A Dose of Reality

David Lereah, Aug. 15, 2006

“Second-Quarter State Existing Home Sales Soften”:
“The quarterly report on total state existing home sales shows that the seasonally adjusted annual rate was 6.69 million units in the second quarter, down 7.0% from the record 7.19 million-unit level in the second quarter of 2005.

“The biggest increase was in Alaska, where existing home sales rose 48.6% from the second quarter of 2005. In Arkansas, the second-quarter resale pace rose 17.9% from a year earlier, while Texas experienced the third strongest gain, up 11.3%. Twenty-eight states and the District of Columbia experienced declines. Complete data for two states was not available.

“David Lereah, the National Association of REALTORS’ chief economist, said two sets of market conditions are apparent in the report. ‘When you look at states with high housing costs or that have experienced a prolonged period of rapid price gains, you typically see slower home sales,’ he said. ‘By contrast, states with moderately priced areas that have experienced healthy job creation are seeing sales gains — the economic backdrop remains favorable for the housing market, which is helping home sales to level out.’
David Lereah, Aug. 23, 2006

“Existing Home Sales Plunge to a 2-Year Low”:
“The ‘boom markets are cooling significantly,’ said David Lereah, chief economist for the [NAR]. Sales fell in all four regions…

“Some markets that never boomed are now weakening because of sluggish local economies…Michigan, Ohio, and parts of the Northeast.

“‘It’s important for the [Federal Reserve] to understand how fragile the housing market is, and how fragile the economy is,’ Lereah said. ‘The economy impacts housing, and housing impacts the economy.’
That last sentence is the key. It seems the reality of Lereah’s circular argument for these past several years, along the lines of “Housing won’t crash, because the economy is strong and jobs are strong,” is about to hit him smack in the face. The economy was strong and employment was growing because housing was strong. Housing fell first, just as many of us predicted.
Yet on the same day Lereah finally started saying a few things that actually made some sense, he quickly reverted to his normal self. Please consider some lowlights from another article the same day.

David Lereah, Aug. 23, 2006

“Existing Home Sales Down With Softening Prices”:

“David Lereah, NAR’s chief economist, said higher interest rates dampened sales, but that price softening is good news for the housing market because it is drawing buyers. ‘Many potential home buyers have been on the sidelines, some “kicking the tires,” but mostly waiting for sellers to compromise on prices and terms,’ he said. ‘Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it’ll likely take some months for price appreciation to rise.’
If ever there were total nonsense, especially in relation to other statements made on the same day, that paragraph is surely it. On one hand, Lereah is saying lower prices are good, while simultaneously bitching that “housing and the economy are fragile.” And what’s with this “softening is drawing buyers” nonsense? Where do the numbers show that?

Cheerleading From the NAR

From the same article, here is some heavy-duty cheerleading from the NAR:

“NAR President Thomas M. Stevens, from Vienna, Va., said most sellers continue to see excellent returns on their homes. ‘Considering that typical sellers have been in their home for six years, the average appreciation during that time is close to 60%,’ said Stevens, senior vice president of NRT Inc. ‘This demonstrates the value of housing as a long-term investment — the longer you own, the better your return.'”

Mr. Stevens, I think you need more than a dose of reality. Housing up 60% in six years is describing a bubble. The longer people hold their houses now, the worse the return. This is likely to go on for years.

Toll Brothers, April 18, 2005

“The New King of the Real Estate Boom”:
“But can this magical market really defy gravity much longer?

“Shockingly, despite his paranoid questions and years of hardscrabble experience, Bob Toll’s answer to that question is a resounding yes. For Toll, what looks to many people like pure craziness is perfectly normal, a reflection of a new supply-and-demand equation that will last a long time. He’s an outspoken believer that, yes, the world really has changed this time. That the traditional boom-to-bust housing cycle is now a smooth upward climb. That housing prices will keep rocking practically, well, forever. ‘We’ll reach the point Europe reached 20 years ago, where families pay 45% of their income on housing and married couples have to live with their parents for years before they can afford houses,’ he says. ‘Prices will keep going up in double digits for years.’
Toll Brothers, Aug. 23, 2006

“Housing Slump Proves Painful for Some Owners and Builders”:
“‘It would be difficult to characterize the position of home builders as other than in a hard landing,’ says Robert Toll, chief executive of luxury home builder Toll Brothers Inc., which reported yesterday that net income fell 19% in the third quarter ended July 31.

“In his 40 years as a home builder, Mr. Toll says, he has never seen a slump unfold like the current one. ‘I’ve never seen a downturn in housing without a downturn in employment or… some macroeconomic nasty condition that took housing down along with other elements of the economy,’ he says. ‘This time, you’ve got low unemployment, you’ve got job creation, you’ve got a stable stock market, and relatively low interest rates.’
It seems a dose of reality is needed for Robert Toll as well. The macroeconomic connection missed by Robert Toll is that housing was and is in a bubble and bubbles pop. As for “low unemployment and job creation,” it should now be obvious to everyone that the reason they were low was because an overheated housing bubble was creating jobs until the bubble popped. The reason you have not seen a downturn like this before is because you have not seen a national housing bubble like this before. Let’s now turn our focus to the Question of the Day.

Does Greed Have Bounds?

“Propitiously Timed Grants Helped Karatz Collect More Than $100 Million”:
“Several past stock option grants to Bruce Karatz, the highly paid chief executive of KB Home, were dated at unusually low points in the home builder’s stock price, and the company said it has commenced a review of the awards.

Four grants to Mr. Karatz between 1998-2001 were propitiously timed. One was dated at the stock’s lowest closing of the year, another at a quarterly low, and the remaining two at monthly lows. That pattern raises questions about whether the grants were made on the fortunate dates specified in company filings.

“Mr. Karatz has reaped more than $100 million from cashing out many of the unusually timed options, according to regulatory filings.

“Caroline Shaw, a spokeswoman for KB Home, said in a statement following inquiries from The Wall Street Journal that KB Home ‘has been reviewing these grants with the assistance of outside counsel. Because they are the subject of pending litigation, we will not comment on them’…

“Last month, a shareholder filed a lawsuit in Los Angeles County Superior Court against Mr. Karatz and other KB Home officers and directors, alleging that executive grants had been manipulated to carry the dates on which the stock was particularly low…

“Backdating can lead to civil and criminal fraud charges, as well as a litany of accounting and tax troubles. Earlier this month, federal prosecutors charged three former executives of Comverse Technology Inc. in a backdating scheme; one remains a fugitive. Two former officials of Brocade Communications Systems Inc. have also been criminally charged with backdating-related offenses.

“The stock option grants at KB Home could complicate efforts to untangle stock options timing problems at another company, UnitedHealth Group Inc. The chairman of KB Home’s compensation and stock option committee from 1995-2000 was James A. Johnson, who also serves as a UnitedHealth director. UnitedHealth Group is facing a criminal and civil investigation into a series of stock option grants to its chief executive, William McGuire, as well as to other senior officers…

“Mr. Karatz’s grants at KB Home regularly dwarfed those given to any other executive. In 2000, for instance, he received 500,000 options — 30.9% of all the options granted to the company’s employees. The grant was dated Oct. 13, 2000, the lowest closing price of October, and just ahead of a leap in KB Home shares that took them up more than 20% in a month.

“In 2004 and 2005, he exercised all of those options, pocketing profits of about $54 million.

“Another grant, for 450,000 shares, was dated Oct. 25, 1999, the day the stock reached its lowest closing price of the year. Those options accounted for 20.1% of all grants to employees. Grants to Mr. Karatz prior to 1998 generally exhibited unremarkable timing.

“Mr. Karatz was one of the highest-paid executives in the U.S. in 2005, according to The Wall Street Journal’s annual survey of executive compensation. His total direct compensation in 2005 was $155.9 million, the bulk of it coming from exercising options, according to the Journal report. Mr. Karatz continued to own stock valued at $132.6 million as of Nov. 30, the fiscal year-end for the company.”

If Karatz is guilty, he needs a dose of reality from a prison cell so he can reflect on whether or not an extra $40 million or so was worth going to prison over. For many, a mere $100 million or so would be enough money to scrape by on.

Mike Shedlock ~ “Mish”
August 24, 2006