Rickety Analysis
By Rich Toscano
Tuesday, Feb. 27, 2007 | The San Diego Union-Tribune's latest housing editorial, Rickety Market, is so misleading that I just can't resist taking a few shots at it. Let's dive right in at the beginning. Here's how it starts:
We've been hearing from so-called experts for at least five years now that the San Diego County housing market was going to crash any day, perhaps sending the economy into recession. They were wrong, and property owners have enjoyed the greatest, most widely shared expansion of wealth in the region's history.
And we're off to a good start with the classic straw man offered up by stubborn housing optimists, a group that I fondly refer to as “the permabulls.” The claim is an exaggeration, for one thing -- I'd really like to see a five-or-more year old example of an expert predicting that the San Diego market was going to "crash any day."
Timeline aside, this oft-utilized but completely ineffectual argument misses the point of the early warnings on housing. Some experts did start raising alarms a few years ago. The typical message, however, was that prices were reaching unsustainable levels and were likely to eventually adjust back to their fundamentals. The fact that prices went even higher before finally turning down did not render these analysts wrong, unless they had attached a premature timeline to their predictions.
In fact, the people who were wrong were the "so-called experts" (to use the U-T's smug phraseology) who insisted that home prices would never decline. And as I recall, the U-T gave the "real-estate-never-goes-down" set a lot more airtime than they gave less optimistic analysts.
Moving on:
"But recently a genuine threat has emerged. Lenders around the world have been burned by rising numbers of Americans who can't make their mortgage payments."
This is the type of permabull revisionism that we can expect a lot more of in the months and years ahead. It goes something like this: "We were right to predict infinitely rising home prices, but who could have foreseen Factor X?" Factor X might be further mortgage defaults, employment weakness, a consumer slowdown, outmigration, or any number of other problems. It will be discussed as if it was some entirely unpredictable exogenous shock, and that the bullish analysts' predictions would have been spot on had the X-Factor not come into play.
The truth is that the X-Factor will not be some external shock as they'd have us believe, but a likely if not inevitable result of the excesses of the housing bubble.
In this case, the subprime credit crunch is treated as some sort of bolt from the blue. Never mind that a self-reinforcing cycle of higher defaults leading to credit tightening leading to even higher defaults, and so on, has been long predicted by those who were paying attention to happenings in the mortgage market. Clued-in analysts certainly didn't know when the lending and borrowing party would turn into a hangover, but many of them forecast, correctly, that it would happen eventually once prices stopped appreciating.
As a matter of fact, this predicted wave of exotic loan defaults has always been one of the cornerstones of the bearish case for housing, and has been accordingly ignored by the housing cheerleaders at the U-T and elsewhere. Until now, that is, when we are being told that this threat -- the first genuine threat to the housing market, according to the U-T -- has just recently emerged.
The editorial then does a decent job of describing the problems in the subprime lending arena, but goes off the rails again when the time comes to sum up the impact of the burgeoning credit crunch.
However, most homeowners in San Diego County are sitting on plenty of equity. Home prices have tripled in a decade; housing assets have more than doubled in inflation-adjusted terms.
Homes have tripled in price, and doubled in inflation-adjusted terms, so that they are now further from rents and incomes than they've ever been. This is supposed to make us feel better?
It shouldn't, and not just because of the obvious implication that real estate continues to be hugely overpriced. The contention that most homeowners are sitting on plenty of equity is irrelevant, because these flush homeowners won't be doing the selling. The people who are forced out of their homes due to loan resets or job loss -- or the banks who have taken over these people's properties -- are the ones who will be selling homes and setting prices in the years ahead.
Resale houses have given back just 3.6 percent of their value in the last year – far from a crisis.
A 3.6 percent decline in the median price (which isn't the same as homes having "given back just 3.6 percent of their value") is just fine, but only if homes prices have stopped falling. They haven't. If anything, comparing the previously mentioned overvaluation of homes with the thus-far minor decline in prices should be a cause for concern, not the comfort that the editorial apparently intends to offer.
And breathless reports of percentage jumps in defaults mean little; absolute numbers remain small.
Now this is just ridiculous. According to the county of San Diego, as reported by the San Diego Daily Transcript, there were 1,436 notices of default in January. This is higher than at any time during the last housing bust, including periods of heavy local job loss, and the parabolic rise in default rates suggests that the trend towards more defaults remains firmly upward. How can the U-T possibly justify the statement that absolute numbers of defaults remain small?
Wrapping things up:
Absent widespread job losses, few prominent economists foresee a market collapse.
In fact, the chief economic threat may emanate from Sacramento and Washington, where lawmakers are talking about regulations to limit sales of "risky" loans.
To suggest that regulation is the chief economic threat to the housing market is to ignore the fact that in the end, it will be the capital markets that make the final decision on whether to tighten lending. This tightening process has already been kicked off not by regulators but by rampant defaults on loans that never should have been made.
The hand-wringing about stricter regulation simply serves to set up another potential fall guy to blame if home prices drop further -- another X-Factor, if you will. The U-T editorial staff and their long-time bullish brethren can blame all the unpredictable (to them) factors that they want, but it won't change the fundamental truth: the housing bust now under way is the inevitable result of the speculative mania that preceded it.
Rich Toscano hosts the Nerd's Eye View -- a fact-based research blog on San Diego housing and economics. Rich is a financial advisor by day; by night he writes about the San Diego housing market at Piggington's Econo-Almanac. E-mail Rich at: rich.toscano@voiceofsandiego.org.
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