“My Two Cents”
By Andy Sutton
10/27/2006
I have never met a Chief Economist. I am not sure how I would stand up from a credential standpoint since I lack a Ph.D. I like to think, however, that what I lack in accolades I make up for in common sense. And the fact that I view the world from Main Street as opposed to Wall Street has to be worth something. While these may be weighty assumptions, I'm sticking with them.
Today I had the chance to read yet another article about housing. You can barely turn a page in any newspaper, magazine or watch the evening news without hearing something about the housing market. Small wonder; that market drives the entire economy. With the recent rises in interest rates and rapidly growing inventories of unsold homes there is a distinct tone of worry throughout Wall Street and more importantly, Main Street. Even more disturbing is the news that many homeowners have about as much chance of being able to continue making mortgage payments as I have of driving a Buick to Mars. This thanks to the all the creative financing that the mortgage industry has created to stoke the fires of equity-driven consumption. (For a more detailed explanation of equity-driven consumption, read my May 29th column : http://www.my2centsonline.com/issues/mtc_05292006.htm)
Against this backdrop, you can understand my outright shock as I read the comments of David Lereah, the Chief Economist for the National Association of Realtors (NAR) in the article on MarketWatch:
"This is likely the trough in sales, said David Lereah, chief economist for the realtors group".
Are you kidding me? He's calling the bottom already? Now I understand that he's as much a shill for the housing industry as he is an objective economist. But he is making a critical mistake here. And his mistake is that it takes a long time for ANY move in housing to occur simply because it is not a liquid market. For example, you can have a crash in the stock market take place in a day or week because people are a mouse click or at worst a phone call from selling stocks. It is a very liquid market. Granted, you may not get the price you want, but your sale will occur. Most brokerages even go as far as to GUARANTEE that a simple market order will go through. You get no such guarantee in housing. It can take months for a transaction to occur (as many people are now finding out). The effects of the excesses of this housing bubble will carry a tremendous lag and will take many months, if not years to work their way out of the system. And that is only true if the Fed and the Treasury let happen what needs to happen and these imbalances are allowed to correct themselves without interference. However, the chances of that happening are as good as Wile E. Coyote enjoying a roadrunner feast. The Fed and the Treasury have already laid out the battle plans to deal with any serious reduction in the nominal value of housing and if this week's numbers are any indication, those battle plans will be needed; and soon.
We are currently sitting on record levels of inventory and taking into account seasonal adjustments, those inventories are still rising. Sales are slowing, prices are falling, and housing STARTS were strong last month. The homebuilders are building into a housing glut. Defaults and foreclosures are up almost everywhere, interest rates haven't come down all that much, people have no savings to fall back on and Lereah is already calling the bottom.
Obviously, anytime you make a call on a crucial issue, you risk your credibility. Lereah is doing it by calling the bottom this early in the game, and I'm doing it by saying he's nuts. He's doing it to paint a rosy picture for the market and keep the iron sow afloat another quarter. I'm doing it because if even one person reads this and thinks twice before committing the equivalent of financial suicide by taking out an adjustable rate mortgage on an overpriced piece of property, it will have been well worth it.
Given the gravity of the situation the housing market faces, Lereah should not be calling bottom, he should be calling 'UNCLE'.
Andy Sutton holds an MBA in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.
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