The National Associate of Realtors wants you to know that “buying a house this year” would be a “good move, both for your family and [for] building your long-term wealth.” To spread this message, they’re running commercials on CBS during the NCAA Final Four Tournament. They’re pushing people to their new website: housingmarketfacts.com. You can see the new commercials there….just follow the “watch TV commercials” link on the lower right side of the page.
I’ll assume my readers are smart enough to know that the National Association of Realtors is a biased source. Their constituent realtors only get paid when real estate transactions close. But to give you some color on these guys, here are a couple of books written by their former Chief Propagandist, er, Economist David Lereah.
The whole title reads: “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.”
The sequel’s title reads: Why the Real Estate Boom will not Bust–And How You Can Profit From It. How to build wealth in today’s expanding real estate market.”
Lereah is no longer with the NAR.
With this in mind, let’s consider the claims in their commercials and on their website. [Fair warning: there's a creepy spokeswoman that hovers to the left on the home page. You can mute her, but she'll keep smiling at you on an endless loop. Anyone remember the hologram of Princess Leah in the first Star Wars movie?]
- “Buyer opportunities have NEVER been better.” I wonder if the NAR has considered the excess inventory of new and existing homes on the market. With housing supply still FAR outweighing housing demand, prices will continue to fall. Even the CEOs of Fannie and Freddie said house prices still have farther to fall. So if you’re planning to buy a house, it makes sense to wait a year, when you’ll be able to get another 10, 20 or 30% off the asking price.
- “Family conditions often outweigh market conditions.” I don’t doubt that owning property can be good for a family, but with house prices falling fast, I think market conditions BECOME family conditions. To the extent that you risk losing a big chunk of your savings, it makes sense for your family if you wait for prices to return to normal relative to median income.
- Speaking of the family savings, the NAR flashes a statistic in their commercial claiming “60% of the average homeowner’s wealth comes from home equity.” The fine print below shows where they got that stat: from a HUD report. Published in 1995.
- But let’s consider the wealth argument, as I don’t doubt that the majority of American’s “wealth” is in the form of home equity. I’ve always wondered about the way we define wealth in American society. Consumption being the root of the American Dream, I think we confuse having STUFF with having WEALTH. After all, to afford that McMansion and the second/third family cars in the driveway, Daddy often has to extract the wealth in his home through a home equity loan. IMHO, true wealth is literally “liquid net worth.” Net worth is assets minus liabilities. Cash good, debt bad. “Liquid” net worth is the ease with which your assets can be turned into cash.As the employees/shareholders of Bear Stearns can tell you, there’s a difference between wealth on paper and cash in the bank. Housing wealth, that is equity in a home’s value, is wealth on paper.
- The website is full of real estate piffle from a “2006 NAR Study.” My favorite: “Homeowners are more likely to vote and they volunteer time for political and charitable causes more frequently than renters.” Hmmmm.
- And then there’s this:
- “Homeowners benefit from the power of leverage. Over 10 years, a $10,000 investment in the stock market at a normal 10% market rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5% would return nearly 5 times the stock market return, at $110,300.”
Wow. You’d think it would be responsible for them to explain the downside risks of leverage while they’re at it. The leverage argument relies on the real estate myth that “prices never go down.”
But what if prices DO decline? Let’s use their example. You take your $20,000 of life savings and make a 10% down payment on $200k house today, which means you have a mortgage of $180,000. Even after house prices have declined significantly nationwide, many experts still claim house prices have much further to fall, perhaps another 20%. What happens to you if the value of your house falls 20% by next year? At that point it’s worth $160,000. First of all, your equity is wiped out, and you still owe close to $180,000 on the house.
The truth of the matter is that leverage is very dangerous. It magnifies returns, to the upside AND downside. To use their analogy, if you’d put that $20,000 in the stock market and watched it decline 20%, you’d still have $16,000. With the house, your $20,000 is wiped out entirely AND you owe an additional $20,000 on a mortgage over and above the continuing value of the home. Essentially, you’ve lost $40,000.
This isn’t just a hypothetical. Thousands of people are walking away from their homes because they owe more on their house than it’s worth. Leverage has wiped out whatever “wealth” was invested in their home.
Still think there’s “never been a better time to buy a home?”