Questioning the Conventional… in Housing

I always look to the headlines of the most prominent business news sites to get an idea of what the media – and by definition most others – are thinking. I must say that Marketwatch has been relatively conservative over the past few weeks. This may also be due to the fact that Marketwatch displays many commentaries and hence a broad range of thinking (Marketwatch and Bloomberg for example, display the daily price of gold – something USA Today and CNN have yet to do).

Recently, when scanning through CNN’s Money Section I saw exactly what I was looking for. An article entitled “Study says home prices not falling“. This I had to read, and once I did the fun began too.

“The Office of Federal Housing Enterprise Oversight (OFHEO), said its housing price index grew 4.3 percent in the first quarter compared with a year ago.” “Earlier this month, the National Association of Realtors reported the latest national average home price dropped 1.8 percent in the first quarter compared with a year ago”.

So you mean to tell me that there’s actually an organization out there less reliable than the NAR?

“The NAR simply calculates the median sale price for each housing market. The median is a midpoint: it eliminates the impact an unusually large number of extremely expensive or very cheap properties would have on mean averages. The values that NAR comes up with, however, do not take into account differences in the mix of homes sold. If more starter homes in lower-income neighborhoods were sold, and fewer larger homes in expensive neighborhoods changed hands, it could skew median prices lower.”

Well, welcome to the world of averages Les. And guess what? The DJIA and S&P are also averages. Just because the Dow makes 5% doesn’t mean you’ll see a dime. The same bodes for any number – the Savings Rate, Income rates and Gas Prices are all averages. As a matter of fact averages actually tone down what’s really going on. It’s a matter of diversification. When you are averaging millions of homes, the price will fluctuate and hence decline at a much more reasonable and less volatile rate. So when the NAR says that home prices fell 8% this means that the average home could have easily fallen somewhere between 4% and 12%.

“The OFHEO hopes to get a clearer picture of house values by comparing selling prices of specific homes over time.”

So now instead of averaging just the prices we have today, they are attempting to average in also prices of the past. This seems “brilliant” considering that one can also create an index that would account for the $500 Billion in ARMs that are set to adjust over the next two years. The historical return on stocks is 10% but that says nothing about what we can expect for the future.

“The agency draws its data from Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase mortgage loans”

If you believe such things. Again why again would a “government-sponsored” organization want to announce bad housing numbers?

Then I see the next article “Why you still can’t find a builder

“Home building is in free fall but construction employment is steady, a sign housing won’t tank the job market.”

First of all, let us question this simple yet profound logic. Home Building in free fall means that builders are stopping or slowing their developments, or have already completed them. This is taken to mean that because things have not been bad they will continue to not be bad (double negative). This must make sense.

From what I’ve seen recently, and this is promoted by the fact that New Home Sales were down 8 percent, is that Builders (unlike Existing Home Sellers) have come to realize that this bull market in housing is over. This is due to both lack of demand (Mortgage Rates, Prices) as well as a surge in Supply (even if housing prices fall you still want to finish your plan). This is leaving Builders with the only alternative which is to break even and sell at the pervailing market price. Sellers have yet to catch on.

Now common sense (which by all means has never been common in instances such as these) says that when these developments begin going into the red or complete, the demand for construction workers and builders will be substantially diminished. Employment is thus a lagging indicator not a leading one. Bear in mind that the employment numbers aren’t due till tomorrow.

“Still, experts in the field suggest several reasons for the strength in construction employment despite the housing downturn. Some of it is due to the shift of workers to non-residential construction jobs, some of it is due to employers not wanting to let go of skilled craftsmen in case the homebuilding market picks up…”

“Non-residential Jobs” we’ve always had these, so why should any event distort them. “In case the homebuilding market picks up…” once again we see a decision being made on sentiment and not on the facts. This downturn may last years. So why again would any employer be paying salaries to workers that are for lack of a better word “unemployed”?

“And part of it may be due to the large use of immigrant labor in the construction industry. If contractors and subcontractors were not reporting off-the-book employees to the government during the housing boom, their absence now won’t be missed in the figures.”

But a few lines later it explains this very phenomenon together with modern day American capitalism…

“The Labor Department estimates that 25 percent of construction workers were foreign-born in 2006, up from 23 percent in 2005.”

We’re not doing a quarter of the work! Immigrants are. David Kelly, an economic advisor to Putnam Investments, who makes himself sound like an idiot then says…

“All construction employment estimates are missing many of the illegal immigrants working in the sector, and that therefore the gains in employment were probably greater than reported during the housing boom, and the drop of employment now is also probably greater than the numbers show.”

So 1-1=0. Very good Mr. Kelly. You are now certified to be an economist. He then reclaims his sanity by noting…

“It can take a while for builders and subcontractors to start to cut back staffing when there’s a downturn. Seiders said builders will often try to cut hours before cutting staff.”

No comment because we noted this in the beginning of our article – Employment is a lagging indicator.

“You try to keep things rolling along as long as you can. You don’t want to lose your best carpenter.”

This sounds all too familiar to the “Hold those Yahoo stocks at $400 as long as you can. You don’t want to miss the next surge.”


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