LOOKING BACK: Some of Us Saw The Housing Collapse Coming

I hate to say "I TOLD YOU SO!" (actually, I love it!), but I saw the real estate meltdown coming before the experts did. Back on Feb. 21, 2005, long before the meltdown, I reviewed a book by David Lereah,  who in 2005 was chief economist of the National Association of Realtors (NAR). He left the post in 2007 (see the entry at the end of the review). 

Since my Parallel Universe column -- elsewhere on this site today --deals largely with real estate, I thought a trip down memory lane would be appropriate...so here goes.

February 21, 2005
 
BOOK REVIEW: Economist Says There's No Danger of Housing Melt-Down; Says Media Exaggerates 'Bubble' in 'Are You Missing the Real Estate Boom?'
 
Reviewed by David M. Kinchen
Huntington News Network Book Critic

 
You would expect David Lereah to be a cheerleader for the housing industry: After all, he's the chief economist for the National Association of Realtors in Washington, D.C. 
 
In his new book "Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade - and How to Profit from Them" (Currency/Doubleday, 288 pages, $19.95) he body-slams the news media for a stream of stories suggesting that double-digit annual price appreciation of single-family houses in select markets portends a crash in housing prices like the one in 1989-91. 
 
In fact, he says that buying a house - or two or three or even more - will continue to be a better investment than buying stocks and bonds for the foreseeable future. I hope the folks who are tinkering with Social Security don't hear about that! Lereah is a fine Ph D economist who writes about housing in a way a lay person - or even a veteran housing journalist like this reviewer - can understand. I receive his regular reports as a member - and as a past president (1984) of the National Association of Real Estate Editors. 
 
As a reporter who covered housing steadily from 1970 to 1990 and off and off and on since then, I've made a few conjectures about housing appreciation, or inflation, if you will. I've been a homeowner since 1977 and believe in homeownership for those who meet the requirements. It's not for everybody, as many recent college graduates who've moved back with their parents have discovered. 
 
I'm sure Lereah, who distinguishes between residential housing and commercial real estate in which pros like Donald Trump get burned, has his heart in the right place. One problem, which he readily concedes, is that only a few markets have substantial housing price appreciation, and he lives in one: Fairfax County, Va., outside Washington, D.C. West Virginia is notably lacking in areas with substantially housing price appreciation, with the possible exceptions of Putnam County and some areas of the Eastern Panhandle. If you don't live in the choice areas, you're out of luck as far as many of his investment tips are concerned. He discusses ways, such as REITs, that those in lower appreciation areas can benefit. They can also buy investment houses in hot growth areas - and experience the dubious joys of long-distance property management. 
 
In the interests of journalistic fairness, I discovered a report from RISMedia in which housing economist Richard DeKaser, chief economist of Cleveland-based National City Corp., studied 99 U.S. real estate markets and found housing "bubblettes" in one-fifth of the U.S. housing stock. 
 
"Bubblettes" are defined by DeKaser as areas with "home premiums in excess of 20 percent, a metric that may indicate future price corrections." Potential "bubblettes" include a city most people have never heard of, Chico, Calif, where a buyer will pay the highest premium at 43 percent. (Chico is a college town more than 100 miles north of Sacramento). Premiums above 20 percent can be found in San Francisco, Los Angeles and Miami. New York is at 16 percent and Chicago is at 11 percent. Chicago is the home town of both my parents, the first city I worked in after graduating from college in 1961 and a place where buying a house makes great sense. Boom and bust cycles like those in California are anathema to Chicagoans. 
 
DeKaser examined what home prices should be, "controlling for differences in population density, relative income levels, interest rates, and historically observed market premiums or discounts," according to the RIS article by Beth Bresnahan. 
 
Among DeKaser's undervalued markets are Salt Lake City, with a 23 percent discount; Memphis at -20 percent; Macon, Ga. at -17 percent; New Orleans at -14 percent and Houston (America's most affordable big city) -11 percent. Dallas, another overbuilt metro area, is also at -11 percent. 
 
Lereah and DeKaser agree on a couple of points, including the fact that residential housing has driven whatever economic recovery the nation has had since the stock market bust of 2000-2001. They also agree that housing appreciation substantially beyond the underlying inflation rate is limited to a relatively few areas - listed in Lereah's book on Page 240. Among the "haves" - areas with substantial housing appreciation - are Las Vegas at 52 percent (that scares me in a city with a lot of low-wage service workers); Anaheim (Orange County); Riverside/San Bernardino; San Diego; Los Angeles; West Palm Beach, Fla.; Miami, Washington, D.C. and a surprise, Portland, Maine, at 23 percent. I would have guessed the other (Oregon) Portland, but Lereah also includes the Maine metropolis in a list (Page 242) of metro areas experiencing boom times - a list that almost exactly coincides with the "haves" list on Page 240. 
 
Lereah's list of "have-nots" includes: Dallas, Austin, New Orleans, Columbus, Ohio, Detroit (which includes some of the nation's wealthiest suburbs); Syracuse and Atlanta. 
 
Fully 75 percent of the houses sold by members of Lereah's trade association are existing houses, so there's no arguing the importance of this market segment. I believe he underestimates (misunderestimates in Bush-Speak!) the stagnation of income for many workers since the 1970s. He doesn't address downsizing, which has thrown many people who should be in their peak earning years (ages 50-60) into the tender mercies of today's job market. The lackluster growth in jobs over the past five years is not something a cabal of journalists is making up (we're not that smart!) On Page 230 he deals frankly and concisely with such bread-and-butter issues as income, savings rates, consumer confidence, job security and "stored wealth." He also downplays the rapid escalation in property taxes in high-appreciation areas. I know that property taxes are deductible, but you have to pay them first, along with mortgage payments, hazard insurance, skyrocketing gas and electric rates, car payments, skyrocketing college tuition and a host of other costs not included in the deceptive definitions of inflation handed out by government economists. 
 
Maybe I take a Max Weber "Iron Cage" pessimistic outlook at the future, but I have serious doubts about the sustainability of the economy in the light of massive U.S. budget and trade deficits and the rapidly declining dollar vis-à-vis the Euro and other currencies. 
 
Advising people to invest in vacation houses and rental properties - as Lereah does repeatedly and forcefully in his book is easier said than done. The scandals at Fannie Mae and Freddie Mac - major sources of housing finance in the nation - will, in my opinion, make it more difficult for even fairly affluent people to make such investments. Why? Because lenders are tightening up their standards and making it more difficult to buy housing that isn't primary housing. While Lereah discusses the problems of dealing with tenants, I wonder if he has had hands-on experience - as my wife and I have had - in dealing with tenants on a daily basis. It's rough! 
 
If all these discouraging words haven't turned you off, or if you're looking for a readable look at housing today, I recommend "Are You Missing the Real Estate Boom?" 
 
(publisher's web site: www.randomhouse.com/doubleday/currency

Where is David Lereah now: From Wikipedia:

David Lereah is the President of Reecon Advisors, Inc., a real estate advisory and information company located in the Washington, DC area. Reecon Advisors is the owner and publisher of Real Estate Economy Watch, one of the industry's leading Web sites providing intelligence and information on the residential real estate market. The Web site has partnered with UPI.com to create http://www.upi.com/Real-Estate/. Dr. Lereah was previously an Executive Vice President atMove, Inc. and before that, Chief Economist for the National Association of Realtors (NAR). Lereah served as the NAR's spokesman on economic forecasts, interest rates, home sales, mortgage rates, as well as other policy issues and trends affecting the United States real estate industry.[1] Lereah was also the Chief Economist for the Mortgage Bankers Association during the 1990s and has testified before Congress on economic and real estate matters.

He received his B.A. in Economics & Marketing from American University, Washington, D.C. and his Ph.D. in Economics from the University of Virginia. He lives in Fairfax Station, Virginia.

Lereah has been criticized for encouraging the rise of the United States housing bubble. According to a blog quoted by the Chicago Tribune, "In October 2005 Lereah was busy calling the bubble believers 'Chicken Littles.' Many of the predictions espoused by the 'Chicken Littles' are fast becoming closer to reality. ... David Lereah has lost credibility because of his irresponsible cheerleading." 

Commenting on the phenomenon of shifting NAR accounts of the national housing market, the Motley Fool reported, in June 2006:

"There's nothing funnier or more satisfying … than watching the National Association of Realtors (NAR) change its tune these days. The latest news release from this sunny-Jim industry group finally fesses up to its past fiction, but even when it admits the bubble's going to pop, it can't muster the courage to just come out and say it. … the NAR is full of it and will spin the numbers any way it can to keep up the pleasant fiction that all is well. … [T]he cracks began to show in subsequent remarks from NAR 'Chief Economist' David Lereah. The head outfit that ridiculed the idea of a housing bubble for years is now crying for Ben Bernanke to bring it back. … It should have been completely obvious to anyone with a loan calculator and a glance at wage increases that those months of industry bubble denials were just wishful thinking."

Business Week also captured David' Lereah's  most famous quote:

"The steady improvement in [home] sales will support price appreciation...[despite] all the wild projections by academics, Wall Street analysts, and others in the media." David Lereah was Chief Economist at the National Association of Realtors when he said this. The day was Jan 10, 2007, just as housing prices steadily worsened falling even farther than many skeptics had predicted.


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