A Case for Dr. Shiller

Big Builder senior online editor Bill Gloede previews tomorrow’s monthly release of the S&P/Case-Shiller index. But Gloede does so in inimitable and unexpected fashion.

In a fit of apparently propitious timing, MacroMarkets, LLC, the developer and seller of structured financial products co-founded by Dr. Robert Shiller, on Tuesday will introduce its new MacroShares Major Metro Housing Shares to trading on the New York Stock Exchange.

Why propitious? Well, in California at least, it looks like prices are starting to firm up and even rise. The early second-quarter view from Lennar and KB Home earnings ;last week also seems to indicate better news, or at least market movement, ahead. 

The new housing shares will trade under the symbols UMM, for housing market up, and DMM, for housing market down. The shares will track the S&P/Case Shiller Composite 10 home price index, a value-weighted average of the 10 original Case-Shiller metro area indices, which include Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington.

Dr. Shiller’s aim is to generate liquidity and stability around residential real estate, outcomes he says will occur if there’s a natural futures market for it.

Pollster Bolster

From BUILDER, by Boyce Thompson: For many a U.S. resident, at least part of their American Dream is owning a home. That hasn’t changed, according to John Zogby, a noted political and cultural trends pollster who keynoted the Pacific Coast Builders Conference this week.

What has changed, per Zogby–author of a new book “The Way We’ll Be,” are the motivations driving people toward attaining their personalized version of the American Dream. Builder editor Boyce Thompson offers an analysis of Zogby’s remarks, with an eye toward connecting the dots between the pollster’s macro observations and specific opportunities and challenges for those trying to win new home buying and remodeling customers in the most dreadful of times.

Zogby outlined four pools of people who share this spiritual connection. A sizable portion of the population, he said, is now working for less. They have de-emphasized what they own or where they live to define themselves. “They are the new American consumer,” he said, adding that these are smart consumers who will shop for bargains but save money to buy something nice they really want. It’s a mistake to try to reach this group by marketing fantasy; reality is what appeals to them.

The blinding conclusion? Less is not only more; it’s all there is to bank on.

In Zogby’s own words:

Who’s Your Goliath?

My dad is and always was a fan of underdogs.

Before sports went berzerkly corporate, and all the New York team owners felt that it was their Manifest Destiny to use zillions of dollars to wrest championship rings from their wearers in other towns and bring them to the Big Apple, my father parked his loyalties solidly behind the longshots like the pre-Dave Debusschere Knicks against the Bill Russell-led Celtics, and the 1964 football Giants with a creaky Y.A. Tittle at the helm, and a new baseball team called the Mets.

So I got it from him.

Click for more info on Malcolm Gladwell

Click for more info on Malcolm Gladwell

Which is why Malcolm Gladwell’s piece in the May 11, 2009 issue of The New Yorker was a must read. As is Gladwell’s typical article approach, blending historical research with a latter day examplar of a noteworthy phenomenon, it’s a scholarly deconstruction of a twist of fate, “How David Beats Goliath.” 

For two reasons, the story should interest those of us whose fortunes or loss of them tie to the new residential construction market.

The first is that the central theme of the story relates to the plight of many organizations who make a living or not in the world of housing. They are David. Foremost, Goliath–the Philistine warrier whose defeat is almost inconceivable–is a real estate market and general economy withering in their effect on combatants large and small.

Gladwell’s yarn–backed by political science data on the number of wars won by undermanned, less powerful armies through history–tells how an underdog gets the upper hand. First thing they have to do is recognize they’re weaker and choose an unconventional strategy.

“When underdogs choose not to play by Goliath’s rules, they win.”

Think Lawrence of Arabia; think Rick Pitino, or if you’re my dad, think Digger Phelps’ Fordham University [no name] Rams against a U Mass team led by Julius “Dr. J.” Erving. The unconventional approach often involves surprise and speed, causing confusion in the ranks of a more potent foe.

Surprise and speed, for home builders, translates into cash. Let everyone else remain paralyzed in a market debatably still deteriorating [or as the Caculated Risk blog asserts, "correcting"], and girding for further waves of foreclosure hell. Don’t play by the rules of the game that you have to price a new home to market. What’s the equivalent for home builders of a full-court press? Is it an Open Series or any number of the other companies’ new, more affordable floorplans that break previously ironclad rules about replacement costs? How do you change your company’s culture so that it can adapt and change its structure?

The other reason to read the article might just be to come to a new understanding of who Goliath really is. Certainly, at the moment, the barbaric, dreaded enemy in most of our minds is a marketplace of still halting consumer confidence, corporate fear of investment, and massive government overcompensation for the ills of free enterprise.

Interestingly, though, a subplot of the article focuses on another kind of David. In this case, it’s Vivek Ranadive, a Silicon Valley software developer who revolutionized data analysis by moving from “batch” collection to real time collection.

What has led and will likely lead many a real estate and residential construction company down the road to ruin is the absence of reliable data to say what is actually going on in the market. There are too many lagging indicators and undependable metrics that allow analysts to assert “the fundamentals are strong” and the “subprime damage can be contained.”

So, in a sense, Goliath is not only an outside force in the marketplace, but an enemy within. Data that is as local as the Census tract you’re competiting in and as instructive as a clock with the correct time is something most real estate players haven’t gotten around to developing or developing a belief in.

Some times, rules that need breaking are ones we’ve made up for ourselves.

Until a megalomaniac named George Steinbrenner came along, my father’s one exception to pulling for the underdog was his love of the New York Yankees. He knew lifetime and year-to-date averages and ERAs of most of the Yankees from about 1935 through The Mick and Whitey Ford.

But even when they were dominant, the Yanks had kind of an underdog’s salt of the earth sense about them. After all, one of the best of them said this. “The future ain’t what it used to be.” Bet you’ll never guess who.

The Dash for Cash

We are still on our uncertainty kick, as it’s the only lasting phenomenon we both be certain of and need to plan around.

Consider a comment from investment guru Jeremy Grantham in an analysis The Big Picture blog’s Barry Ritholz is raving about for its keen guidance on “what we should expect over the next few years.”

“The uncertainties of the economy are so great that when the uncertainties of the stock market’s anticipation are laid on top of them, you simply must have big ranges of outcomes and hedge your bets.”

In home building, we see parallels to this principle.

The first quarter of 2009 has now made it clear that, by violently turning the screws on their gross margins, public home builders can at least stir the pot on home sale volumes, especially if it’s the right time of year and there are a couple of “x” factors like a California home buyer tax credit around to help.

Here’s how Citigroup’s home building sector equity analyst Josh Levin puts it.

While most investors entered [the just-concluded] earnings season focused on y-o-y (year-on-year) net orders, we think many were surprised by the q-o-q (quarter-on-quarter) gross margin deterioration reported by most home builders.

In the next three quarters of 2009–especially after there are no more $10,000 tax credits to hand out to Californians who step up to buy now–home building companies will be left even more to their own devices to get the job done moving inventory.

Seasonal forces, rock-bottom prices, record-low interest rates, and money back on income taxes for a home purchase have been working. 

Take away seasonality, and add back the toll of continued economic weakness leading to a weak recovery, big layoff numbers, another wave–maybe two–of credit meltdown shocks in the form of widening credit card defaults and commercial real estate implosions, and one can get a sense of genuine challenges to the kind of consumer confidence it takes to make that largest of consumer purchases.

Home building companies that have made it to this point with a truck load of cash need a plan to try to expand their “range of outcomes,” even as they hedge their bets.

A truck load of cash, a delevered balance sheet, a skeleton-crew cost structure, a few tax-carryback induced inventory turns, and few if any false moves, serve as Part I of the plan–the part that has gotten the stronger companies to where they feel they still have cards left to play.

Part II is where a broader ”range of outcomes” comes clear, because even the stronger companies can’t sit around for the next three quarters waiting for the home buyer market to suddenly tilt their way. Both public and private companies with cash will in the next several months begin to try to slide in unobserved to pick of lots that pencil to new hurdle rates. Those lots, and the business plan around them, and the product on them, will all have one mission. Generate cash from sales.

Whatever goes on by virtue of “the visible hand” of government, home building operators need just one more critical part of the downturn’s plot line to kick into effect. Capitulation. “Ask” prices need to succumb finally to new, uncertain, sustainedly weak realities. And they will, but first only discreetly.

So, what we’ll be observing, even as clouds of uncertainty continue to sit over residential construction’s landscape, is the beginning of chapter that will see home buyers pop in and buy land, hoping finally that it’s cheap enough that they can put a home on it with one of their existing or new products that will get them inventory turns at a greater than one-or-two-a-month pace by the end of 2009.

We invite you now to jam our comment box with questions and challenges for leading home building executives, either about their companies, about the markets they operate in, or about the business environment ahead. who’ll gather in Chicago over the next several days for the 2009 Builder 100 Conference.

We hope to see you there, but if not there, then let us know here what you want to have these folks address in the days ahead.

Bottom Fishy

Are you the glass-is-half-full type, or a life-stinks-then-you-die kind?

A whiff of less-bad news here and there has bred with it a subtle change of expectations on the part of some economists, if not the eventualities themselves.

Clearly, though, economists are best at using two words to begin talking about even their strongest convicitons. Those two words? “It depends.”

Here’s a roll-up of economists’ opinions from the Orange Country Register’s “Lansner on Real Estate” that limbs out the Silver Liners from the Doom and Gloomers as to when that most-coveted of pieces of bottom might be in view.

Optimists

Fed Chair Bernanke:

  • The worst of the recession has passed: “We continue to expect economic activity to bottom out, then to turn up later this year.”

Mark Zandi, chief economist, Moody’s Ecomomy.com:

  • U.S. home prices will reach bottom by the end of 2009.
  • “Notwithstanding the intensifying economic gloom, the bottom of the housing downturn is within sight.”
  • U.S. home prices will fall another 11 percent on average before stabilizing.
  • The Case- Shiller home price index will fall 36 percent from its 2006 peak to the bottom this year.

UCLA Anderson Forecast:

  • Housing market to stabilize in late 2009, and “when it does, the contraction in residential construction will, finally, after more than three years, cease to be a drag on the California economy.”
  • “As the housing market has completed most of its required adjustment prior to the downturn in general economic activity, it will not be as much of a drag on the recovery as experienced in previous recessions.”
  • Orange County: Home prices stabilizing in 2009 and starting to rise in 2010. But appreciation rates remain in the single digits and prices will still be at 2004 levels in 2013.
  • “This could well be the worst post-WWII downturn yet.”
  • “If there is any good news in the picture it is that the correction in the housing market is almost complete.”
  • “We are due for significant increases in unemployment through the 2nd quarter of 2010.”
  • “Continued job loss in California is going to lead to more foreclosures and more uncertainty about the ultimate bottom in housing prices.”

California Association of Realtors:

  • Recessionary conditions through the first half of 2009, “before we begin to see a turnaround in the second half of next year.”
  • Prices down 28.4%. That’s revised from an earlier projection that prices would drop just 6% this year.
  • Sales up 25%. CAR forecasts that 550,000 homes will sell in 2009, pretty good considering that the state was down to 347,000 sales a year in 2007. That’s revised from an earlier projection of 445,000 home sales.

Pessimists

Michael Carney, director, Real Estate Research Council of Southern California, Cal Poly Pomona:

  • “I don’t see home prices leveling off in 2010. … The real reason we’re not going to see a recovery: The financing is not coming back for at least 5 years.”

Richard Green, director, USC Lusk Center for Real Estate:

  • “I’d say we’re at bottom if it weren’t for the fact that the jobs picture is so dim.” … (Thinks market will turn around in 2010.)

Stan Humphries, VP of data and analytics, Zillow:

  • “I’m doubtful that we’ll see the bottom until 2010, and thereafter it’s increasingly clear that we’re likely to have a long bottom before we see meaningful recovery in home values.”

Construction Industry Research Board:

  • 2009 is expected to be the worst year on record for new residential building permits.
  • Just 63,400 units will be produced in 2009, down 3% from the 2008 record-low of 65,380 units.
  • 2008 construction was 20% lower than the lowest point during either the 1980s or 1990s housing downturns.
  • The low in the early ’90s recession was 84,656 units in ’93. The worst year during the early ’80s recession was 85,656 in 1982.

Multi Talented: News About Us

We’re proud of our colleagues this week.

They’ve toiled long and burnt the midnight oil to bring audiences something bright and new–a sign of their redoubled intent to be the first, best source of insight on the multifamily housing management, economics, and leadership.

Here’s the topline thought on the new multifamilyexecutive.com Web site from the brand’s primary steward, editor-in-chief Shabnam Mogharabi.

But first a look at the fresh new design of mfe.com. Have a visit.

Click image for access to Multifamilyexecutive.com

Click image for access to Multifamilyexecutive.com

Here’s how Mogharabi describes the new features and functions.

>> Real-Time Data and Research As mentioned above, our senior editor Les Shaver leveraged MFE’s strong relationships with the industry’s leading research firms to provide something no other multifamily industry publication can offer: Up-to-the-minute, real-time national and regional market research. Throughout the site, you’ll find built-in widgets from Real Capital Analytics, M/PF Yieldstar, and others that provide customizable, searchable data on occupancy and vacancy levels, transaction volumes, rent trends, and more. In addition, the new site features a live stock ticker with continuously updating information on publicly traded multifamily real estate companies.

>> Multimedia-Rich Experience With the re-launch, we are now able to offer enhanced multimedia offerings and interactive features such as slideshows, polls, and Webinars. We also have, through our newly launched MFETV platform, four new videos up on the site, including a 20-minute sit-down interview with Henry Cisneros conducted at the AFT Conference last month.

>> Local and Regional Coverage Since multifamily real estate is very much a local game, it was important for us to be able to have some locally focused content. We were able to modify a Flash-based map created for Remodeling’s Web site and modify it to link to lists of MFE articles about specific markets, both at the local and state level. This was a temporary solution that I think works well for us until we are able to build more targeted local markets pages.

 >> MFE Top 50 Rankings Our annual industry benchmark—the list of MFE’s Top 50 Owners, Managers, and Developers—is now viewable in a user-friendly table format that allows for a quick scan to find the company or information needed from any year in which the survey was conducted. And the data can be downloaded into an Excel spreadsheet for easy reference.

 >> Daily Exclusive News / Content Aggregation Our vision for MFE.com was to be news-heavy and a destination site for the industry. To do so, we needed to be able to offer folks in the multifamily industry everything they would need in one place. The site is rich with daily Web-exclusive news, features, and stories from MFE, each with its own RSS feed. But in addition to that, we have made a point of offering more aggregated news coverage from around the Web and article feeds than any other publication in the industry. Stories from every industry resource on the Web—including our competitors, national trade associations, and commercial news vehicles such as the Wall Street Journal—can be found on MFE.com. In addition, we offer links to industry blogs, calculators, resource centers, lists, and more.

 >> Expert Opinions We have begun to cultivate a blogroll that includes perspectives and opinions from the editors of Multifamily Executive as well as multifamily real estate experts. Over the course of the next few months, we will be bringing together more than a dozen multifamily experts, architects, and consultants to share their insights on the site. 

  >> Streamlined Design and Navigation With the re-launch of the site, we have updated our color scheme and style. The sleeker, streamlined design allows users to easily locate the right content. And we developed a topic-driven navigation structure that focuses on vital areas of the multifamily real estate business with less of a focus on the magazine product itself.

We congratulate the team that brings you this Site, and we wish them all good luck as they work to bring you the smartest, best, and first intelligence on multifamily housing business and management!

Staying Influence: It may be the next best alternative to staying power.

You still hear it plenty these days, even in these worst and most uncertain of times. It’s what a private home building company executive will tell you makes the biggest difference between his operation and public residential construction companies that may or may not find this or that market fit to build in.

“We’re here to stay.”

 When he says it, it’s certainly about selling new-homes to people who want or need them, with a solid name in the community to back up the promise. It’s a way of expressing the belief that real estate–and home building–is local. If prospective home buyers view you as part of the community, and they know where  you live, doesn’t it make sense that they’d put more trust in you with the biggest purchase decision they’ve got to make?

It may. But that’s only part of what they mean when they say, “We’re here to stay.”

It’s just as much a statement about buying land from a developer or a farmer. During the run-up of the early 2000s, land was a game of magic numbers, and developers and land sellers got to name their price on home building lots.  Now, those public builders who were tripping over one another to outbid everybody on every piece of dirt that showed up in auction are now tripping over one another to exit markets that don’t pencil for them. For, developers and land sellers, “we’re here to stay” means they can and will work with you, even to the point of soft take downs, so that you’ll have access to lots and they’ll continue to have a willing buyer in the market. 

It’s also about a local banking relationship that may go back generations. Yes, today so many of the community banks you used to deal with have been scarffed up by regional, national, and even global players. Now, after talk up the kazoo about partnerships for the first several years of the decade, many of those “partners” are among the disappeared. Your accounts have been turned over to special services “don’t call us, we’ll call you” departments whose business goal seems exclusively set on getting as much of the money they may have loaned you back in their tills immediately, while discussion of continuing to lend as they said they were going to is out of the question. 

Clearly, a bank partner will mean something different to the average private home builder when this crisis has run its course. But “we’re here to stay” today means that capital in the community, in the submarket, in the marketplace, might set its sights on home builders whose word is their bond. Even before the global credit and liquidity reset values to assets, people locally know what locations are worth, and they’re going to pay for them. Being a “we’re here to stay” kind of builder is an opportunity for people and banks who still have money and want to put it to work investing in something they know.

“We’re here to stay” means that your subs, trades, and materials suppliers won’t get left in the lurch, like with the others who just pull up their stakes and exit the market.

“We’re here to stay” is also about hiring people with more attitude and, maybe, less aptitude. If you’re like most private home building companies, you’ve had to let go of no less than half, and more likely seven people in 10 who worked for you in 2006. It’s the same everywhere. Who you’ve got left has to not only be an “A” player for today’s market, but has to help you have the ideas to deal with even a worse times than now before they get better.

Ultimately, the truth in the claim “We’re here to stay” depends on being able to build a home in a desirable community, fast, well, and efficiently, things you can only do if you’re in a local people business. Per-square-foot direct costs mean more to being here this time next year than perhaps ever in the history of U.S. home building. That’s sole proof of a home builder’s staying power.

Good News du Jour Department

Real estate is local.

Real estate trends occur one local market at a time.

Here’s two upbeat notes from opposite coasts. A third would make a trend.

Mark J. Perry’s Carpe Diem blog reports the following: NoVa Home Sales Increase for 12th Straight Month.

Here’s the graphic he’s supplied, an oh-so-rare look at measurably higher sales volume year-on-year.

Click on image for Northern Virginia Association of Realtors site.

Click on image for Northern Virginia Association of Realtors site.

Here’s what Perry’s comment is:

The data suggest that the Northern Virginia real estate market is way past its bottom, and has been making a solid recovery and strong comeback for many months. And yet doesn’t much of the national news suggest that real estate markets in most parts of the country are still years away from a recovery?

It’s a different story on the Left Coast. A story of foreclosure sales. The question is, can foreclosure sales (and 60% sales of other existing for-sale homes) keep up with the pace of foreclosures?

Calculated Risk quotes this report from DataQuick.

The number of homes sold in the Bay Area rose for the seventh month in a row in March, the result of continued bargain hunting in the East Bay and other foreclosure-discounted communities. The past year’s steep drop in the median price slowed significantly, indicating that the market might be near its price bottom, a real estate information service reported.

Speaking of recovery, Builder magazine asked five real estate analysts to offer their take on which five markets might make it across the gulch soonest. Here’s their response.

One way or another, it’ll be a market at a time. With fewer local newspapers around, we can only hope that there’ll be headlines enough to take note when it begins to happen.

Brother Act: Chapter 11 won’t stop Raleigh-based St. Lawrence Homes from making a go for the other side

Dad was a vintage movie theater proprietor in upstate New York, whose six-day work weeks and 14 or 15-hour workdays in the 1960s and ’70s rub off directly on his daughter and sons, who consider work fun and laugh a lot on the job. The older brother starts out as an electrician working job sites for Ryan Homes’ Buffalo division in the 1970s; the younger goes into school teaching, but not for long.

They’re the Ohmanns, Bob Ohmann who founded and is the CEO of Raleigh, N.C.-based St. Lawrence Homes on a bank loan that allowed him to do exactly one spec and two pre-sales, and his kid brother Rich, who joined Bob as head of marketing after the venture got its footing.

Bob’s early experience with inhospitable housing cycles came when he’d shifted gears from doing electrical work on new houses to selling them for Ryan Homes in the Buffalo area.

“In the 1970s, they had a little thing called the gas crisis, and interest rates were up around 19%,” Bob Ohmann recalls. “Still, out on French Road [Buffalo] the Ryan Homes folks would set up a card table out in a field, and people would line up at the card table to buy a new home from them. No matter what, you got to stay in touch with what people need. Even today, a couple’s about to have their first kid, and my bet is they’re not thinking we need to move into a two bedroom rental apartment. More times than not, they’re thinking they need a new home.”

From one spec and two pre-sales in Raleigh in December 1989, the Ohmanns built their company into a $191 million powerhouse, closing 489 homes in 2006, peaking at about 600 in 2007. Then, time warp hit. The Carolinas, like Texas, withstood the worst of housing’s dislocation just about all the way through 2007 before the Carolinas market and their company succumbed to gravity.

“We started to feel it go a little soft around August ['07], but then we had a great November—sold about 50 houses that month—and we thought then that it was going to be a good snapback, but then everything collapsed,” says Bob Ohmann.

On Groundhog Day 2009, as most people began their vigil for the end of one of the grimmest winters in memory, Ohmann elder sought protection under Chapter 11 bankruptcy laws. Within five days after filing, the Ohmanns had secured Debtor-in-Possession financing from Raleigh-based community lender Capital Bank.

Their story with lenders is all too familiar. They started banking with a local bank called Pioneer, which was acquired by regional bank Centura, which was acquired by international financial company RBC. Their major lender today, SunTrust, bought the regional bank, Central Carolina Bank, they’d initially set up business with.

As their success trajectory steepened in the years 2003, ’04, ’05, and ’06, they found themselves at the local and regional land dance with some new players with hugely deep pockets.

“They [the public home builders] were printing stock and printing money, and they’d come in and bid up the price of all the land,” says Rich. “We were thinking, we have to go get some land or we’ll run out, but we were paying prices that were way too high because the publics had bid it all up.”

Now, the publics are dumping that land, getting tax carryback money from the IRS, and then coming back into the land market to buy the land at enormously reduced prices. “They got their bail out,” Rich says. “They should be happy.”

Meanwhile, banks continue to exert pressure on builders who owe them land acquisition and development payments as well as construction loan project financing.

“We’re not blaming anyone for what’s happened, but the business just doesn’t work the way it used to when it comes to home building finance,” says Bob Ohmann. I.e., no one takes your call if you’re trying to get through to a big bank.

Today, their company has cut 75 percent of its staff, has turned to real estate brokers as its sales force, has renegotiated as many deals as it can with trades and materials suppliers, and has introduced new entry-level product under its BroadStreet Homes line. It’s doing its damnedest to build and sell 150 homes in 2009 to pay the bills, keep the lights on and the doors open.

Apart from the faceless, nameless big bank lenders where it’s well nigh impossible to get a returned phone call, the other big challenge they’ve had is with some of the subs that have been absorbed into big conglomerates, especially in the concrete business.

The Ohmann name’s not on the company signage, but the brothers Ohmann like to think of their name as backing the value of every St. Lawrence Home.

“Bankruptcy isn’t giving up,” says Rich. “It’s a way to get enough time to reorganize and save the business.”

As they fight each day for survival, two key “learnings” occur to Bob and Rich Ohmann, and they think other private home builders who may get sucked into the default vortex might benefit from knowing them. One is company data. The more straightforward and simple and correct all the company accounting is, the better the relationship will be with multiple creditors and lenders who’ll have to agree on modified terms and cuts. So, keep all accounts in good order and be able to understand and explain every part of the balance sheet to make things easier on yourself if you get in trouble.

The other thing is this. If you’re headed into trouble and plan to work yourself out of it, do some work on your Web site before you announce that you’re filing. Analytics show that you’re going to get an awful lot of hits on your site the minute you file, and you want all the explanations and articulation of the go-forward plans need to be there when word surfaces that you’re reorganizing.

How do they rate their odds of getting to the other side? Rich’s opinion on the matter: “My brother Bob is like a guy up in the bridge of a ship, and he doesn’t care if there’s rocks, or icebergs, or tsunamis ahead; he’ll still say ‘full speed ahead.’ Me, I’m just really good at steering.”

We Won’t Get Fooled Again… Or Will We?

Conundrum on a gloomy, rainy afternoon. 

Housing is more affordable. But for whom? Which makes the first statement questionable, if not untrue.

Whether the statement–Housing is more affordable–is valid or not is a big question. Many of housing’s economists say that the degree to which housing affordability reverts to longtime norms–such as house price-to-household income ratios and house price compared with market rate rents–will tell when the housing correction is complete. Once the house price correction is complete, and norms are restored, the assumption is the housing economy will have troughed out, and transactions, absorptions, and an efficient market will resume.

People will buy because it will be the time to buy. But is that asking too much of an economy whose consumer sector–the engine that could…once–is under such duress as it is?

We like Irvine, Calif.-based real estate consultant John Burns; he’s smart, and he can be a help to clients on both sides of the bid-ask chasm that has paralyzed the central nervous system of real estate in the United States.

We also like CNBC real estate correspondent Diana Olick for her standup job of reporting on the housing landscape from both Wall Street and Main Street.

What’s more, we like good news, just as much as the next guy.

These three stars aligned today, but we’re not comforted.

First, John Burns released data that backed up his lead assertion. “We have the best housing affordability in 38 years…” That’s 1971, folks.

Burns trots out chart porn to illustrate the drama of his assertion.

Source: John Burns Real Estate Consulting

Source: John Burns Real Estate Consulting

Here’s Burns’ commentary on the data.

The monthly cost of homeownership has fallen 43% from the peak in this cycle, with more than half of that due to the decline in price, and the remainder due to the decline in mortgage rates and increase in incomes. The median-income household, which earns $52,800 per year, only needs 25% of their income to buy the median-priced single-family home of $164,600. In July 2006, that ratio was 44%.

Those of us who are in the housing business know that the monthly payment is far more important than the price for entry-level buyers. Entry-level buyers compare the cost of homeownership to the cost of renting and have no idea what a Case-Shiller index means. Once the word gets out that homeownership is less expensive than renting, which is now also true in 54 of the 88 markets where we track this information, we expect buying activity to increase substantially (even in a horrible economy).

CNBC’s Diana Olick caught wind of Burns’ data and smelled a good news headline, which all of us wish for desperately. See earlier Wishful Sinful post. Here’s her take today in her blog: “Yes, You Can Afford A House.” Her evidence of the validity of that claim? John Burns, of course.

I know we’ve been saying over and over that home affordability is soaring to record levels, but a report today from John Burns Real Estate Consulting really puts it into hard numbers, which I thought I’d share.

Let’s start with the big number: the cost of homeownership has fallen 43 percent from the peak in this cycle, with more than half of that due to the decline in home prices and the rest due to lower mortgage rates and increases in income.

Still, realty reality is what it is, not some spin that gets a fleeting instant of attention and then goes away like so much in this throwaway society.

Affordability, by definition, is a real-world term, not a theoretical one.

For instance, what happens when you add home price depreciation rates to your mortgage rates to figure out your real monthly interest rate?

This is the real world way that Chris Flanagan, Asset Backed Securities Research chief at JP Morgan, advises us to look at affordability. Flanagan notes that that by adding the FHFA index’s current 7% YOY decline to a 5% mortgage rate, “real” mortgage rates are closer to 12%, which results in affordability being near the lowest level in the last 30 years.

The other issue is your cost-to-household income ratio. Just as the “V” in loan-to-value has been destabilized by deflationary forces, so too have household income data points been corrupted by galloping job loss trends, which also corrupt consumer confidence.

Fact is, the single most important data point for housing and real estate people to watch is industrial absorptions. This is where the rubber hits the road in non-cyclical job formation that will need to happen to turn the tide on real estate across the board.

All the jobs formed during the W Bush administration have been wiped out. Structural challenges with non-cyclicals that pre-dated the jobs and economic run up of the 2002-2007 period continue. We’re going to need to see non-cyclical industry sectors get well–and household incomes to normalize–before we’ll see the term “affordability” mean anything in the housing market.

We like Burns, Olick, and good news. But we don’t believe them here.

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