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July 25, 2006

Five Stages of Grief
by Mike Shedlock

Before looking at the five stages of grief, please consider a medley of tunes that David Lereah, chief economist for the National association of Realtors, was singing on July 25th 2006. It's quite a collection.

Let's start with the MarketWatch article Existing home sales fall 1.3% to 6.62 million

The report shows a continued weakening in the housing market, with inventories up sharply while prices are softening.

The inventory of unsold homes rose to a record 3.725 million, a 6.8 month supply at the June sales rate, the highest since July 1997.

The median price has risen 0.9% in the past year to $231,000. It's the weakest price growth in 10 years.

What tune is Lereah Singing?

"I hope we are hitting bottom," said David Lereah, chief economist for the private real estate trade group, which is predicting sales of about 6.60 million this year.

Sellers should expect lower prices, Lereah said, adding that he wouldn't be surprised to see single-family home prices fall nationally.

Also on July 25, the National Association of Realtors reported Existing-Home Sales Flattening, Prices Cooling.

David Lereah, NAR's chief economist, said the housing market is flattening-out. "Over the last three months home sales have held in a narrow range, easing to a level that is near our annual projection, which tells us the market is stabilizing," he said. "At the same time, sellers have recognized that they need to be more competitive in their pricing given the rise in housing inventories. Home prices are only a little higher than a year ago."

What tune is it?

I think this snip best expresses the tune of the day. In fact it represents the tune of the day, day in and day out, 365 days a year.

NAR President Thomas M. Stevens from Vienna, Va., said opportunities have opened for home buyers. "People who were discouraged by the bidding wars that were so common over the last few years are finding more choices now," said Stevens, senior vice president of NRT Inc. "Relative to the five-year housing boom, this year is a buyer's market in much of the country with plentiful supply, along with interest rates which remain historically favorable, so it's a good time to buy a home."

It's always a good time to buy a home according to these cheerleaders.

If home prices have "flattened out" after a massive 5 year run, pray tell exactly what value is there in housing? Or have home prices rally fallen more that you want to say? If inventories are high and the top cheerleader is admitting "he wouldn't be surprised to see single-family home prices fall nationally", why should anyone be rushing into this market?

Home prices are 4-5 standard deviations above wages increases and 4-5 standard deviations above rental prices.

The truth hurts.

You know it is not a good time to buy, I know it is not a good time to buy, they know it is not a good time to buy, and FINALLY the public is starting to realize it is not a good time to buy. A very lengthy correction has only just begun. Yes, it's a better time to buy than a year ago, but only because prices have fallen more than anyone wants you to believe. That does not make this a good time to buy.

Five Stages of Grief

The Palm Beach Post is talking about the five stages of grief.

Thomas Lawler, a Virginia-based housing consultant, thinks South Florida's real estate market has entered what the respected "death-and-dying" psychiatrist Elisabeth Kubler-Ross called the first of five stages of grief.

1. "Denial in a previously hot real estate market occurs when a home listed at a high price doesn't sell quickly, even though just a few months ago houses sold in just a few weeks," Lawler says in his July 19 Lawler Economic & Housing Consulting newsletter. "The home buyer says, 'This is weird, but I'm sure it's just a glitch,' and does not alter his or her asking price.

2. "Anger occurs when, after a few months pass, the house still hasn't sold, and little interest has been shown," he continues.

3. "Bargaining begins as the home buyer starts to offer a few incentives, agrees to more open houses, starts to fix up the house to make it show better, and actually agrees to lower the listing price a bit.

4. "Depression starts to set in when the house has been on the market for about four months or so, and the seller realizes that his or her net worth simply isn't going to be as high as he or she thought.

5. "Finally, acceptance occurs when the seller realizes that homes prices have fallen; that he or she will not get peak price of what is now six months or more ago; and that if he or she wants to sell the home, the asking price needs to be adjusted downward considerably."

This process takes time, Lawler says, which is why home prices in hot markets that cool fast don't immediately start falling.

I agree it takes time. Far more time than the four months that Lawler is suggesting it takes for depression to set in. Depression does not set in after 4 months (except perhaps for flippers on the fringes). I think six years is more like it. In Japan it took 18 years. Why can't it take four, six, or even ten years here? It can and it likely will.

For the most part, we are probably still in the denial phase after 6 months to a year. If each phase lasts six to eight months we are in for a three year collapse. Given that this is basically a national bubble, and the biggest bubble ever, it would seem to me that 5-7 years minimum is more like it. Some people have not even hit the denial stage yet. Those people are still trying to flip, buy foreclosures, or buy the dip.

It's a long way down from here.
That is in terms of time, price, and emotion.
For most recent real estate gurus it will not be a pretty ride.
Nor will it be a pretty ride for those trying to make a living off of ever decreasing sales.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

Copyright © 2005-2008 Mike Shedlock

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