(This article first appeared in Real Estate Investor's Monthly.)
The National Association of Realtors® chief economist, David Lereah, has written a book that appears to be a direct response to all the "bubble" stories the financial media have been running in recent years.
Two comments up front. The Realtors® have an agenda. It is use the services of their members whenever you buy, finance, sell, or lease real estate, and do lots of buying, financing, selling and leasing of real estate. David Lereah is not going to deviate from that party line unless he wants to become the former chief economist of the NAR.
The other comment is that Lereah and the NAR do accurate, rigorous analysis. They mislead by "accentuating the positive and de-emphasizing the negative," but what they say is accurate.
Lereah says the current market is a once every other generation phenomenon: a long-term expansion of the real estate market. I am not sure I believe that. A generation is about 20 years. To say that what is happening now is the reincarnation of what happened 30 or 40 years ago seems unlikely to me. The country has changed too much.
I think restrictions on construction are a big force driving appreciation today; less so in 1965 to 1975. Population growth including immigration and increases in incomes are also factors. People make more money than they did 30 or 40 years ago even after adjusting for inflation. They want bigger and better homes as a result.
Lereah wants readers to shift some money out of stocks and bonds—ownership of which has become more widespread due to 401(k)s and such—and into more real estate like rental property. I do not think that’s NAR’s call.
On page 5, Lereah says, "No one can predict the future with any regularity and accuracy." Amen. The fact that that negates the whole idea of his book, however, is ignored as he moves on, having covered his butt.
Lereah says the costs of purchasing or refinancing a home have dropped precipitously. That would be nice, although I must say I have not noticed. It may be that I have not been active other than refinancing repeatedly. I kind of have the impression that commissions have declined about 15%, but that additional paperwork and regulatory requirements have compensated for much of that decline. Closings seem to be faster. I do not know that they are cheaper.
Certainly mortgage interest rates have been at what Lereah calls "generational lows." He has a chart of rates since 1972 on page 9. They were 7.38% then; 5.9% now. The peak was 16.63% in 1981. Those rates, which are totally unpredictable, have been a big part of the home price appreciation. Rates could rise tomorrow, which would make values fall instantaneously.
Mortgage underwriting has gotten much more intelligent. It used to be in the 1970s that those with good credit could get a mortgage and those without could not. All mortgages were fixed-rate. Twenty percent was the standard conventional down payment.
Now, virtually everyone can get a mortgage, albeit on terms that reflect their credit status. And there are a dizzying variety of terms and payment patterns. They are not likely to go away as low rates might, and they help buyers and refinancers and thereby make real estate more valuable.
Generation X is a concern. Lereah says there are 82 million Baby Boomers, but only 46 million Generation Xers. Part of the difference is the Baby Boom lasted 18 years (’46 to ’64) and Generation X is defined as an 11-year time span (‘65 to ’76). If you can wait for the Echo Boomers, born after 1976, there are 76 million of them.
Lereah says, "Notice in the housing data that home prices never fell." I take issue with that. As I have often said, NAR undercooks the books when it comes to appreciation rates. They do not acknowledge things like sellers taking their properties off the market when they do not like prices, changes in home size and quality, or the fact that in hard times, some of the market is foreclosures and such that do not generate Realtors®’ commissions or statistics.
There is no question, for example, that all real estate values fall whenever mortgage interest rates increase. You cannot generally see it in sale prices because of sellers withdrawing their homes and such. But it is arithmetic. An increase in interest rates causes a decrease in values.
Lereah says, "Mortgage rates are expected to hover in the 5.5-8.5 percent range…" Is this the same guy who said, "No one can predict the future with any regularity and accuracy?" He was right the first time.
What is this word "expected?" By whom? What would they know about it? I love it when news organizations predict the unpredictable by taking a poll of persons who, when pressed, admit they do not know. "Nine out of ten charlatans agree, rates will stay low."
Lereah also welcomes various numbers that turned out to be, "higher than anticipated." Are we going to apply the principles of the politicians’ "expectations game" to real estate analysis? Like Bill Clinton proclaiming himself "The Comeback Kid" when he finished second in a presidential primary in 1992? Are we now going to believe the forecasts of guys who "anticipated" inaccurately low numbers last go-around? Higher-than-anticipated figures are nothing more than a manifestation of lousy anticipating.
Lereah repeats the old shibboleth that investors in the 1970s and early 1980s bought on the tax benefits rather than the "economics of the deal." The tax benefits were the economics of the deal back then. I learned from the Realtor®s’ CCIM courses no less, that you should focus on after-tax numbers. In the 1970s and early 1980s, the after-tax numbers were significantly different from the before-tax or "economics of the deal" numbers. If you tried to buy based on before-tax numbers back then, you would always have been outbid for the property. JTR