The Tycoon Report

Lies, Cries, and the Real Estate Guise

Friday, June 6, 2008 | Ethan Roberts

Tycoon readers, today I have my time machine all revved up with $4.00 a gallon gasoline, and it's ready for blast off.  Let's take a short trip back to that magical time when Real Estate ruled the world, a time when HGTV taught CEO's and Janitors alike how to flip homes with no money down for huge profits, and everyone was quitting their day jobs to become Real Estate Moguls...

Late summer, 2005:  I am talking with a somewhat terse and rigid site agent, employed by one of the leading national homebuilders.  My customers are quite unhappy with some of the features of the new home they are viewing, and have asked me to inquire if the builder can make some adjustments.  The site agent looks at me like I'm a complete idiot and snarls, "Listen, if they don't like it, I have three couples waiting outside who will take the house exactly as it is."  I retreat to where my customers are, with tail tucked firmly between my legs, and sheepishly explain to them that the builder is unwilling to accommodate them in any way, shape, or form.

Early spring 2006:  There are only 30 or 35 foreclosures for sale in my very large geographic area, the lowest total in years.  Every home has at least three or four offers, full price or better, and some customers even go so far as to write offers that say they will exceed any other offer by up to $3000.  Listing agents snicker if you dare to tell them your buyer is offering less than full price on their home.  Almost everyone qualifies for a no money down mortgage, maybe even an interest only, or no documentation loan.  If you like a house, you have about one hour to make a decision, or the house will be gone.  Wanna-be investors call listing agents from out of state to make offers on homes they viewed online, but have never even seen in person!  People actually cry when they find out that someone else has won the bid on a house they thought would be theirs...

Ugh, this irrational exuberance is absolutely gruesome.  Quick, let's get back into our time machine, and zoom forward two years...


Late Fall, 2007:  The Real Estate world has changed drastically in the last 18 months.  Homebuilders, who are now crying for business, hire day laborers to stand on street corners, waving "Homes For Sale" signs, juggling, dancing, and wearing Ape costumes -- anything to attract attention to their glut of unsold inventory.  Site agents now become annoyingly friendly to Realtors, and builders are increasingly more flexible with customer requests.  The "flippers" are all flipping out because the greater fool theory has now come to an end, and they are stuck with overpriced condos.  How did this happen in such a short period of time?

May, 2008:  There are now 475 foreclosures in Northeast Florida, and another 1405 "short sales" (homes where the mortgage lender agrees to consider a sale in which the price, minus closing and other costs, will net less than what is owed on the mortgage).  Most of these short sales will never sell, and will then be taken back by the banks at auction and re-listed for sale as foreclosures.   Buyers take days to decide which house they want, and then make offers that are far less than the asking price.  What's more, they dare to require that the seller pay buyer closing costs, and in some cases even provide the down payment for them.  Realtors bombard each other's e-mail boxes with obnoxious e-flyers,  in a desperate attempt to drum up non-existent buyers for their listings.  Hucksters, who formerly gave expensive seminars to Realtors on how to increase listings, now offer expensive seminars on how to attract buyers, or how to profit from short sales.  

Here's an e-mail flyer that I just received the other day from someone calling himself the "Short Sale Genius":



Sorry, I'll pass on this one.  With over 1,400 listed short sales, and only 19 closed during the month of May, you don't have to be a "genius" to figure out that short sales are simply fool's gold!  Do the math -- only about 1% of the available short sale inventory is selling. 

Speaking of fool's gold, I just finished reading a very lovely fairy tale, only this one wasn't by the brothers Grimm or Dr. Seuss.  This one was by a local Real Estate Broker, explaining to Joe Average why now is a "truly unique window of opportunity for buyers of residential real estate."  This article is similar to many that I have read lately, always written by those whose livelihoods depend on how many homes get sold.  The usual pitch is that prices have come down, mortgage rates are the lowest in some time, it's a buyer's market, blah blah blah.  

I read another fairy tale in the Saturday newspaper which proclaimed "Florida's existing condo sales off to strong start in '08".  Reading further into the article, they defined "strong start" to mean there was a slowing expansion of unsold inventory, and an 8% increase in first quarter 2008 over 4th quarter 2007.

Now anyone who knows Real Estate sales in Florida knows that the early spring will always be stronger than late fall to the end of the year.  Two weeks before Thanksgiving and two weeks before Christmas,  the market typically dies, as people turn their attention toward holiday plans and shopping.  So all this really means is that first quarter sales were up 8% over a dismal fourth quarter.  I wouldn't exactly call that "strong".  Furthermore, a "slowing expansion" just means that we are still expanding in inventory, just not as fast as before.  How exactly does that constitute a "strong start"? 

Another indicator of strength cited in the article was that "pending sales" were up, meaning there has been a first quarter increase in new contracts to purchase homes.  However, understand that a pending sale is NOT a closed sale, and these days, with tougher lending standards,  there are more potential buyers than ever who are being rejected for loans.  Thus, a greater percentage of these pending sales are falling apart before they can be completed.  The pending numbers may be grist for the Public Relations hyperbole mill, but no real difference is being seen in the closed sale totals.  And in Real Estate, closed sales are the only number that matters.

There is an organization called the National Association of Realtors (NAR), which is the leading advocate for Realtors and the Real Estate market in the United States.   NAR regularly sends lobbyists to Washington to promote legislature which will help the Real Estate industry.  For example, many of the recent bills that were passed to help homeowners who are facing foreclosure were collaborative efforts between politicians and these lobbyists.

I have no beef with NAR when it comes to their efforts in Washington, or the work they do in developing educational standards and ethical practices within the industry.  My problem is with their public relations hype and media predictions, which are dead wrong almost every time.  For example:

In October, 2005, David Lereah, the chief economist for NAR was quoted as saying,

"...housing activity will remain healthy for some time to come."

In April, 2006, NAR put out this statement:

"We can expect a historically strong housing market moving forward, earmarked by generally balanced conditions across the country and fairly stable levels of home sales with some month-to-month fluctuations."

NAR In June, 2006:

"Right now we are on course for a soft landing in housing"

NAR, October, 2006:

"The worst is behind us, as far as a market correction - this is likely the trough for sales..."

NAR, June, 2007:

"Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year."

NAR, November, 2007:

"It is possible for even higher home sales activity than we're forecasting if buyers regain their confidence."

Don't they paint a pretty picture, folks?

But what about this picture?!


Remember in the TV show, "Dragnet", when Joe Friday would say, "Just the facts, Ma'am"?  

Well, here are the facts (at least in my neck of the woods): 

Inventory levels of homes are still sky high, there is an extraordinarily high number of foreclosures and short sales, and prices continue to decline.  Mortgage standards are the toughest they have been in years, with lenders demanding higher credit scores and larger down payments from buyers.  The no documentation, stated income, and zero down nightmare loans have all been eliminated, or sharply curtailed to only those with enormous down payments and the highest of credit scores. 

Strong first quarter?  Let's see.  In my city, the closed sales from May were down 5% from the previous month, and a whopping 39% from May of 2007! 

Now let's expand out to National levels.  Mortgage rates are the lowest in some time?  Guess again.  In January, 2008, the average Freddie Mac 30 year fixed loan was 5.78%, but more recently the average 30 year fixed loan had risen to 6.17%. 

The facts are that even areas that had previously held their ground in home prices, such as Seattle, are now seeing price declines as well.  In New York City, where prices have been remarkably stable in recent years, the first quarter of 2008 produced a year over year decline of 21%.  Job cuts in the financial industries are now taking their toll on home sales.

The facts are that mortgage applications across the U.S. fell for a third consecutive week, reaching the lowest level in over six years.  Applications were down almost 20% from last year.

So a lot of gloom and doom.  But does this mean that nobody should buy a house right now? 

Absolutely not!  But there are some conditions.  If you are able to find a very good deal, especially on a foreclosure or from a motivated seller, and you are paying a price that is well below the current market level, then long term you should be fine.  You have down side protection in case the market drops any further, and you are probably getting a price that is at or below what was paid in 2003 or 2004. 

The point that I want to make is that both NAR and those who have an axe to grind in the Real Estate industry are colluding to create the false impression to the public that the worst is over, that buying any house right now, (even the ones that sell at full market price) is a great opportunity, and that the market will be right as rain again by the end of the year or so. 

But it just ain't so!

So if you are considering a home purchase in the near future, do it because you need more room, or you're tired of renting, or you hate living with your parents, or for some other good reason.  But don't do it because you believe the NAR television commercials, or those sappy little articles in your Sunday paper.  You will know when the worst is over when you don't see as many homes sitting empty, with For Sale signs littering the land.  What I would really love to see is a Time Magazine cover, exclaiming "Is Real Estate Dead?"  Now that would be a great contrarian indicator!

Given what I have written here, it may surprise you, but I myself have recently begun to search for, and am considering buying investment properties, for the first time in three years.  With prices declining, the ratio between rents and home prices has narrowed considerably.  It has been years since an investor could buy a property with 20% down in which the rent will more than cover the mortgage and other expenses.  In a few weeks I will be taking a road trip to explore an area where the prices have been absolutely slashed, looking for foreclosures and other bargain priced homes that can generate positive cash flows.  More on that later. 

For now, all I want is just a little bit of integrity from my own industry.  No more overly optimistic spins.  No more outrageously incompetent predictions.  No more embarrassing fluff pieces in the Sunday paper.  I just want somebody from NAR, or my fellow Realtors to publicly say something like:

"Things still look rather stinky to us!  Recent developments in the economic and political areas are giving us hope that things will improve over time, but we don't know exactly how much time it will take.   For now, let's just suck it up and remember that Real Estate markets are cyclical, and after a time of greed and irrational exuberance, we are now in the middle of what could be a negative couple of years before improvement arrives.  The stock market went through it in 2000 and now it's our turn.  Just hang in there and wait for better times!"

Yeah, I know, the chances of that happening are about equal to the chances of a June blizzard in Florida.  But I for one intend to keep telling it like it really is.  Let's just hope they don't kick me out of the local Realtor board for insubordination! 

If they do, maybe I can still make a living selling those snappy looking time machines...




Ethan Roberts
Contributing Editor
The Tycoon Report