Figures released last week indicated a contraction both in housing starts (lowest level since 1997) and in median sales prices.  Median prices fell in 73 metro areas in the final three months of 2006.  These results on the back of one of the strongest housing booms in U.S. history.  The sober view is that concern is not unwarranted.

Glance at today’s USA Today, however, and you’ll get the idea that everything is rosy; unless you dig into the article you might come to the conclusion that some positive numbers have been release.  The main headline on the front page of the Money section (three of our columns - use your imagination if you're looking at the online version): Realtors expect home price recovery.  The first quote is from David Lereah expressing optimism that a “discernable improvement in both sales and prices” is already upon us. 

Real estate professionals will know who David Lereah is, but some investors might not.  Lereah is the Chief Economist for the National Association of Realtors®.  The NAR is the industry group charged with keeping the real estate market moving, keeping prices on the rise – and most importantly ensuring that sales volume stays high, which means more commissions flow into Realtors® pockets. 

A statement from Lereah isn’t "news", it’s a sales pitch.  Lereah is just doing his job – trying to convince homebuyers (and investors) that everything is rosy.  The problem is that consumers will read an article like this one – prominently published by a high volume national news source like USA today, and mistakenly conclude that it’s news. 

So what does it mean to me?  Two things to consider as an investor.

• Consider the source.  It’s fine that the National Association of Realtors® has a voice in the press, but don’t give their forecasts and vies the same weight that you’d give to an impartial market expert.  The NAR has a point of view that they’re trying to sell. 

• Look at the underlying numbers.  Even a bad article like this can yield some information.  National median sales price for an existing single family home is down 2.7% nationwide from the same period last year – so instead of trending upwards with inflation (the natural path) the market has entered into a quantifiable correction.  Ask yourself “is this enough.”  What’s your view on your own area. 

• Be skeptical about some “information” you get from the popular press.  I note that on the same page of the USA Today they have a color photograph of the new Ford Edge HySeries prototype SUV, a fuel-cell plug-in hybrid that the paper refers to as “pollution free”.  This is simply wrong.  A car that you plug into your wall to recharge runs on electricity, and the vast majority of electricity in the United States is produced by power plants that burn hydrocarbons – primarily coal and natural gas.  Electricity isn’t free, and it can’t be produced unless you burn something, which creates pollution.  Fuel cells run off of hydrogen, which in itself is clean, but is produced as a by-product of natural gas – again, a hydrocarbon. All cars pollute – it just makes us feel a bit greener if the pollution is coming from the smokestacks of a remote power plant or hydrogen facility instead of the tailpipe of the car we’re driving.  A tangent from the topic of real estate?  Perhaps – but for me it’s a clear example of the fact that the press will simplify issues until they’re simply wrong – and that’s dangerous for an investor.  

The real estate industry slowly but surely continues it’s march towards a new, yet-to-be-defined future state – driven by technology, new players, new business models, and ever changing customer expectations.  Against this backdrop the National Association of REALTORS® continues it’s quest to block the freight train of progress, this time lauding H.R. 111, the deceptively titled Community Choice in Real Estate Act which was introduced Thursday by Congressmen Paul Kanjorski (D-PA) and Ken Calvert (R-CA).

In a statement released today, Pat Vredevoogd Combs, the NAR Presidents, states:

• Realtors® provide extensive personal attention to consumers during the lengthy process of buying a home.  It would be difficult for banks to provide that type of counsel because of conflicts with their other business objectives.

Wow, where to start?  First, banks already offer advice on a vast array of services, and they do this well because of the brutal competition between them.  Sure, it’s probable that some banks will do a shabby job of representing real estate customers – and these are the banks who won’t manage to make any money doing it.  The phrase “extensive personal attention” is buzzword filler.  The consumer will determine the standard, and whatever market player meets this standard will capture the business.  This is the very definition of competition.

More importantly, the banks will jump in if and when it's profitable to do so -  which means using synergies to pull cost out of the system and using this to compete with customers based on price (lower fees).  Beware an industry group who seeks legislation to keep a class of competitors out of the market in the name of… drum roll…competition. 

But perhaps I’m not being completely fair here.  It’s hard to knock the NAR for backing their friends Kanjorski and Calvert – after all this legislation is unambiguously a threat to Realtors®.  In corporate America “synergies” is a code word for “redundancies”.  This isn’t corporate America we’re talking about here, but the concept remains the same. 

The real problem, though, is that all of the arrows in the NAR’s quiver look kinda similar.  Storm clouds on the economic horizon?  Just send David Lereah out to tell everyone that everything looks rosy! .  Sales are down?  Proclaim that now is the perfect time to buy and sell a house!  .  New technology players offering new options?  Use your leverage to muscle ‘em out. 

Facing an evolving market with a brave face and a vision isn’t an easy thing, but 1.3 million Realtors® out there are waiting for some direction.  Bad idea.  Some regional associations are taking matters in their own hands, but there’s trouble on the horizon for the rest. 

David Lereah, the chief economist for the National Association of Realtors, gave a view of the future of the housing market this week during  a meeting of agents in Saratoga Springs.  In Lereah’s estimation the decline that started in the third quarter of 2005 was a needed cooling off period, but would be short lived. Interestingly, he stated that a rebound would occur in the next three to six months in most regions, but prefaced this prediction on the condition that the Federal Reserve shows restraint in raising interest rates. 

Lereah’s most quotable statement was in reference to the median price for a single family house in San Francisco: $740,000:  “Who can afford that?”

Read the full article here

Note that prices vary widely by region.  As a sample, according to NAR figures Houston averages $152k, Orange County $726k, Boston $421k, Chicago $278k, and Springfield $112k.