THE BLOG
06/12/2013 11:24 am ET

Well, That Was Ugly

Better late than never, I suppose, but it looks like the long awaited real estate downturn has finally turned a corner. On what appeared to be the real estate version of the movie Groundhog Day, where the movie's protagonist, Bill Murray, wakes up every morning only to realize that the day will be exactly the same as the previous day, this real estate malaise has been an ugly never-ending economic hell. And finally, ding-dong, the witch is dead.

But just like it takes five miles for an airborne 747 passenger jet to turn around in mid-air, this elongated real estate recession seems to have a mind of its own -- and may not be over, technically speaking.

Not only is this lingering real estate implosion like a catholic nun who enjoys corporal punishment, this real estate recession is hell bent on being sadistic -- in a sort of "I told you so" type of way. One can imagine it saying: "Try not to mess up next time when the real estate gods bestow upon you, the Mother of all Real Estate Booms." In fact, you could almost hear him saying (the real estate god has to be male, since I can't imagine any female being that cruel) -- and snickering aloud while he looks askance, "What part of "Real Estate Bust" don't you understand, you petulant unlearned greed-centric fool."

As someone who has witnessed a few real estate boom and busts over the past two decades -- professionally and personally, I am hesitant to pay heed and listen to the born again effervescent real estate prognosticators who seem to have a sudden case of selective amnesia when it comes to the recent real estate implosion only a mere 50 to 60 months ago.

Many of those who are unseasonably optimistic that happy days are here again, are relying on isolated markets that are doing uncharacteristically well in terms of appreciation. As an example, markets like Phoenix and Vegas over the past year have clocked in 22 percent and 20 percent appreciation spikes, respectively. This is according to Standard & Poor's/Case-Shiller Index, which tracks prices in the 20 largest metropolitan areas. These metropolitan areas are known as MSA's (Metropolitan Statistical Areas), of which there are no less than 388 nationwide! Hence, relaying on only 20 markets as a representative benchmark is shortsighted and non-representative of actuality.

It wasn't too long ago that Phoenix and Vegas were the bastard twin toddlers of the real estate market. Now, having been the bridesmaids' for a painful five years (always a bridesmaids', never a bride) -- these two markets are not only brides with ear-to-ear grins, but suddenly everybody's BBF (for the culturally un-hip, BBF means, best-best-friend).

Real Estate Economists Perspective
The news media all too often rely on indices like the S&P/Case-Shiller Index as the holy grail of real estate prognostication. Like it's some sort of goddamn crystal ball. Which is really what it is, since it lacks the aptitude and intellectual capacity to take in other germane considerations. Don't take my word for it. According to John Husing, an economist based out of Los Angeles, CA: "This is not a natural recovery. A lot of what is driving demand has nothing to do with a normal housing market. It's an anomaly caused by huge investment firms. This has kept families out of the housing market."

Mr. Husing seems to be on something, since markets like Vegas are outliers at best, which is fitting, given Vegas has always been a land of illusion, wherein reality is often suspended and superficially morphs into truth. Ergo, what happens in Vegas should actually stay there. Nobody wants the gift that keeps on giving.

In terms of institutional graft, once this institutional money has had its fill, and suddenly the internal rate of return being sought does not neatly mesh into their economic models, then what happens? It means the appreciation arc that is now being reported goes back down to normal post mortem recovery trends.

To be clear, nothing is wrong with investors -- institutional or otherwise, feasting on a scorched earth real estate landscape. The problem occurs, when news media reports the fundamentals incorrectly and suggest a "full" recovery has occurred -- it's goddamn blasphemous.

Media Men, similar to their television counterparts, Mad Men, can't help themselves when it comes to writing the next great scene in a Greek tragedy. The story arc is just too irresistible.

The CEO of ForeclosureRader.com, Sean Toole, recently made the astute observation, as quoted in Reuters.com, "Real housing recovery should be based on people living in homes in which they have a healthy equity stake, and a mortgage lending market not underwritten by the federal government in the form of loose monetary policy." As Mr. Toole further noted, "We have artificially low interest rates, and low supply", which means, "You do get an increase in prices, but I don't think you have a real recovery."

And other industry experts seem to be in agreement with Mr. Toole. According to Ken Fears, an economist with the National Association of Realtors, it is not unreasonable to expect market distortions to undermine long-term health. "While tight inventories can drive price growth, excessively stringent supplies can create headwinds to demand as consumers are priced out of the market or left with inadequate options."

The Market End Game
Ultimately what the market is creating, are a great deal of distortions that are not reflective of a healthy recovery. It would be analogous to giving a cancer patient a clean bill of health, only days after showing signs of improvement and with the cancer in remission.

A little caution is needed before popping open bottles of champagne in celebration. As it is in some markets -- although not all markets, since I hate to overgeneralize like some drama queen real estate economists -- who love a great comeback story, many markets are not being transacted with normal buyers and real estate brokers. In fact, many are institutional buyers, who -- bless their heart by the way, have revolutionized a transaction model where they are buying several hundred, to several thousand homes at a time.

As it turns out, normal home purchasers are also being out-bided by large institutional investors (i.e., hedge funds, pension funds, insurance companies), who have been on a buying spree for scratch and dent single family homes over the past year. And their hold strategy is to rent the distressed units into rentals. Don't be mistaken, this is a good thing. However, at the end of the day, it perverts reality, and a distorted reality leads to bad decision making amongst elected officials, which leads to fuzzy legislative decision making in curtailing safety nets that are in place to help consumers of all hues.

Either it be poor white folk in the deep south who need extended unemployment insurance -- that many states are eagerly ending, to a paltry of black Americans in inner cities that are still in need of Section 8 housing vouchers that are being pinched by sequester cuts, this is not good economic policy. So many others of the working poor and working middle class who are eligible for so called "entitlement" programs for government assistance -- that they paid into by the way, are in fact entitled to a return on their investment, just as much so as an upper class wage earner is entitled to his six figure tax deferred 401K monies that was built up over a lifetime of work.

Before reining back these programs, including refinance and principal reduction programs that are apart of the Making Home Affordable Act, lets' make sure the boat is sea worthy before cutting loose the anchor and setting it a float. Numbers lie, hungry bellies don't.