I imagine David Blitzer trembles with nervous energy just before he joins conference calls. In his mind, I’ll bet he fancies himself the utmost authority on housing prices and national real estate trends. This week, the Chairman of the Index Committee at S&P Indices, in a tone that burst off my newspaper as moderately enthused, levied this decree: “This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation.” I didn’t see the news conference, and I wasn’t in the room when he delivered this news, but I imagine he was wearing his traditional black cloak with his particularly shiny sickle in his left hand. The grim reaper of real estate has spoken, and has proven to the world that anyone who has purchased a home in the past year, or ten, should be ashamed.
I do not know David Blitzer, but I’ll bet if I got him out on a boat on Geneva he’d warm up a bit. He might even trade in his giant black robe for some shorts and a polo shirt, and perhaps I could pry that sickle out of his left hand and replace it with a medium action spinning rod. Mr. Blitzer has been the bearer of much bad news for the housing market over recent years, and it seems to me that the news of a continued softening comes as pleasant news for him. After all, if you’ve been forecasting the demise of the markets, it would be only natural to take delight in the correctness of your own prophecy. If fire belches from the sky in 2012 and consumes the earth, don’t you think at least a few Myans will be happy about it? I know if I were Myan I’d probably hate the burning alive part, but I might take some parting solace in the accuracy of my ancestor’s prediction.
I don’t believe the market is any sort of a double dip, not in the least. The market was artificially buoyed by the first time home buyer credit for a while, but ever critic of that credit knew that once it expired the markets would have a difficult time recovering from the lack of added impetus. The markets didn’t slide, correct, and slide, as a double dip would indicate, rather they slid, moderated, and slid. There is nothing dramatic about this, and the entire situation is nothing more than a market bouncing along a bottom trying to find something to build off of. And speaking of building, much continues to be made about the low housing start numbers. There must be some differentiating about what is good for the stock market and what is good for the housing market. This key difference is overlooked by analysts and headline writers alike. Low housing starts are bad indicators for the economy, as profits at building firms will be down, this is obvious. But low housing start numbers are actually a huge positive for the actual housing market.
Excess supply fanned the fire of our real estate meltdown, and the absorption of supply is what a recovery will be based on. The major source of supply is the REO vacuum- a potent factor in the market that all but rules most individual markets and has essentially consumed our national psyche. Yet the supply of new inventory, that inventory that is being built and introduced into a market that is not potent enough to absorb even the existing supply is a real danger. The lack of additional supply is healthy and expected, and anyone wishing to see the housing market return should rejoice in the low housing starts numbers, even if it means continued pain for our builder friends who continue to face difficult times.
The idea that the real estate market and its “Blitzer Double Dip” will somehow lead to a renewed economic recession fails to consider one key component of real estate sales. The National Association of Realtors is scrambling of late, producing mostly ineffective ad campaigns that talk about how Realtor’s are good and necessary, and how something like 41,842 jobs are created for each house sold. I made that number up, but I do recall the ad might say that two jobs are created for every sale. How can this be? In any sale, many people get paid. Governments get paid through transfer taxes and capital gains taxes. Title companies are paid, surveyors are too. Municipalities are paid past due water bills and past due taxes. Brokers are paid. Insurance agents are paid. Movers are paid. The guy who puts the sold stickers on real estate signs gets paid. You can see how this whole trickle down thing actually does work, if only you’d consider the humble real estate transaction. Milton Friedman would have you consider the pencil, I ask that you look to your home.
And if these people are paid, and this is good for the economy, does the price drop of one or two percent hurt this process? Does a slip in sales price of a percent here or a percent there significantly impact the economics of a transaction? Nope. REO sales are bad for neighborhoods as they are bad for pricing, this is not profound. But those nasty REO sales are good for one thing- the economy. If an investor or an individual buys an REO, even at a low price, it will generally be bad for price indexes, but enormously bullish for the economy as a whole. The absorption of inventory is always good for housing, even at low prices, but the true benefit lies in the transaction itself. An REO will more than likely require remodeling or renovation, or at least a bucket of paint. So in the list of economic beneficiaries to these maligned transactions, be sure to add Home Depot and Lowes and your local Ace. In that, a sale that represents a low number, and makes Mr. Blitzer and friends salivate at the prospects of another quarterly loss in their pricing index, can still provide a boost to the economy.
Beware the mixed news in these ongoing headlines. There is reason for concern, this is obvious. Just remember that low housing starts and their sensationalized headlines bode well for the housing market even as they harm the broader economy, and lower prices brought on by REO sales hurt the housing market but provide liquidity that benefits the economy. Lake Geneva? We’re beyond spoiled when it comes to the housing crisis, but a little national context never hurts one’s understanding of local markets. Mr. Blitzer, your sickle is duller than you think.