Behind the headlines

Quick comment on the LA Times story (12.16) re the increase in home prices and activity. Nice headlines, but does it mean a recovery is on the way or even already beginning?

Not likely. I was chair of regional MLS for 5 terms and spent considerable time attempting to convince the press that statistics must be carefully considered before conclusions are drawn. In this case--a rise in prices means that those houses actually closing escrow have a higher average price than those selling in the previous month. Does that mean values have gone up 1.8%---NOPE! It doesn't really mean anything about the real estate values as a whole--just a slice in a long continuum. Same with numbers of sales. More is better than less, but in terms of recovery we really need to know whether the sales that are occurring are representative of the Mainstream Real Estate Market or clustered in the REO, Short Sale, Desperate Seller, First time home buyers with tax breaks categories.

Here's my take on where we are and what may be a rude awakening in Q2 of 2010.

At any time there is a pool of prospective buyers and another pool representing the inventory of homes available for sale. Buyers move into the pool when they actively commence a search (hopefully after getting qualified with a lender). They move out of the pool when they quit searching or buy a house.

The pool of buyers is small and getting smaller. Anyone who bought in the past 2+years isn't likely to be buying again FOR A LONG TIME--unless they won the lottery. No equity build up makes trading up a bit tough. So those buyers are out of the pool for several years. Because of persistently difficult underwriting, many potential buyers aren't able to qualify and won't be able to until lenders loosen up. Lenders are now passing up some relatively low risk loans because they can make money pursuing other activities (mostly on Wall St). Net result is that new buyers entering the pool are a trickle.

The number of houses available for sale will continue to be augmented by a steady flow of short sales, REOs and people who just need their equity and can't get it with no real ability to achieve secondary financing. What's a HELOC??

So we have a shrinking pool of buyers and a growing pool of available houses. That alone is reason to be skeptical regarding a real estate recovery.

Consider this though---the activity with REOs, short sales, desperate sellers, etc. has little to do with the real estate core activity typical of a healthy real estate market--it's really off on another path. It's a stretch of faith to assume that this alternate path will eventually roll up an on ramp in 2010 to smoothly merge with the Mainstream Real Estate Market (which is a pretty empty freeway at present).

In Q2 the public may finally see that the headlines aren't describing progress toward a healthy real estate market, but progress along a separate path that is largely decoupled from the road to a real estate recovery. The psychological impact of that discovery could be pretty interesting for us all.