The Contrarian: Housing values are not falling

This blog is an open forum, but it's dominated by a like-minded crowd: those of us who believe the housing and credit bubbles have popped, and housing prices are declining -- rapidly in some areas, gradually in others.

Today a contrarian view from a guy I respect, mortgage broker and Fed watcher Lou Barnes. He argues that we have our collective head on backwards, at least regarding trends in national housing prices:

"The financial press is having a wonderful time ginning-up a housing depression, this week shrieking about new home-price data: “Decline in Home Prices Accelerates” (WSJ), emphasizing the Case-Shiller index, down 8.9% in ’07.

More: " Case-Shiller is designed to magnify home-price declines. Mr. Shiller ... has spent the last several years misapplying financial-market principles to real estate, gleefully predicting a 30-40% national crash in home prices."

More:  "The design flaw: it captures only sales of homes, obviously heavy with distressed transactions. For the authentic story and great methodology, visit www.OFHEO.gov and its All-Transactions House Price Index, which includes repeat appraisals in refinances, by definition free of distress. By that measure, national home prices in the 4th quarter rose by .8%. Prices fell in only 11 states, and in only five of those were declines in excess of one percent. See page 21 of the report for its critique of Case-Shiller."

More: "At the micro level, some spots are in horrible trouble: of OFHEO’s 291 Metropolitan Statistical Areas, 15 had price declines last year in the 10%-19% range (all CA and FL). And the national market is decelerating: of 39 states with positive appreciation in the 4th quarter, 32 had gains of less than 1%."

Thanks, Lou.
There's a very big drawback to applying OFHEO data to Los Angeles: It is pretty much irrelevant to this market because it tracks only conforming loans, those under $417,000. Still, Lou is making an argument about national housing price trends, and for that purpose OFHEO is worth discussing. So discuss away. Send story tips to peter.viles@latimes.com.

Comments

[sunsetbeachguy]

Lou is an industry shill and is taking the LA LA LA LA I can't here you approach.

There is a reason he is a mortgage broker and not something respectable.

[Sam]

Lou, is that a bottom I hear you calling?

Check, Ill add him to the long list before him.

Incidently, Lou, you are right housing is falling because of a lack of credit. Consider, however, that inappropriate credit issuance caused housing to explode in value. Time for a rewind all the way back to 2000 values and probably even further. Remember, markets over correct in both directions.

[Digitalian]

Barnes is less than objective and for him to arrogantly claim to identify flaws in other valuation methods and then counter with a method riddled with flaws is laughable.

[arroyogrande]

Besides the "conforming loan only" problem stated by Peter, there is this:

"The Contrarian...Housing values are not falling...At the micro level, some spots are in horrible trouble: of OFHEO’s 291 Metropolitan Statistical Areas, 15 had price declines last year in the 10%-19% range (all CA and FL)."

Translation: Housing values are not falling (nation wide), but CA and FL are in 'horrible' trouble.

Not much of a contrarian in my view...more of a contrarian on the severity of the downturn.

"By that measure, national home prices in the 4th quarter rose by .8%. "

I wonder what his prediction is for Q1, 2008...

As for the true housing bulls, not to beat a dead horse too much, but remember the Option-ARM and Prime-ARM resets taking place starting mid-2009 going all the way to 2011, and the tightening up of down payment requirements, such as Wells Fargo's 25% down payment in "severely distressed" markets. Suddenly, median income level and ability to pay starts to mean something as far as house purchases are concerned...

- arroyogrande

[BottomFisher]

Denial phase is a long and tough period for the RE shills

[Paul Hiller]

I admit that the blogs like this one are a bit of an echo chamber. Still, it doesn't make us wrong.
On my own little patch [Coachella Valley] we have 9500+ active listings, and for the month of Feb. we averaged 12 sales a day. That does include a fair share of the new homes sold, as more of the new homes are going into the multiple. This is obviously a huge imbalance and as financing and down-payment requirements tighten, the situation regarding prices will deteriorate. The NAR loves the phrase “all real estate is local". Guess what? Financing isn't.

[LouDubb]

Hey Lou,

Why not buy more houses and apply for some loans if housing market is so great? I mean, you can probably still buy 10 houses with stated income and 0% down, right?

Yea, there's no housing crash and no credit cruch.

And I'm sleeping with Jenna Jameson

[allen gillespie]

Barnes' main claim is that statistics on sold homes overstate the decline. However, the OFHEO data itself show the difference between the sold house index and their broader index including appraisals over a year is 0.4%. Regardless of who is right, this is making a lot out of nothing. You've got to come up with better, Lou.

[150 multiple choice questions]

What kind of A-H$$$ is relying on appraisals? Why, it's Lou Barnes and the OFHEO... either complete idiots, complete liars, completely paid to make it look like housing is in great shape or all three...

[NationalBubble.com]

Maybe Lou should watch this video:

http://tinyurl.com/2ecana

[Joseph F]

Contrarian?

A contrarian is someone who bets against prevailing sentiment.

You quote a shill who misrepresents established fact.

That makes him wrong, not a contrarian.

[Dan]

Still, we are going through a process of price discovery for where the market would have been if the non conforming loan never existed. It has 2-3 years yet to run.

[tom]

why waste people's time wtih this nonsense? Look at
the headlines Lou. There's no more teaser rates.

[mbob]

Hey Arroyogrande, how about if we modify a figure of speech to "....not to beat a dead realtor..."

To misquote the great M. Ali, "....no horse ever sold me an overpriced dump."

Samuel Clemens once opined "...there are lies, dam*ed lies and statistics." He was right.

Vermont, South Dakota, North Dakota, West Virginia, Maine et al did not join in the bubblefest. So, these kinds of states are not suffering the hangover effect. Average them in and voila: no crisis. But remove them and things don' look so hot.

[anon1137]

Who cares if home prices aren't falling in South Dakota?

[Jimmyz]

Shiller is one of very few who have been honest, objective and correct on housing. If you watch his interviews, he is careful to tell only what the fundamentals indicate to him and not that he is predicting anything.

Lou says that Shiller's design flaw is that he captures transactions that are heavy in the distress area. In a normal market this would be a flaw. However, if the market is a market of distressed transactions then by definition that is the market.

[Hans]

To say that appraisals tell a completely different story than sale prices is to put some doubt on the value of the appraisals. To be sure, distressed sales usually happen at low prices, but other than distressed properties, the market clearing prices are what should be the basis of the appraisals. If there is an offset between these and the sale values, then the professionals doing the appraisals should really get better data for their comps.

[shockg]

As for the true housing bulls, not to beat a dead horse too much, but remember the Option-ARM and Prime-ARM resets taking place starting mid-2009 going all the way to 2011, and the tightening up of down payment requirements, such as Wells Fargo's 25% down payment in "severely distressed" markets. Suddenly, median income level and ability to pay starts to mean something as far as house purchases are concerned...

You mean the resets on the 5-10 year ARMS that will reset to a rate not much higher than the existing rate?? The horror of going to 5.5% to6%!!! Of course that is after 5+ years of raises to help offset this "alarming" reset. lol

[Stump Barnes]

Lou Barnes claim that the Case-Shiller Index is flawed because it includes "distressed properties" is akin to claiming that yesterday's decline in the S&P 500 was flawed because the decline included people selling their stocks at a loss. What nonsense. The selling of "distressed properties" is all about price discovery in a real market, not artificial appraisals riddled with conflicts of interest.

If people had spent more time thinking about the real estate market in the same terms as they think about other financial markets, perhaps they would have realized that asset prices can and do frequently decline, and that excess leverage cuts both ways.

There is a reason that Joe Six-Pack can only get 2 to 1 leverage on stocks. To think Joe Six-Pack could handle 100 to 1 leverage on real estate was insane. This was the 1920's all over again.

[Brian]

"You mean the resets on the 5-10 year ARMS that will reset to a rate not much higher than the existing rate?? The horror of going to 5.5% to6%!!! Of course that is after 5+ years of raises to help offset this "alarming" reset. lol"

The "reset" will be the jump in payment of the Option ARM when they reach the 110-115% trigger after years of making the less than interest owed negatively amortizing amount. Stats show fully 75% of Option ARM borrowers make the minimum payment. LOL,

[steve]

It seems like the issue of fraudulent appraisals is casually left out. In the current situation in LA requires 25% down on an average home price of $500-600k, are buyers going to look at appraisals or at recent closings before they plop down $125-200k cash? I say that if someone is smart enough to have saved $200k cash, they'll be smart enough to ignore the rampant fraudulent appraisals that are commonplace in LA.

[amir]

appraisals are junk. Always have been, always will be. The reason the banks are in such trouble is because they appraised real estate loans incorrectly.

Schiller's data is far more correct because it relies on actual sales. It's all bull until someone actually puts his hand in his pocket and pulls out some cash.

The only problem with Schiller is that it's behind the curve. Houses that are declining in value or haven't sold will not appear in his data until they sell. That's why I think the picture is actually worse than in Schiller's current numbers.

[Daniel]

What is new about this? If you are on the coasts, your price rockets up and then rockets down. Thats historical cycle, prices here are falling, just as they are in Boston and New York. If you are in Chicago or Nashville or Cleveland on the other hand, prices are flat or up a percent or two, because they don't get the 20% appreciation years that the coasts do.

If you like housing roller coasters, live on the coasts, if you like slow, steady but extremely low appreciation, likely as not barely keeping up with inflation, live in the middle somewhere. This is hardly new information.

D

[N Your Dreamz]

Seems like Lou is saying that there are two classes of home prices: those that sell and those that don't. And only the ones that are sold lose value, while homeowners who are smart enough to keep their properties off the market (and perhaps whistle in the dark the next ten years or so)won't suffer any loss in value. That's one hell of a stretch to make an argument (that he can't possibly win in the end).

[waitingforgodot]

I think you should carefully read Barnes's full commentary before dismissing him.

E.g., The key to this unpleasant situation: housing is sinking because of credit starvation, not the other way around, housing wrecking credit markets. No matter what it takes, the supply of credit must be restored to housing and the rest of the economy."

He is no pollyanna, and while perhaps overstating his case is trying to refocus attention on what he believes to be the underlying issue: the collapse of credit. If anything, his implied vision of the future is worse than a lot of the bloggers here, who are focused solely on housing prices. I could be wrong, and I could be a bad reader, but he's no RE permabull who is arguing that now is great time to buy.