Sorry gold bugs this is not what you think. David Lereah, Chief Economist of the National Association of Realtors made a claim this morning that real estate is the “new gold standard.”

I just received that message along with these notes from Mike Morgan taken at a meeting today where David Lereah spoke. Following are Mike Morgan’s notes and comments:

Hello Everyone,

I just left a meeting where the Chief Economist of the National Association of Realtors (NAR) spoke. You all should have been there to hear his spin on the real estate market. Here are some highlights.

David Lereah was not as positive as he has been. After a few worn out jokes, he made an effort to put a positive spin on the markets. However, his wrap up summed it all up. “Some builders will get caught with their pants down, because they built too much”

He lead off by stating, the media is responsible as they are not looking at the data or putting it in the right place. I disagree emphatically. I believe the media is being conservative, as no one is looking at what these numbers are made up or where they come from. The recent release by NAR showing an increase in homes sales is a perfect example. With the Florida market being the largest component of this number, and Florida down 22%, there is no possible way to be up . . . without a footnote. There is a possibility we are seeing a spike in those folks in the Gulf Coast that lost their homes, buying new homes or renting the available inventory and forcing other market participants to buy versus rent. However, it is highly unlikely that the other States that make up the South could have boosted the numbers into positive territory . . . unless the sampling NAR does was in non-representative markets. Even with the Gulf Coast effect, that is temporary.

Mr. Lereah went on to blame the issues on FNMA making it easier to finance a home and, get this, the Internet making it easier for buyers to find homes.

Lereah noted that 40% of homes are second homes. He failed to note that most investors purchased homes and told the builders that these were primary homes. If they admitted they were second homes or investments, the builders would have either told them to walk or charged them 20% deposits. I can verify this, as many of my clients did this. Why? The home builders’ sales reps told us this was the way around the investment restrictions!

He continued to paint a rosy picture by stating that real estate was the, and I quote, “new gold standard.” That’s scary, as this has been the complete opposite. If we want to analogize this market for the last few years, let’s analogize it to options, derivatives, naked puts and the Big Wheel in Vegas.

On the flip side of the rosy picture he admitted, “Prices got a “little” too high, we got ahead of ourselves. . . . We need to catch our breath.”

He then noted, “It happened in the stock market. How many people purchased Qualcomm, Lucent, I doubled down on Lucent. We became irrational during the stock market craze.” Well, I ask, how does that balance with his statement about real estate, “There were lotteries to get into deals. I got into one!” He got into one? The Chief Economist of NAR?

A few more quotes, “Go to Miami to see the excess.”

“40% of all loans in 2006 were interest only. . . Prices went higher because of the artificial energy in the real estate market . . . that’s what took the punch bowl out of the party.” Party? Did he admit this was nothing more than a party? He sure did.

After his Miami reference he said, “Naples Florida is even worse. Misery loves company.”

“We are transitioning to a buyers market. It could be 1 month, 6 months, 12 months.” Very highly unlikely that this is one month or even six months.

“If you have a healthy local economy it is almost impossible to have a bubble burst!” Well, I got news for you, we don’t have a healthy economy with oil at $75 a barrel and the bulk of all jobs created during the last few years in real estate!

“You have a great future in real estate, but you need to cleanse your real estate markets. We made a mistake. It’s going to hurt. You are going to have a double digit drop. Expect it.” And in his very next breath, “2006 will be the best year ever.”

“No signs of a bubble bursting.”

Next breath, “Naples right now is experiencing some problems.”

“Conventional wisdom turned on its head.”

I love this one. “The laws of supply and demand have not been revoked.” Exactly. We have a supply that can be analogized to Dutch tulips.

“Is this a bad year. Yes. Your numbers will down. You got ahead of yourselves. The market got ahead of itself.”

Lereah said it will be the “middle of 2007 when you start to pick up again. I see Florida picking up in 2007. But there are particular markets that will not. It depends on inventory levels.”

I guess I must ask how 60,000 condos in Miami with a 2,500 a year absorption rate isn’t a supply and demand problem. Let’s take the 60,000 reported by McCabe Research and cut it in half, and then double the absorption rate. So we have 30,000 condos and 5,000 sales. Do the numbers.

I have warned my investor clients for more than a year that this was coming. If builders, banks and real estate agents acted responsibly we would not be in this situation. Many agents blast me for being so negative and “single handedly bringing down the market.” I take great pride in how I have conducted my business. Unfortunately, I will still take quite a bit of heat, as I recommend to my clients to rent for 6-12 months and then buy . . . unless there is some overpowering reason for them to buy now. That’s certainly not what my fellow Brokers want to hear, but my duty is to my clients. As a licensed professional, I must adhere to our Code of Ethics. I do what is best for my clients, not my fellow Brokers.

Great Day to You All,


OK, let’s do the math as Mike suggests. 60,000 condos selling at 2,500 per year. Hmmm. It seems we have a 24 year supply of Florida condos coming online. OK let’s double the sales rate to 5,000 and have the number built at the same time. 30,000 / 5,000 is a 6 year supply.

Not to worry, Real Estate is “The New Gold Standard”. Besides, as everyone knows “If you have a healthy local economy it is almost impossible to have a bubble burst!” Excuse me but isn’t everyone saying how healthy the economy is right now?

On one hand we see that there are “No signs of a bubble bursting.” Yet we see builders “caught with their pants down” even though bubble bursting is “almost impossible”. Compare and contrast “We made a mistake. It’s going to hurt. You are going to have a double digit drop” with “2006 will be the best year ever.” Read back over Mike Morgan’s notes and you will quickly see that David Lereah is talking out of both sides of his mouth at the same time, each side saying the opposite thing.

Mike Shedlock / Mish/