NAR Propaganda

March 23, 2008

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: 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.

From 2005:

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.”

From 2006 (published even as the housing bubble started to burst):

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?”

[for those interested: a buy vs. rent calculator and a closer look at the math of renting vs. buying]


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LOL, I really like this part: “7 years on a job….7 years in a marriage…7 years in a home….these are norm.”People are changing jobs at an ever-increasing rate. 7 years? Not likely, in the corporate world at least.And I love the pessimism of spending just 7 years in a marriage. True or not, it’s just sad.

Posted by Rachel | Report as abusive

Rachel….you may not like the statistical facts, but they are what they are…facts are facts…deal with them, sad as they may be…Anyway, to all, I have come back to follow up on the thread. “More NAR BS” is really not an accurate lebel, as I beleive my knowldge-base and experience factor go well beyond NAR. Yes, I am a member of NAR. But I have also been a mortgage lender, a title S&L officer, an underwriter and a licnesed appraiser. And, I read a lot.The focus of my posts is two-fold: (1) To corrent the record with facts; and (2)To state my opinions to the group for reasonded consideration and comment. Basically, I want to help the discussion.First, imagine a large stadium setting, such as the Rose Bowl. Next, imaging the person sitting in the most distant seat is announcing on the game for one of the media companies covering the event, with his color analyst. Lastly, imaging they are all near sighted and suffering from myopia. Something tells me that “call” will be problematic.This is how I view much of the commentary on the current situation in mortgage lending and real estate. Many commentators, too far from the playing field, viewing the blur as it were, and making simplistic comments and rendering poorly supported criticisms about a very real situation…and missing much of the game. I do work on Main Street, in the mortgage and real estate industries. I sit with home buyer prospects, and have since the late 70’s, and discuss with them on the whys and wherefores of the transition from tenancy to home ownership. Or, I meet with existing homeowners and discuss refinance and debt restructuring choices. I hear the details of their situations, the realities of the lives and explain options currently available. Like the infamous Jim Cramer rant…”they just don’t get it” …he was right…THEY don’t get it! THEY being the folks in the cheap seats.It is my view that, if a homeowners income is at or above the level it was when they purchased their home, or last financed their home, then all is probably ok. It is my view that, of those who are in trouble, the vast majority (in the high 90% range) have suffered significant income discounts of 30% or more…and that is not a story I ever hear. This is not a subprime, ARM reset, 100% LTV problem…it’s not a housing problem. It’s really the economy, and about household income, and negative changes taking place. As I see it, housing is a victim, not the culprit. The real culprit is not the free market…it’s radical, poorly formulated , market manipulation. Were there some housing issues developing…assuredly, YES. Had the response been more measured and responsible, would the issues have developed to the point we are at today…most assuredly, NO.Case examples:Case #1: I had a Hispanic client who was working as a roofer. He was grossing about $7,000 per month is 2005, according to his paystubs. He did not possess a green card, but his sister did. So, she bought a house as a second home. She did not need th3e property…or want it…or intend to pay for it. It was the brothers plan to pay for the house, and to eventually correct his legal status. Today, with the construction downturn, his income is $3,000, and Arizona has its Employer Sanctions Law, which is making employment difficult. Is this a sub-prime problem or an income problem.Case # 2: Client and his wife buy a home in 2006 with a conforming, 100% LTV, fixed rate loan. He delivers rock and decorative stone. Today, with the construction downturn, he no longer has a job. They may leave their $1,100 payment, for a $900 rental, in part because they can save on fuel prices as their home is 20 miles (one way…80 mile per day for both) from their new jobs. Is this a 100% LTV problem or an income problem.Case #3: Retired teacher and his teacher wife build a new luxury home. They gross over $100,000 with his retirement, his income from a second teaching job with the University of Phoenix, his wife’s income and payment from the State of Arizona for children he adopted. After 12 years with the UoP, his $25,000 job was cut and now they are in trouble. Their current loan is a 5/1 ARM, with 2 years until reset…unfortunately he will lose the home before then…by sale or foreclosure. Is this a reset problem???I have more case studies from my closed files like these, but you can see the trend developing. In 2005, the FIDC did a study entitled “Boom Does Not Always Follow Bust. The conclusions of the study were that, after price run-ups, prices stagnate, rather than burst, unless there is a severe economic reversal (like in Detroit…like in the construction industry…like what may be developing right now) or an event like Katrina. In most case, the housing market stagnates until income growth regenerates…then housing prices take off again. The study was done in 2005, so none of the radical reversals in lending practices and guidelines were included in their model. Just like homebuyers and borrowers, they looked the current playing field, the “rules of the game” so to speak, and made a buying/borrowing decision. Would their decision be the same if they had the benefit of knowing “today’s playing field” …but that is hind sight.With proper management of the mortgage markets during this transition to stagnation by the highly paid, but myopic rulers of the GSE’s, Wall Street and the major lenders, we could have avoided all of this current mess. The mortgage industry spent 7 years, or so, developing guidelines and then spent 7 months, or so, undoing it all. Had we amortized our way back to a more reasoned approach to lending, we would have not have the “shock and awe” problem we are now faced with. How does housing impact the economy? Robert Shiller, he of index fame, did a paper in 2006 which compared the impact of increases in stock market prices and increase in housing prices on consumption in the general economy…this study was multi-national. It concluded that stock market increases had no correlated impact on the consumption in the economy. He did, however, conclude that housing had a strong correlation to consumption in the economy. Shiller concluded that a 10% growth in housing prices had a 1.1% increase in consumption patterns in the economies he studied. Which begs the question, ”What will a 10%-20%, or greater, downturn in housing values do to consumption and the general economy?” When housing works, it seems, the general economy works well. When you crush housing, and believe me, for some reason housing is being crushed…nothing in the economy will work. This snowball is out of control now, in part due to an artificially magnified downturn in the real estate and mortgage markets, which is the result of an inadequate understanding of the various dynamics involved by those highly paid individuals, and pundits in the cheap seats. The The old saying, “whether you rent or own, you pay for the space you occupy” really applies now…everyone will suffer, renters and homeowners alike, in some manner, in some degree. ALL homes will go down in value…all interest rates will be affected…all participants in the economy will suffer. ALL! So why all of the negative and angst driven posts regarding housing…we all should want housing to work and work well.Market timing…when to cross the line and make a buying decision, is really personal It is not necessarily math driven as far as prices go, or interest rates for that matter. The concept of low versus high counts to a degree. There are also intrinsic considerations. The need or desire to own a home, the capacity to actually accomplish the purchase , and confidence in the future . These considerations are as critical as is the math. Real estate is not a slide rule industry… the process is not that precise. Warren Buffet, referenced above, only has to be right once a
year, or so, he says, when describing his investment process. He has a long term vision, like homebuyers. Homebuyers have to be right once, too, and wait for seven years…the average term of ownership. But, being right is more than just about the price…

Posted by JohnP | Report as abusive