"Economist" Publishes "Why The Real Estate Boom Will Not Bust" Shortly Before Real Estate Boom Busts

David Lereah was the chief economist for that National Association of Realtors before he left to become an Executive Vice President of Move, INC. During his tenure as chief economist, he published several books. One of them, released in 2005, was titled Are You Missing The Real Estate Boom? Why Home Values And Other Real Estate Investments Will Climb Through The End Of The Decade—And How To Profit From Them. The cover depicted a nice enough looking family staring up at tiny little house that was hovering in the sky above their heads, out of reach, but still tantalizingly close. If only, if only they’d just read Mr. Lereah’s book!

According to Lereah, home owners who pay off their mortgages are bad at managing their money and are “very unsophisticated.” He told the LA Times in 2005,

“If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years,” said David Lereah, chief economist of the National Association of Realtors and author of “Are You Missing the Real Estate Boom?” “It’s as if you had 500,000 dollar bills stuffed in your mattress.”

When suspicions began to arise that residential real estate was experiencing unsustainable growth and that a correction was inevitable (and disastrous, considering the amount of mortgages that were financed with the assumption that the home owners could sell the house at a substantial profit in only a few years), Mr. Lereah’s book was retitled. The new title read Why The Real Estate Boom Will Not Bust—And How You Can Profit From It . That was February of 2006. We think enough time has passed without a title update.

What should Mr. Lereah’s book be called now?

Home Equity at Risk [LA Times]
David Lereah [Wikipedia]

Comments

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  1. starrion says:

    How you can have a house fall on you financially, and how to avoid it.

  2. ChrisC1234 says:

    “Watch as your house is taken from you during the real estate bust!” They wouldn’t even have to change the cover image.

  3. stinerman says:

    The freedom associated with being completely debt-free beats getting a 1% better return on an investment.

  4. TCameron says:

    How to lose a house in 10 months.

  5. rmz says:

    Only a Realtor(r)(tm) would be so blindly optimistic.

  6. NoWin says:

    @stinerman:

    Good one!

  7. rmz says:

    Also,

    “How to Purchase (and Lose!) $2.2 Million in Real Estate and Still Be a Holier-Than-Thou Asshole About it”

    by David Lereah with Casey Serin

  8. MadMatter77 says:

    “Gone in 60 Days” or

    “F is for Foreclosure” or

    “Daddy, why do we have to live in a cardboard box now?”

  9. Buran says:

    Who Repealed The Law Of Gravity?

  10. Teki says:

    BOOM, It busted! you and your lost money.

  11. ancientsociety says:

    “How to Equip Your House With An Anti-Gravity Device and Never Pay Real Estate Taxes Again!!!”

  12. silenuswise says:

    Ah, this is rich. And here’s a funny take on it from the writer of the Irvinehousingblog (one of my go-to sites for housing crash info):

    [www.irvinehousingblog.com]

  13. catnapped says:

    How about “Foreclosure: Sucks To Be YOU!”

  14. TechnoDestructo says:

    @Buran:

    No one. The house is just full of hot air.

  15. Meg Marco says:

    @silenuswise: That’s wonderful!

  16. Tikabelle says:

    This Time, Dorothy Stays in Kansas

  17. rbb says:

    How about “Next time try to actually read the paperwork you are signing.” Or “If you can’t afford a 30 year fixed mortgage, then try later after you save some money.”

  18. Roadkill says:

    “If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years”

    Could someone please explain this to me? Honestly, I’m not being rhetorical here.

    It seems to me that if you paid your mortgage off you pay less in interest overall, so once you sell your house again you end up with MORE money, not LESS.

    Is he saying you should stay in a perpetual state of mortgage?

  19. Parting says:

    @silenuswise: Lol, picture’s amazing :)

  20. WhatThe... says:

    I second Roadkill’s comment! I want my mortgage to be gone and at the rate we are paying it will be completed in under 15 years (on a 30 year loan)… why is this bad?

  21. noquarter says:

    @Roadkill: I’m assuming, because I can think of no other possible reason for it, that he means you should always be borrowing against the value of your house and investing the borrowed money in something that pays off more than the interest on the mortgage costs you.

  22. Gopher bond says:

    @Roadkill:
    @WhatThe…:

    Re: mortgages,

    Believe it or not, some financial “experts” advise on keeping your mortgage since you can dump money somewhere else and get 8% pretty commonly if you leave it alone. So they say keep your mortgage for 30 years at 5% and stuff money in an invesment at 8%. Simply math but it doesn’t take into consideration the security feeling of not having a mortgage.

  23. Roadkill says:

    @WhatThe…: I’ve figured it out by RTFA. Here’s the idea:

    Person A has a $500k house and has paid off his mortgage. He has $500k in assets, but it’s what he lives in, so he really has no spending money.

    Person B also has a $500k house but refinances constantly to keep the mortgage at the value of his house. He has to pay interest monthly but that $500k is in his pocket at all times, ready to be spent.

    Person A (overall) has more money than person B, in the long run. But person B gets to spend extra money, whereas person A just has security.

    So the reason we didn’t understand is because the concept of person B is foreign to both of us. I assume we are similar in our approach to finances – safety – because otherwise it might have even *occured* to us that person B could exist.

  24. Roadkill says:

    @noquarter:
    @testsicles:
    Ah, that’s another angle I hadn’t thought of. Thanks.

  25. Hawkins says:

    Mr. Roadkill:

    If Mr Lerah’s assumption is that real estate will continue to appreciate in value at a rate higher than the interest rate that you’re paying, then you are indeed a moron for not buying as many houses as you possibly can with whatever kind of loan you can get.

    That is: If you have enough money to pay off your mortgage, then maybe you should buy a second house instead (or a way bigger house), because you’ll make more money on the ever-booming real estate values than you’ll pay in interest.

    Can’t afford the payments on a 30-year fixed note for that second house? F*ck that! Get a three-year interest-only loan! You’ll do great!

    Now that’s managing your funds efficiently!

  26. SuperJdynamite says:

    If you have a $500k house that you own outright you can, at any time, get money out of it via a mortgage or HELOC. You can deduct that interest no matter what you’re actually using the money for. You don’t have to pay interest until you actually decide to do something with the money. If it’s a HELOC you can get a pad of checks and start sending them out whenever.

    With this in mind, does Person B really have that much of an advantage?

  27. Roadkill says:

    @Hawkins: A one house situation (as described above) won’t get any better by adding houses… Plus, everyone knows that housing prices won’t rise forever. That’s already been disproven before the current slump.

    Are economists really that blind with greed?

  28. noquarter says:

    @Roadkill: I think never-ending always-increasing consumption is the foundation of the US economy. So, yeah, I think there are a lot of economists who are blind to the reality of such markets and their inevitable brick walls.

  29. Majisto says:

    LIEreah was a paid shill (I don’t like the term “economist” to describe this guy) for the NAR and now he’s shilling (albeit less so now) for Move Inc. Lawrence Yun is the new paid shill. He’s picked up where Lereah left off… though I don’t believe he’s written any books yet, I just keep reading articles where he says “this is the bottom” and then there’s another 4% price drop when the next month’s figures come out. These guys represent a trade group who directly benefits from rising prices, so it’s no surprise the outlook is always rosy.

  30. johnva says:

    @testsicles: Mathematically, he’s correct that it’s usually better NOT to pay down your mortgage early. If you have a mortgage locked in for 30 years at a low interest rate, you’re probably much better off investing any excess than paying it down early. For one thing, it’s rather easy to get a better return by investing. For another, money invested in the stock market, bonds, etc is usually much more liquid than money invested in your house. So you don’t have to sell your house to access your pile of money. And, with a fixed rate mortgage, dollars later in the 30 year repayment period will be worth less than dollars early in the repayment period due to inflation. So your inflation-adjusted payments actually decrease over time in a fixed rate mortgage, and they go lower the longer you keep it.

    That’s not to say that there aren’t good reasons to pay down your mortgage early. But mathematically the guy is correct on that point (though he was an idiot, or a greedy opportunist, about the state of the real estate market). Most people who want to pay their mortgages down quickly do so because they have an emotional desire to “escape debt”.

  31. quagmire0 says:

    “Ha! Look at those schmucks that paid of their house and now are completely financially stable!” Says the guy who’s house is now worth less than his mortgage. :D

  32. johnva says:

    @quagmire0: That guy is fine as long as he has been investing/saving his excess instead of paying down the mortgage faster.

  33. VeritasNoir says:

    The more accurate situation would be:
    Person A and Person B both buy 100k homes at 6% rates.
    Person A chooses a 10 year program and pays around $1110/month. He has his home paid off in 10 years and, if he invests the $1110/month for the 20 years following, ends with a savings of $631,589 (assuming the 8% rate that was discussed in previous posts).
    Person B chooses a 30 year program and pays around $600/month. He uses the $510 he is saving to invest monthly. In ten years, he still owes $83,685 on his home, but has saved $91,863. Assuming he still doesn’t pay off his home and lets his interest compound, he will have saved $718,361 after 30 years.
    The Outcome: Person B has saved $86,778 more over a 30 year period, could have paid off his mortgage at any time (THAT is financial freedom) and can use his additional savings to do with as he pleases.

  34. jeffl says:

    @VeritasNoir: @VeritasNoir: Thanks, that is a great explanation of the logic. My problem with that plan is that it’s making the assumption that an 8% gain is guaranteed. 8% isn’t very high, and in the crazy 90s was easy to get buying stock indexes, but unlucky timing, bad markets, etc. can turn 10 years of 8% into 10 years of 0% or even losses.

    I think the answer, like all investing, is to spread things out. Extra money paid into a 6% mortgage is like putting it in a 6% savings account (except it isn’t very liquid). The interest savings is a guaranteed return. Other savings can be put in the market, bonds, etc. It doesn’t have to be all or nothing.

  35. huadpe says:

    @VeritasNoir: That is all well and good, but it’s faulty. Assuming the efficient markets hypothesis to be true, then no particular investment strategy will beat others when accounting for risk. Assuming also that the bank did due diligence in lending you that money*, they figured that your 6% payments represented a market-optimal risk to reward ratio. You cannot beat your mortgage in the long run, if you could, then the bank would have done your investment strategy and not given you a mortgage at that rate.

    *This is by far the weaker of my two assumptions, and many financial institutions have not done this recently. They are paying heavily for playing fast and loose with their mortgages.

  36. newspapersaredead says:

    There were all kinds of articles like this a few years ago. I can’t remember how many times I heard “you can’t lose in real estate” in the mid 2000’s.

  37. backbroken says:

    Reminds me of that assinine “The Dow at 32,000″ book that came out in the late 90’s. Not sure of the exact title.

  38. BugMeNot2 says:

    Reminds me of thank you for smoking: “The man’s a genius,” Naylor says approvingly in voiceover. “He could disprove gravity.”

  39. ludwigk says:

    @huadpe: your assumption is wrong (for some reason that i dont know), but the historical return of the DJIA has been greater than average mortgage rates for about the last century.

    @jeffl: over a long enough time the growth of well diversified assets has consistently grown at about this rate. for virtually any 20 year period this century it would hold. You would have to be extrordinarily UNLUCKY for this not to be true.

    Veritas didnt even account for the tax break provided by paying so much more interest over the years. Paying off a low interest home loan aggressively is leaving a lot money on the table. Like a couple new luxury cars.

  40. huadpe says:

    @ludwigk: There are two reasons I’m not wrong. The first is risk. Mortgages are lower risk to default than stocks are to tank*, and therefore will require higher average returns in order to attract investment. Banks are mildly risk averse, since they have short term debts to pay, the cost of a massive loss is greater than the opportunity cost of a missed opportunity.

    The second reason is that the banks are gigantic. They can’t buy and sell stocks in quantity without affecting it’s price. If they want to reinvest 10% of their mortgage assets into stocks, the price premium they’ll have to pay to buy that much stock will wipe out their gains instantly. It’s pretty easy to find sellers for 50,000 shares or less of any stock, but if you want to get 5,000,000 shares, you have to bid up the price significantly to attract buyers.

    The best way to see that second point is to consider a buyout. You will see in almost every case that the per share price they offer is much higher than the current market rate. The reason for this is that if 1% sell on any given day, that means 99% think the stock is worth more to them than the going price. They have to raise the going price to attract 50%+1. Mutual funds also encounter this problem when they get too big.

    *The subprime mortgages were leveraged to hell and back. Anything can become high risk when you leverage it.

  41. disavow says:

    People seem to forget that personal finance is about security and well-being (the “personal” aspect) as much as it is about profit. On a pure numbers basis, generally it is better to carry a mortgage and invest the proceeds, but what’s the point for people who live each day in fear of losing their house? What they’ve really mortgaged is their happiness.

    @ludwigk: Dirty math. You can’t include the mortgage interest deduction while ignoring costs from maintenance, insurance, etc.

  42. Call it How To Float Your Mortgage.

  43. artki says:

    The Amazon reviews are funny and savage.

  44. forever_knight says:

    it’s difficult for me to buy the “don’t pay off your mortgage” line that people frequently tout. sounds too much like the frequent lies of “real estate doesn’t go down” and “the stock market only goes up” and “i love you”.

  45. ziegs says:

    How about he calls it “Oops”