Wednesday, March 6, 2013



This month the National Association of Realtors (“NAR”) announced soaring median house prices USD 174K up from USD 155K the previous year and a mere 1.75 million homes, 4 months supply remaining in inventory. The message is clear buy now before it is too late. The NAR is one of the main sources of “irrational exuberance” for the US property market.

Believing this assumes one has a very short memory of previous forward looking statements by the NAR such as those in 2005-7 that the housing market could never collapse. Indeed David Lereah the NAR spokesman making them at the time was fired, and when interviewed by the media admitted he was pressured into making optimistic forecasts, and left to be the fall guy when the market collapsed.

Could history be repeating itself for Lawrence Yun, Lereah’s successor?

US Residential Real Estate Market Overview

Based on the National census the market consists of 133 Million homes. The average price, not the median price, based on Zillow statistics, is currently USD 152K. This means that the total value of all US residential real estate is approximately USD 20 TRILLION

Of the 133 million homes, 75 million are owner occupied, 40 million are rented, 4 million available for rent and 5 million are secondary residences. This leaves 9 million homes totally vacant.

From the above, there are estimated to be 14 million residential mortgages nationwide currently underwater. Some 5.5 million homes are already either delinquent or in foreclosure and this trend is accelerating.

Imagine the impact on prices of all the excess inventory above, some USD 2-3 Trillion in value hitting the market. One can see why Bernanke has tried desperately to re-inflate the bubble and save his banking buddies from the massive loan losses they would inevitably have incurred, by passing the burden to the taxpayer.

This is why Fannie Mae and Freddie Mac, the mortgage lender GSE’s were effectively nationalized and now issue virtually all new mortgages in the US. It is also why the FED is buying up to USD 45 Billion in mortgage backed securities monthly from the banks and other lenders.

This shadow housing inventory has a major impact on new construction where volumes are now 400,000 per month up from 300,000 over the last 3 years. This represents a 70% drop from the peak of 1,400,000 per month in 2006 and is back at levels last seen in 1982.

The product mix has also changed, where instead of building Mac mansions, current new construction is concentrated on low cost student apartments or lower middle class housing units frequently government financed.

The only bright light in selected areas, South California, New York, Boston, Nevada, Arizona etc. is that private equity/hedge funds and high net worth individuals have also been investing in high end properties. These are mainly buy, to let at good yields, when the investor's sources of finance are either cash down, or close to 0% interest loans. This is a game for the rich and the well connected, and normal buyers are excluded. This increase in supply will also push rentals down in prime areas, driving the lower quality property prices down even further.

The NAR members, are specifically exempted by Congress, from Money laundering regulations. Thus real estate purchases are frequently little more than a vehicle to recycle drug money.

In conclusion, it is mathematically impossible for many reasons for the market to enjoy a broad based recovery. There is a massive shadow inventory of properties. Too many owners who would move up the ladder are currently underwater on their loans. The first time buyer is saddled with massive student loans and no cash and probably no job. More children are moving back with their parents. Baby boomers faced with sharply declining retirement prospects are offloading large and secondary residences. 

This is why the NAR and the FED whose interests are directly aligned are working hard to entwine the trusting investor in their spider’s web of deception.

As always “Caveat Emptor” buyer beware.


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