Mar

4

The current Administration is very concerned about the poor and the middle class. But little concern is expressed for the upper middle class or as the Administration likes to call them 'the rich'. One wonders if there is a downside to this asymmetric outlook.

About a month ago the National Association of Realtors again called for an easing of terms on the large jumbo mortgages. Their argument is that the upper end of the market has seized up. In fact the data bear this out. In the upper end very few homes are being sold because of the difficulty in getting financing. Only cash buyers are nibbling and there are very few of them.

For example in the Seattle market in some areas there are 30 homes for sale but only one will sell in a given month at the high end. At the high end prices are not necessarily coming down at the rate the Case Schiller index claims. The sellers are not making concessions on a comparable same house basis. Rather, what is happening is that they are financially able to hold on hoping for some light at the end of the tunnel.

So why is there a disconnect between what the Case-Schiller and other median type indices say and the ground truth? Let's take a simple example of a neighborhood with 5 homes sold at the following prices (in thousands of dollars) :

500
600
700
800
900
Median = 700

Let's say that was a year ago. Now pretend that the exact same houses are sold for the exact same prices with one exception. There are no transactions above 750 because of mortgage financing issues. So now we have only homes below 750 that are sold at the same prices at which they were purchased:

500
600
700
Median = 600

So comparing medians one might superficially conclude that in the last year that home values have dropped from 700 to 600. But we know that the prices in fact are unchanged from the year before. The point here is that the drying up of mortgage financing at the high end has created an appearance of a greater decline in real estate prices than has actually occurred. The fix is simple and obvious. We must relax rules on high end mortgages and allow that market to function again. The interesting thing is that it will reverse the statistical anomaly and create the perception of a real estate price increase. Most importantly it will not cost the government a single dime in bailout money.

Jason Thompson writes:

J TAs a prospective home buyer that has thus far legged the trade the right way, I've been doing a lot of counting in the arena of luxury homes — following the higher end of the market in my current locales, Chicago and Reno/Lake Tahoe, and a future destination, southwest Ohio. Though I'm leaving Chicago as I've tired of the nanny state and sky-high taxes (10.75% sales tax anyone, or how about a $125 dollar parking meter fine?) I admit I'm going to a place not much better, Ohio, though at least there I will be next door to my kin. While what Dr. McDonnell says about the state of the jumbo mortgage market and the lack of compromise on pricing back to reality is largely true, his observation that easing credit will fix this is not.

Rather, there has been a collapse in the pool of buyers, combined with a glut of custom built homes by small builders that have populated the exclusive suburbs of this country for many a moon. Further delinquency checks call in to serious question the belief that these "homeowners" (they don't own anything, rather are renting from creditors) have the staying power to remain in their homes.

One market I am now knowledgeable about is Indian Hill, the most exclusive suburb of Cincinnati. Median income is $188K per household (its $47K per for Ohio overall) and median home value was $1.1 million in 2007. There are around 6K residents, enough of whom wish to sell their house such that there are 338 listed homes or prepared lots (80% are completed houses). Based on 2008 sales levels, Indian Hill has 11 years of home inventory, yet based on transacted prices, "values" are only down 18% from 2007 levels which were in-turn flat to 2006. To me this is beyond nonsense, especially when some smart sleuthing can determine 90+ day delinquency rates for loans in the 45243 zip code is rising faster than the DJIA is falling. Market clearing prices are likely 30-40% lower, just to adjust to the wealth effect, not to speak of executive level job losses and the imminent sale/forced merger of FITB.

Albeit it is a sample of one market, but it is in the Heartland of America and as Ohio goes so goes the nation, no? What rose-colored glasses should I be using if above not correct?

Kim Zussman comments:

It's relatively easy to look up foreclosures/REO in your area of interest. Realty-Trac sells lists of these (notice they don't call it "Reality"), and the ghost of Countrywide has about 20,000 nationally:

Prices won't bottom until there is no one left with money or interest to buy, and judging by the size of the recent bubble that could take some time. The wealth effect should work both stocks –> housing and vice versa.

Upscale homesellers of coming years have the same problem as stock-invested boomers: sell to whom?

One can quibble with Shiller's methodology or his optimism, but he is certainly on the short list of market timers of the millennium.


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