losing a big chunk of your savings, it makes sense for your family if you wait for prices to return to normal relative to median income.
- Speaking of the family savings, the NAR flashes a statistic in their commercial claiming “60% of the average homeowner’s wealth comes from home equity.” The fine print below shows where they got that stat: from a HUD report. Published in 1995.
- But let’s consider the wealth argument, as I don’t doubt that the majority of American’s “wealth” is in the form of home equity. I’ve always wondered about the way we define wealth in American society. Consumption being the root of the American Dream, I think we confuse having STUFF with having WEALTH. After all, to afford that McMansion and the second/third family cars in the driveway, Daddy often has to extract the wealth in his home through a home equity loan. IMHO, true wealth is literally “liquid net worth.” Net worth is assets minus liabilities. Cash good, debt bad. “Liquid” net worth is the ease with which your assets can be turned into cash.As the employees/shareholders of Bear Stearns can tell you, there’s a difference between wealth on paper and cash in the bank. Housing wealth, that is equity in a home’s value, is wealth on paper.
- The website is full of real estate piffle from a “2006 NAR Study.” My favorite: “Homeowners are more likely to vote and they volunteer time for political and charitable causes more frequently than renters.” Hmmmm.
- And then there’s this:
- “Homeowners benefit from the power of leverage. Over 10 years, a $10,000 investment in the stock market at a normal 10% market rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5% would return nearly 5 times the stock market return, at $110,300.”
Wow. You’d think it would be responsible for them to explain the downside risks of leverage while they’re at it. The leverage argument relies on the real estate myth that “prices never go down.”
But what if prices DO decline? Let’s use their example. You take your $20,000 of life savings and make a 10% down payment on $200k house today, which means you have a mortgage of $180,000. Even after house prices have declined significantly nationwide, many experts still claim house prices have much further to fall, perhaps another 20%. What happens to you if the value of your house falls 20% by next year? At that point it’s worth $160,000. First of all, your equity is wiped out, and you still owe close to $180,000 on the house.
The truth of the matter is that leverage is very dangerous. It magnifies returns, to the upside AND downside. To use their analogy, if you’d put that $20,000 in the stock market and watched it decline 20%, you’d still have $16,000. With the house, your $20,000 is wiped out entirely AND you owe an additional $20,000 on a mortgage over and above the continuing value of the home. Essentially, you’ve lost $40,000.
This isn’t just a hypothetical. Thousands of people are walking away from their homes because they owe more on their house than it’s worth. Leverage has wiped out whatever “wealth” was invested in their home.
Still think there’s “never been a better time to buy a home?”
[for those interested: a buy vs. rent calculator and a closer look at the math of renting vs. buying]
10 Responses to “NAR Propaganda”
Leverage works in odd ways. 100% financing…which many current greybeards used to finance their first home ofter WW2 or Korea, did not ruin the economy, nor will leveraged financing kill us this time.
I am in the mortgage and RE industry, and I do not know one person who is in trouble with their mortgage due to leverage, ARM adjustments or housing value issues (unless they are forced to sell at this time)whose income has reamined stable or increased.
The income problem we have is the single greatest issue facing the economy, and the recent success of housing has masked the fact that employers were not maintaining pace with the rest of the economy as far as the grouth wages is conserned.
Now, as the mortgage guidelines tighten like a noose around the economic neck of the country, we need more effective dialogue, not finger pointing.
By JohnP on Mar 23, 2008
“Family conditions often outweigh market conditions.” Interesting. So they AGREE that market conditions probably suck in your area, but that nagging wives should trump financial logic. How to deal with this problem? Wifey-poo would probably agree that wiping out the family savings through a fall in home equity is worse than renting a house for another year.
You forgot to mention the fact that in many areas including where I live rents are going up as people that are choosing to not buy are competing with people that must rent. Rents are up substantially year over year, at least here.
By Jim on Mar 23, 2008
When purchasing a home, always take a clue from the rental market. See how much the place would rent for. If the potential rent would cover the mortgage and then some (at least 40% more), then this is a good deal.
But if the rent does not even come close to a regular mortgage, fugettabadit! The cost of owning a home over 20 years is about twice the mortgage payments. Trust me, I’ve been there.
Of course, when the prices go up, the appreciation makes up for the extra cost big time. Plus, if you’re lucy, you’ll flip this place without having to pay the REAL cost of a home.
But in this real world of today, don’t count on appreciation for the next 5 years. Look at the cold hard facts. A medium priced place that sells today for 300K instead of 400K in 2006 is still not cheap enough if the median income is 45K and would rent for only 1200. The numbers just do not add up.
And forget about the “people will pay a premium just to own” mantra. Today a house is a safety piggy bank, a retirement plan, a health care back-up plan. Pride of ownership is now second to the investment nature of real estate.
By Christophe on Mar 24, 2008
“Homeowners benefit from the power of leverage. Over 10 years, a $10,000 investment in the stock market at a normal 10% market rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5% would return nearly 5 times the stock market return, at $110,300.”
Not so fast there NAR. $10,000 invested in an S&P500 index fund is “fire-and-forget”. You get your $23k without further investment.
$20k as a down payment on a house is not the end of the story. You still have to pay off the $180k mortgage. For a 30-year loan that’s about $1260/month, plus property tax. After 10 years you’ve “invested” at least $150k more for that on-paper $110,000 gain.
By Carlos on Mar 24, 2008
Carlos, unless you live in mom and dads basement, you’re paying rent….say $800 x 12 x 10 yrs = $96,000. If you are making a living, the after tax cost(est 30%) of rent could be around $137,000….you would chase $23,000 like that…???
I have yet to see an analysis which considers a complete picture, including the cost of renting, covering a 10 year ownership period, where home onwership does not beat renting.
Jim, you are right on the rent increases…one of the reasons rent was low for this period was the expansion of home ownership.. Those who crossed the line to buy…the brave ones, created vacancies and helped to force rents down for those who could not muster the courage to buy.
I have an FDIC study prepared in 2005. They study addresses the issue of boom and bust. The conclusions were that: 1) booms do not necessarily end in bust; 2)in the abcense of economic problems (Dteroit/auto) or natural disasters (Katrina, these economies stagnate; 3)The period of stagnation exists because home prices outstripped income growth and now income must catch up. 4) When income is inline with or exceeds housing cost, then price growth begins again….
We are stagnated, or we would have been if the financial markets had remained stable. As long as the mortgage markets contract, there will be problems not anticipated by the FDIC study. The problems are getting far worse than they should have had the markets kept their composure.
By JohnP on Mar 24, 2008
1) Family conditions often outweigh market conditions.” Interesting. So they AGREE that market conditions probably suck in your area, but that nagging wives should trump financial logic. How to deal with this problem? Wifey-poo would probably agree that wiping out the family savings through a fall in home equity is worse than renting a house for another year.”
Wifey-poo? Nagging wives? at first I assumed there must be something on the NRA page or ad to provoke this shockingly backward thinking gender bias, but there is not. Somehow you have concluded from the phrase ‘family conditions often outweight market conditions’ that women (specifically wives, perhaps yours?) are nasty harridans who have no financial sense. Nice.
2) I live in Los Angeles and regulary move to different neighborhoods about once a year to try them out. Rents are not going up. They have stayed level. Although that may be because folks are still deep in denial in this market.
By brenda on Mar 24, 2008
Responding to johnp, I’ve added links to the post to demonstrate the folly of buying vs. renting when the TOTAL cost of buying far outweighs the total cost of renting.
Arguing that leverage hasn’t hurt people in the past ignores the obvious, that the market conditions in which we find ourselves, including the continued fall of prices NATIONWIDE and the unprecedented credit terms previously available to borrowers, make the present completely unique in the history of American housing.
If, like johnp and the NAR, you have to rely on assumed “long-term” appreciation in order to justify taking a loss now then I still argue the prudent thing to do is wait.
Responding to Brenda, you’re right. That particular paragraph was flip and backward-thinking. I thought my readers would understand that I was trying to be ironic, speaking in ridiculous generalities the way the NAR seems to do. But reading the paragraph again, I see it wasn’t written well enough to be seen the way I wanted it to be. Hence the change above.
By RW on Mar 24, 2008
JR…future appreciation is not an opinion…the fact is that over the past 40+ years housing has appreciated around 6.5% according to OFHEO….
In our area, according to OFHEO stats, we gainded 78% in value on the past 5 years, and gave back 3.8% last year…these are facts…not guesses.
Next fact is the rule of 7’s … 7 years on a job….7 years in a marriage…7 years in a home….these are norms.
Those who bought a home in the 2001-2002 recession did very well…their 7 years is up this year or next. Those who bought on 2006, their 7 years is up in 2013.
There is no evidence that they will not achieve a positive yield on their home onwership experience.
As for the mortgage credit stranglehold currently exacerbating the housing market, this same knee-jeck reaction took place the late 80’s-early 90’s problems, when lending abandoned the market place. Had we maintained a more stable attitude towards lending, our problems would be greatly reduced.
I have a client on the phone right now. His income is about to be cut by his employer…he works in a stone quarry and has had this job for 10+ years. His hours are getting cut 25%….next month..
Is this a housing problem or an income problem?
By JohnP on Mar 24, 2008
RW, thanks for your response. I take responsibility for not giving you the benefit of the doubt. Your explanation of your ironic tone makes sense and I will read ‘between the lines’ in future!
By brenda on Mar 24, 2008
Take a look at johnp’s argument, it continues to rely on “long-term” results. And his argument that 40 years of data prove his point is specious because, as I said in my comment above, we are in the midst of a housing decline of unprecedented proportion. By definition, I think an “unprecedented” event is hard to fit into a box using “historical” data.
Again, let me reiterate the core of my argument. Buying a home isn’t necessarily a bad idea. Buying a home NOW is a bad idea–unless you can get a big discount on the market price.
Johnp notes in his first post above that he works “in the mortgage and RE industries.”
It’s funny, the similarities between real estate professionals and investment professionals. People listen to them when they say you have to “stay invested for the long-term” because you “can’t beat the market.” Having spent a few years in the investment profession, I can speak for that one and say the guys who always say “buy and hold” often do so for two reasons.
1. unfortunately, they don’t do a lot of real work to determine which stocks are actually a good value.
But perhaps more importanly,
2. they ONLY GET PAID if you “stay in the market.” Investment pros typically get paid fees based on the level of assets under management. Therefore they have an incentive to keep you invested at all times.
Because the bottom line is that investment “pros” are actually SALESMAN. They get paid to sell you something, a stock or a mutual fund….making you money is also important, but SECONDARY.
I suspect things are similar with real estate and mortgage professionals like johnp, who only get paid when house sales and loans actually close. These people are salesman. They’re out to make THEMSELVES money, not you. So when common sense says now is CLEARLY NOT a good time to buy, they have to fall back on sophistries like relying on the “long-term.”
I would certainly grant you that you CAN make money in the stock market or in housing if you hold on for the long-term. But to MAXIMIZE your gains and to AVOID losses, first you have to buy assets (a stock or a house) at a good price.
Look at two investors who have been ridiculously successful, Warren Buffett in stocks and Sam Zell in real estate. Sam Zell (aka Saltator Sepulcir, Latin for “grave dancer”) has made billions largely by buying AT THE RIGHT TIME. Same story with Warren Buffett, he would be the first to tell you that you only buy assets your comfortable owning over the long-term. But before that, he would say you have to buy that asset at a discount to its true value.
Most of you would say, well you have to have some kind of special brilliance to be a Warren Buffett or a Sam Zell. Yes of course you do.
But common sense is often enough to keep people from buying at the wrong moment. Who among you didn’t KNOW deep down that real estate was starting to get ridiculously overvalued back as early as 2004? You just have to stick to your conviction for the (seemingly interminable) period before which prices finally return to common sense levels.
Same story with tech/telecom stocks circa 1997-1998. Wasn’t it hard to stay on the sidelines while fortunes were being made in 1999 and 2000, before the crash that you KNEW would come finally did?
The people that lost fortunes were the ones that kept drinking the kool-aid.
Buying and holding CAN BE a good strategy. But you first you have to mix a little common sense into the buying part of the equation.
So, dear reader, I say to you ignore real estate/mortgage “professionals” who say you have to buy now. Your common sense is a better guide to smart investing, whether in the stock market or real estate.
By RW on Mar 24, 2008