Through the Roof:
A Book Review
March 9, 2005 -- Perhaps it won't come as a complete shock that the chief economist of the National Association of Realtors thinks it's a good idea to buy houses.
Still, you have to give David Lereah some credit. At a time when many economists think that home prices in parts of the U.S. are dangerously inflated, he is bold enough to declare in his book -- "Are You Missing the Real Estate Boom?" -- that "there has never been a better time" to load up on property.
Over the past few years, his rosy predictions have been closer to the mark than those of the doomsayers. And he has put his money where his mouth is, plunging his own savings into rental properties in the Washington area and Florida. If Mr. Lereah is wrong, he will go down in history with the author of "Dow 40,000" (published in 1999). He may also be looking for other ways to put his three kids through college.
He could be right. Mr. Lereah notes that there isn't much space to build new homes in many of America's more desirable cities and towns. Meanwhile, there will be lots of demand from baby boomers, their children and immigrants.
But Mr. Lereah skates over the reasons for caution. "While there can always be local price bubbles, with today's economy, home owners are in no danger of experiencing a widespread fallout of home prices," he purrs. That may be. But if you're unlucky enough to buy tomorrow in an overheated California town where prices may drop 10% next year, it will be little comfort to know that the national median is still rising.
Mr. Lereah advises a careful study of economic indicators to avoid investing in the wrong place. But how many people have the expertise to make sense of local data? For that matter, how many people with doctorates in economics predicted that Los Angeles housing prices would drop nearly 30% in the early 1990s?
At one point, Mr. Lereah assures us that "the U.S. economy is projected to grow at a healthy pace into the next decade." Who is making this prophecy? Based on what divine revelation?
Never mind. Mr. Lereah stresses that the national inventory of homes for sale is lean. For the past two years, he notes, there have been enough homes on sale to last for only 4.3 to five months at the current rate of sales, compared with what he calls a normal level of 5.5 to six months. But these "months' supply" data tell us only that homes have been selling briskly of late -- not what will happen in a year or two. If the market turns, the pace of sales will drop and the supply will suddenly be ample enough to last many more months.
Other housing pundits are troubled by a rise in the absolute number of homes on the market. At the end of last year's third quarter, vacant homes available for sale stood at 1.08% of the nation's total housing stock, up from a range of about 0.8% to 1% during most of the 1990s, says Rick T. Murray of Florida-based Raymond James & Associates Inc. Meanwhile, lots of people dazzled by the prospect of instant riches are bidding up rental properties. LoanPerformance Inc., a mortgage-data firm in San Francisco, says that 8.5% of purchase-mortgages in the first 11 months of last year went to people who didn't plan to occupy the homes themselves (mostly investors). That's up from 5.8% in 2000.
Renters for these homes are hard to find. Single-family rental vacancies topped 9% at the end of 2004, up from less than 5% a decade earlier. If these would-be Donald Trumps start to get the willies and put their rental units back on the block, we're going to have a lot more inventory.
Mr. Lereah sees no reason to fret. "Condos are good investments...having enjoyed double-digit appreciation during each of the last three years," he writes. So buy now? This doesn't sound like the sort of logic that made Warren Buffett rich.
Mr. Lereah, whose salary is paid by a million Realtors, advises using "your real estate agent as an objective adviser" on pricing. Now, I for one am happy to pay for my agent's valuable services -- not least her sunny disposition -- but I do not consider her an objective adviser. Our goals, as a consultant would put it, are not aligned. She wants me to buy a home soon so that she can get her commission; I want to avoid overpaying.
For Mr. Lereah, it isn't enough to be a home owner sitting on nice paper profits. You need to get out there, now, and buy a bigger primary residence or vacation home or even Fannie Mae securities. "Most households are underinvested in real estate," he writes. Remember when we were underinvested in technology?
The most valuable parts of his book are the tips on how to create a strategy for buying rental properties, finance them and predict your cash flows. Here Mr. Lereah is writing from his own (so far) pleasant experience. He also has some good tips on judging whether improvement projects will make your home more valuable. (Forget the pink Jacuzzi.)
But Mr. Lereah seems to have been straining to fill up a whole book. In one paragraph, he writes: "Lenders view rental properties as riskier and thus charge investors a higher borrowing rate." In the next paragraph: "Lenders consider investment property riskier and will charge a higher mortgage rate." Elsewhere he observes: "As a real estate purchaser, your objective is to purchase property that will rise in value, not fall."
If you strip out the verbiage and hucksterism, this 278-page book contains perhaps 125 pages of information useful to people who want an introduction to investment in residential real estate. That makes the price, $19.95, a bit of a stretch. Like home values in Las Vegas.
Email your comments to rjeditor@dowjones.com.