A Market Still Hostage To Meaningless Data

The stock market did not fall apart at the seams, but it did very poorly on news that existing home sales dropped last month by 2.7% to a rate of 5.1 million. That was down from a figure of 5.24 million in July. The National Association of Realtors put a brave face on as it released the figures. “Home sales retrenched from a very strong improvement in July but continue to be much higher than before the stimulus,” said Lawrence Yun, NAR chief economist.

The news was particularly hard on financial stocks, which are counting on a real estate recovery to improve their fortunes. Many of these shares, particularly Fannie Mae (FNM) and Bank of America (BAC), decreased in price.
The reason for concern beyond the August numbers is obvious, but it is still a sign that the market can be spooked very easily. Monthly economic figures can be subject to large revisions, so they are often not even directionally accurate. That does not seem to matter in the case of housing.

The first interpretation of this information from most economists is that housing is bad because employment is bad. The statement is as obvious as it is true. Unemployment will certainly hit 10%. It will certainly stay above that level through most of 2010. Consumers do not have money that they are willing to risk to buy houses or gifts for the holidays. Too many people believe their own jobs are not safe or are using their incomes to help friends and family who are out of work.

All of the clichés about housing trends are correct, and, at the same time they don’t go far enough.
Housing is going through a multi-generational shift which has little to do with the economy although the recession certainly magnifies this effect. Millions of people, a huge balloon of those born in the 1950s, are moving into early old age. Many of these people own their homes. Many no longer have mortgages. Most have homes that will yield them a lot of cash at the closing of a sale. That allows these homeowners who are around 60 years old to be patient. They have no need to panic, in almost every case.  That should keep the supply of housing a little tighter and help a recovery in prices.

There are the young, not very young, but 25 or perhaps 30 years old. They are in many cases considering buying a first home. Their end of the demographic map of adults is where the problem is. No matter how much housing prices drop, they do not want to buy the homes of their parents, aunts, and uncles. Their elders do not have to offer low prices for their homes.

There is a third group that is adding fuel to the housing fire. These are people who have to sell their houses. A man in a rush to get out from under an onerous mortgage will drop his price. A buyer smells the panic and wonders what it wrong.

It is the panic in the market as much as the level of unemployment that is keeping home sales down. Buyers who have access to home loans and even believe that their jobs are relatively safe sense that a market in which there are pockets of panic is a market that could still go much lower. People are selling houses for reasons that would not have appeared rational just three years ago. The tectonic shift is unnerving.

It used to be that people who bought houses bought them to live in. That was true of most people who are 60 now. People who purchased homes after 2000 often looked at them as places to live and as investments. Home prices were rising fast enough so that they offered a better return than stocks. Even better than that, they were sources for capital. A homeowner with a home equity loan could buy a new car or pay for a college education. The tremendous increase in housing prices even created a large group of people who were the antithesis of the 60-year-old owners—people who did not want to live in their homes; they just wanted to buy and sell them for a profit.

The speculators have been wiped out. The owners with large home equity obligations are in trouble. That leaves the nearly-old who are in no hurry to offer their homes up at bargain prices and the young who are too timid to take the risk of a bargain.

Douglas A. McIntyre