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CNBC Survival Guide: Surviving the Real Estate Market, CNBC-TV, 6/22/06 Date: June 22, 2006Time: 08:00 PM - 09:00 PM Station: CNBC Location: Network Program: Survival Guide BILL GRIFFETH, host: Higher and higher. For five years, home prices only went in one direction, straight up. Cheap money and a floundering stock market fueled the frenzy. But the party's over. Tens of thousands of condos are sitting empty and unsold. A building boom in the West and South, but not enough buyers. And town after town with just too many homes for sale. Tonight, the big question on everyone's mind. Will your home ever be worth more than it is right now? Unidentified Man #1 (Announcer): This is your CNBC SURVIVAL GUIDE. Real estate, what now? Live from CNBC global headquarters, here now, Bill Griffeth. GRIFFETH: Thank you and good evening. And tonight, we want to talk about what has really been the great American obsession for the past five years, real estate. Now, we've invited an audience of our regular viewers who have come armed with the kinds of questions you would ask, whether you're a buyer or a seller, or an investor in real estate. Now, if all this seems familiar, it was just over a year ago when I stood right here in this very hall hosting a program called "The Real Estate Boom." What a difference a year makes. Look at this. Back then, we were talking about the hottest cities on the map: San Diego, Las Vegas, Boston, Miami. Home price increases up 8 percent, 10 percent, 7 percent, 30+ percent respectively. But the tide has turned obviously, and so have the price forecasts. San Diego down 4 percent; Las Vegas down 8.2 percent. Boston down just over a percent, and Miami down 2.5 percent. In fact, that's where we begin this evening, in South Florida where Diana Olick is on top of this bottoming market. Good evening, Diana. DIANA OLICK reporting: Good evening, Bill. And we've said it all along, the hotter the market, the harder it will fall. And no place is that more true than right here in overheated, overbuilt Miami, where condo sales have now dropped 25 percent from a year ago. We are in the beautiful Blue Condos, a brand new building high atop the Biscayne Bay. This building was 100 percent pre-sold before it was built, 345 units. Half of those units are now back on the market for sale or up for rent, with very little foot traffic coming through them. Why? Because in Miami, there is no longer any such thing as a one of a kind condo. Thirty-four stories above the heart of downtown Miami. Mr. LYLE SHARIF (Realtor in Miami): I'm not going to say anything to you. Stand right here. Take a panoramic view. You tell me what makes this unit. OLICK: Lyle Sharif (sp) is giving his million dollar penthouse condo the hard sell. Mr. SHARIF: Everything that you're looking at that really is in view of this, starts at probably $800 to $1,000 per square foot. This unit we're selling for as little as $500 per square foot. It's a real value. OLICK: It's 2,000 square feet with a 300 degree view through 27 panes of hurricane-proof glass. The only thing you can't see here is a buyer. So why is it been on for three months? Mr. SHARIF: Because the traffic's not here. People are not looking, they're waiting. OLICK: It's the same story all across this crane-filled landscape where condos are beginning to outnumber palm trees, and realtors are using words like desperate. Unidentified Man #2 (Miami Area Realtor): Today, people are having to reduce their prices 10 percent, 15 percent, 20 percent in some cases, back to 2004 pricing. OLICK: In Miami-Dade County, there are approximately 70,000 new condo units under construction; 25,000 more units announced. You have all these units. You're pointing crane, crane, crane, crane. That's all yours, and you're not concerned? Mr. GEORGE PEREZ (Multibillion Dollar Developer): (Not identified on screen) I mean, I wake up concerned. OLICK: And multibillion dollar developer, George Perez probably should be. Most of those cranes are working for him. He built the bulk of South Beach's condos, and now has 11,000 units under construction in Miami proper. Do you expect to lose any money on any of your projects here? Mr. PEREZ: I never expect to lose money. But are we prepared to? Yes. So am I concerned? I'm more concerned on the jobs that I am selling, now that I haven't started construction. With some I might have to make a decision to shelve them. OLICK: Now, George Perez says he still sees some money on the sides of these waters. He still believes there's money in Miami. But he says he's got to change his marketing strategy now, because it's going to take a couple more years to get to that money. He's going to have to go out after the buyers, not wait for them to come here. He's going to go out domestically, as well as internationally. He says, that is the heart of Miami. It's the international buyer. That's where the money is, Bill. GRIFFETH: Now, wait a minute, Diana. What happened to all the investors we kept hearing about that were keeping the liquidity in that Miami market not too long ago? OLICK: Well, you use that lovely word investors. We tend to call them "flippers." These were the people who came in from out of state, from anywhere in the country, saw this booming market, and immediately bought. The flippers are gone. They are history. Now, we're back to the regular buyers, back to a normalization. And the realtors here have to start pricing things for normal people, not for the flippers. They're gone. GRIFFETH: Diana Olick in Miami, thanks very much. Now, let's meet the members of our all-star panel who will be with us throughout the hour tonight. Joining us this evening, Robert Schiller, the Yale University professor of economics, founder of Macro Markets, which helped create a futures and options market for single family homes. David Lereah, the senior vice president, chief economist at the National Association for Realtors. Thomas Kunz, who's the chief executive officer of realty giant, Century 21, and Bob Moulton. He's the president of the Americana Mortgage Group. And I should point out, by the way, we invited the CEOs of all the big publicly traded home builders who have become familiar faces here on CNBC. We'd hoped that at least one of them would join us this evening, but every one of them declined our invitation. David Lereah, let's start with you. How--how would you assess this market? We look at a map of the sales declines that we've seen year over year right now. What's your assessment of this market right now? Mr. DAVID LEREAH (Chief Economist, National Association of Realtors): Right now, this is a tale of two markets. We have the boom markets that are cooling, and that's primarily on the West Coast and the East Coast. And then, in the middle of the country we have real estate markets that are actually picking up and gaining momentum as we speak. GRIFFETH: To the upside or downside? Mr. LEREAH: To the upside. Cincinnati, Albuquerque, Houston, Dallas, these are cities that are actually picking up activity, and there's good strong demand for real estate there. But clearly, the boom markets of the last five years are cooling down. And as we mentioned a year ago when we had this town hall meeting, we were--with fingers and toes crossed, we were hoping for a soft landing. And from my vantage point right now, we're starting to see that soft landing. GRIFFETH: Tom Kunz, earlier today here on CNBC, the chief economist at Merrill Lynch, David Rosenberg, talked about what he sees as a glut of inventories (inaudible-loss of audio/video). Bob Moulton, the kinds of mortgages have been ARMs and exotic mortgages compared to the '90s, especially with the kind of mortgages people take out. Mr. BOB MOULTON (President, American Mortgage Group): We've seen a lot of creative products come out over the last five years. Over the last five years, the housing market has increased their prices each year. And that's attributable to a lot of exotic mortgages that have come out, such as your interest only mortgages. Your traditional mortgage will lend three and a half times income, but now, with these products, they're coming out at five times income and six times income, enabling the borrower to buy more house. So it has been an interesting past five years. GRIFFETH: To say the least, which we'll talk about a little bit more. Professor Shiller, you have foreseen something like this coming. Is there more to come, or how do you see where we are in the real estate cycle at the moment? Mr. ROBERT SHILLER (Yale Economics Professor): I think your segment was good in focusing on the construction. Prices have gotten very high, and so builders have an opportunity--and they have created a supply. So the fraction of GDP that is residential investment is at almost a record level. You'd have to go back to 1950 to see as much construction as a fraction of GDP as in the last year. GRIFFETH: Is that such a bad thing? Mr. SHILLER: It's going to be. As an economist, prices get high, construction responds, supply increases, prices come down. That is a likely outcome in many place. GRIFFETH: How much more could you see prices coming down? Mr. SHILLER: Well, I mean, I--I--I don't know because-but I would guess--let's look at what happened to some extreme cases in the last cycle. Los Angeles, from 1990 to 1997 lost 40 percent of its real value. And this boom is even bigger than the last boom that preceded the '90s. GRIFFETH: But yet, you're still saying there's a lot of demand out there. Mr. SHILLER: Well, I think we need to be real careful about what we say about real prices, nominal prices. Let's just talk about the price of a home. Because real prices have gone down before, whether it's stocks or real estate. GRIFFETH: It's part of a cycle? Mr. SHILLER: It's just part of a cycle. But what's happening right now, is that we are--you can't sustain double digit price growth forever. You have to come down. We all said that last year, and we are coming down. It's healthier for the marketplace. It will end up, we are ridding ourselves of the speculative investors. These interest only loans where they got way too high in terms of a market share, and that introduced an element of risk into real estate we've never seen before. GRIFFETH: All right. Mr. SHILLER: I think we will be healthier by the end of next year, and the real estate markets will be better positioned. GRIFFETH: All right, gentlemen. We'll take a break here. We'll come back and continue our conversation here. We'll get the audience here first crack at talking to the experts. And you at home can get in on it, as well. Our email address tonight is survivalguide@cnbc.com. * * * (Commercial Break) * * * GRIFFETH: Welcome back. Now, we're going to take a few questions from our audience who is here this evening with us in just a moment. But first, I want to get your thoughts on a few long standing real estate myths. Fact or fiction? Now, I want a show of hands, or stomp your feet, or whatever you want to do here. In the long run, especially in the coastal areas, land is always a better investment that stocks because, after all, there's only so much land. How many of you agree with that statement? OK, hands down. How many disagree with that statement? OK. Fact or fiction? Lenders don't lend to people who cannot pay. How many believe that statement? Show of hands. OK, hands down. How many don't believe that? All right. Tom Kunz of Century 21, that is one of--the first one is one of the arguments that real estate agents always make. You should by something, especially waterfront property or--you know--a prime piece of land, because they're not making land anymore. Is that--is that a true statement, really? Mr. THOMAS KUNZ (Chief Executive Officer, Century 21): Well, I--I don't think that most agents say that. I think what most agents do, and I--and it goes back to the basic belief, that most people buy homes for shelter to live in. Most people don't buy homes just for investment. They make money on their homes as they go up. But primarily, their home is bought to put your family in and live in. GRIFFETH: Bob Moulton of Americana Mortgage, you don't lend to losers? Mr. MOULTON: You now, every--there's a loan out there for everyone, and it's based--and it's based on credit score. The better your credit, the better the rate. The lower the score, the higher your rate. And there's more risk associated with those loans where people don't pay. So lenders will lend, but you're going to pay a little higher rate than someone who did pay on time. GRIFFETH: Well put. He's answered that question before, I can tell. Welcome. What's your name? Ms. SHOVANA MIJOLIE (Audience Member): (Not identified on screen) Shovana Mijolie (sp). GRIFFETH: What's your question. Ms. MIJOLIE: What role and responsibility has the media played in enhancing the real estate market over the past few years, and now, slowing it down and the retraction in the market? GRIFFETH: OK, next question. Who wanted to ask-- What role did the media play? Tom Shiller. Oh, everyone wants to answer that one, OK. Mr. SHILLER: I think the media played a significant role. GRIFFETH: Really? Mr. SHILLER: Because seven out of ten Americans that own a home, everyone wants to know about their real estate. I don't think seven out of ten Americans own stocks. So everyone wants to pay attention to real estate. And with all due respect, the media has been focusing on real estate heavily over the last 12 to 24 months. And when they hear that word bubble, sellers get concerned and want to put their house up real quick to make sure they get the price. GRIFFETH: Is this the first financial bubble, or whatever you want to call it. Is this the first time we've ever seen an up cycle in real estate? No. Is it the first time we've ever seen a--a down cycle in real estate? No. And you've had it even before there were media, don't you think? I mean if you want to talk about manias, tulip mania occurred in the 1600s in Holland, right? I know you were going to bring that up, right? Mr. SHILLER: The Dutch, you know, invented the newspaper just before. GRIFFETH: Oh, fine. You know, your point is well taken and we could spend the whole hour on it. But show of hands. Show--go ahead. Mr. LEREAH: With respect to the media, The Wall Street Journal, if I remember correctly, about four and a half years ago had some headline about the real estate market, the expansion, the boom was going to bust. And if people had listened, if people on Main Street listened to the people on Wall Street four, five years ago, they would have been out the $5 trillion they earned in excess wealth--in wealth gains from their home property ownership. GRIFFETH: See, they don't even listen to us. They don'teven listen to us. Your name, sir. Mr. NESTOR RIOS (Audience Member): Nestor Rios. GRIFFETH: Nestor, what's your question? Mr. RIOS: Yes, in relation to the general real estate market in general, would it be a soft landing or a hard landing? And will it be area or region specific? GRIFFETH: OK. Bob Shiller, you want to go first? Mr. SHILLER: It will definitely be region specific. As you say, Cincinnati is not high on my list for crashes. But I'm not sure that it will be a soft landing. I think there's way too much confidence-- GRIFFETH: How do you know the difference between a soft landing and a hard landing? MR. SHILLER: So much--so many people say that it's just going to return to normal. But you've got to remember, prices have gotten very high, and we have a psychology that can't last. GRIFFETH: David? Mr. LEREAH: I totally disagree. GRIFFETH: I thought you might. Mr. LEREAH: Yes. This will be a soft landing. Now, it may not be a soft landing for every local marketplace across America. I can't guarantee that. But it does depend on the local economy. The difference between this real estate cycle and the previous real estate cycles where we've had contractions, is that this one still has a healthy local economy. The economy is healthy. It's creating job gains. And because of that, it's going to be very difficult to concoct a scenario where you get prices tumbling, because people still have the financial wherewithal to purchase these homes. GRIFFETH: So as long as jobs are good-- Mr. SHILLER: So real estate prices bring down a recession. We just heard from Rosenberg who said that's an interesting possibility. Mr. LEREAH: And what's happening now in the real estate market is that we're going from a seller's market to a buyer's market. When you do that, the stubborn gets-the seller gets very stubborn at first. So he keeps the price up. When that price stays up, the days on market lengthens, and the inventory of homes expands. That's why you're observing this excess inventory of homes. But the pent up demand is there, and as the seller begins to bring the price down, there will be pent up demand because the financial wherewithal is there. All the households, the boomers haven't gone away. They're still there. They still want to purchase homes. The immigrants still want to purchase homes. So I think the price adjustment will be very quick and fast. GRIFFETH: All right. We have email coming in. We have one from Charlie in Elkhart, Indiana, who says, "Help me survive. There are so many numbers out there about the housing market. I'm confused, which ones should I trust?" Which ones do you guys follow? Tom Kunz? Mr. KUNZ: Bill, I think there's never been a better time in the last few years that an individual who is actually interested in looking at buying or selling a home needs to get professional help. They need to get people who have been able to go through these types of markets and understand how to help guide the individuals through the type of home they're looking for. And to link them up with some professional mortgage people who understand. Mr. MOULTON: Because he's absolutely right. There's a mortgage for every type of individual that's out there, depending on how long you're going to stay in the home, how long you're going and if you're going to get out. GRIFFETH: Point well taken. But if you want to figure out for yourself where we are in this market, which number? You have housing starts and permits. So if you've got a home buyer, that home buyer has to get educated on the specific area where they're looking to buy. GRIFFETH: So the national numbers don't mean anything to the buyer. Mr. MOULTON: I think they need to look locally-you know--at what's sold, how much it sold for, what type of house it was, and compare what they're seeing by homes sold to what they want to buy. Taking that information will help them make the right decision. GRIFFETH: Very quickly, professor. Mr. SHILLER: We are just--the Chicago Mercantile Exchange has created futures markets for single family homes, and in most cities, they're predicting a decline, the futures markets now. GRIFFETH: There you are. That's something we should pay attention to. Mr. SHILLER: That's the market forecasts. GRIFFETH: All right. Well, we're going to take another break here. We'll come back. * * * (Commercial Break) * * * GRIFFETH: Welcome back to our CNBC SURVIVAL GUIDE. Tonight we're talking real estate. And apparently, we're getting a lot of questions from you folks that are of the same nature which I'm going to pose to our panel very quickly. We're talking about a market that's losing altitude, for the most part, in many parts of the country. Those that were the hot markets are now some of the cooler markets. And a lot of people want to know, 'How much lower could it go, and where do you think we see a bottom in this market?' I'll go around the horn very quickly. Bob Shiller? Mr. SHILLER: Well, I think declines are likely in the next year, but slight declines. There's--after that, it's hard to forecast. But there's a chance that in many cities we'll see, over the next five years, a gradual deflation of the market. GRIFFETH: David Lereah. Mr. LEREAH: Again, I disagree. I think what's going to happen is all real estate is local. So it depends on the local marketplace. There are some markets that are vulnerable and fragile right now, to interest rate rises. And they could get hurt. But there are other markets where the local economies are very healthy and there's job gains. I think that that will minimize the downturn in those local areas. GRIFFETH: You're not going to answer the question, right? Are you going to agree with him? Mr. KUNZ: I absolutely agree with David. It's a totally localized marketplace. And everybody needs to look at where their particular markets are going. We haven't seen a lot of decline in prices. Prices are still moving up. We've seen a decline in the number of sales. But--but that's in comparison to the largest marketplace we've ever had in the history of the real estate. GRIFFETH: Right. Mr. KUNZ: So naturally, there's been--you know--we've seen a little cooling of the market. GRIFFETH: Bob Moulton? Mr. MOULTON: I think in the areas where you've seen the fastest increases over the last five years, you'll see the fastest declines. I think that's where you had most of the speculative buying. I think, in the bedroom communities of your major cities where the job market is strong, you'll see a very steady decrease of maybe about 5 percent. GRIFFETH: All right. Well, regardless of where you live, it seems that affording a home is not getting any easier. According to a new report from Harvard University's Joint Center for Housing Studies, nearly 16 million households now spend more than half their income on housing. That's a 14 percent jump from just five years ago. Nicolas Retsinas spearheaded that Harvard report. He says, 'When it comes to home prices, you better get used to a new normal.' What is that new normal, Nick? Mr. NICOLAS RETSINAS (Harvard Joint Center for Housing Studies): Well, 50 years ago, the rule of thumb was a house should cost twice what you make. The good news is, appreciation is slowing and we may even see some declines. The bad news for consumers wanting to buy is at the same time, interest rates are going up, reducing their purchasing power. GRIFFETH: That's how you measure some of the overheated markets, is when you do see home prices that are, what, four times the ratio, or four times the average income in that area, right? Mr. RETSINAS: That is one of the factors. The number we look at is jobs. GRIFFETH: OK. Mr. RETSINAS: As long as the jobs are growing, then that probably means that prices aren't going to fall precipitously, shutting out that firs time home buyer. GRIFFETH: Here we are at 4+ percent unemployment rate right now. We're at what economists usually call full employment. I mean, that should mean a pretty good housing market, right? Mr. RETSINAS: Well, it means it's probably stable. There are areas of overbuilding, as your panel has pointed out. There are pockets where there is substantial overbuilding. Overbuilding does lead to price correction. But again, for that family wanting that first home, they're not looking to invest, they're just looking to live in a home. It's going to be hard with interest rates going up. GRIFFETH: Where do you think we are in this cycle, which David Lereah was talking about, where when we make the transition from a seller's to a buyer's market, the sellers remain stubborn. Prices remain high for a while, or in place before they start to decline. Where are we there, do you think? Mr. RETSINAS: Well, prices are sticking now. I think prices are likely to stabilize. The big unknown is if the economy starts to turn. If the economy starts to turn, we start to lose jobs. Then some of those new mortgages that people took out, they're not going to have the escape valve. When they took out a mortgage that they couldn't pay, well, they put the house on the market. Today it's not that easy. GRIFFETH: Comments anybody? Mr. KUNZ: Yeah, I'd make a comment. I agree with you, in terms of the most important thing we look at in terms of what's going to take place in the real estate market is jobs. Without a job, you're not going to get a mortgage. And without a mortgage, you're not going to get a house. But we--you still have to--I mean, we still sit here and look at this little cooling period that you've talked about, I think there's a number of things going on. You've got real estate agents working in a boom market. And so now, they're trying to adjust and move to it. So you've got sellers that are looking, saying, 'Jesus, why can't I get those prices?' And now, they have to adjust to the point that--you know--that they're there (sic): You've got buyers that were jumping out there, trying to put offers on homes just so they could get something. And now, they have an opportunity to look at the overall market. But I think one of the biggest things is that we've seen interest rates--the front end number on that real estate jump from a five to a six and stay there. Psychologically, I think that's having an effect on the individuals in terms of buying. But when you look at the actual price difference on a monthly payment, it is not that big. GRIFFETH: You know, I recall, the first mortgage I took out, my wife and I did in 1982, 1982! That's all of us remember, those of us who were around then buying homes, what the rates were: 16 and five-eighths. And we were still buying at that point. That's a chart going back 25 years of the 30-year mortgage out there. And I bought it just about at the peak there. Nick Retsinas, at 6+ percent right now, why would we be talking about a softening of this market? This is still a very healthy and low mortgage rate, isn't it? Mr. RETSINAS: Well, it is trending up. You have to match interest rate with price. Prices are high. The new mortgage prices that have smoothed the process of those rising interest rates, it's pretty clear that the trends are to increasing interest rates. That's going to put a real challenge to people wanting to buy. GRIFFETH: Is there a 30-year rate that you would start to get nervous about for this market even more? We're at 6.7 percent nationally on average this week. Mr. RETSINAS: I think if it kept trending up slowly, it wouldn't be a significant problem. But once you reach 7.5 percent or back to 8 percent, then I think it might have a real dent in the market. GRIFFETH: Nick Retsinas, good to see you. Thanks for joining us tonight. Much more to come this evening here on CNBC's SURVIVAL GUIDE. * * * GRIFFETH: Bob Moulton. Mr. MOULTON: My advice is do your homework. Understand the market where you're buying or where you're selling. Consult with a real estate professional. Work closely with a trusted mortgage advisor. And understand how long you're staying in that house for. If it's a primary residence, understand that market. But certainly do your homework. GRIFFETH: If you have an ARM now, go with a fixed rate? Mr. MOULTON: If you're going to refinance into a fixed rate, you're going to pay a higher rate. But if you're going to stay in the house for another three to five years, it's insurance. So yes, go with the fixed rate. GRIFFETH: Gentlemen, thank you all for being with us tonight. Appreciate your time. Maybe we'll see you again next year. We'll do another story on real estate. Yale economics professor, Robert Shiller; National Association of Realtors, David Lereah; Century 21's CEO, Tom Kunz, and Americana Mortgage Group president, Bob Moulton.
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