Housing: After the Fall, or Before the Blowoff?

On the Buzz & Banter yesterday afternoon Minyanville Professor Fari Hamzei pointed out a well-written and reported article on U.S. Housing from The Economist magazine.

By now everyone who reads Minyanville knows that I certainly agree that house prices in the U.S. have indeed reached dangerous levels. The anecdotal evidence that we are approaching a speculative frenzy in housing grows by the hour.

In fact, just to add my own nugget of anecdotal evidence to the observations Jason Goepfert, Fil Zucci and others have thrown out there, last Thursday after work my wife and I walked to a neighborhood bar for a drink.  Now, this wasn’t a real estate hangout mind you, we’ve visited this place dozens of times, it’s just a typical neighborhood bar where locals hang out.

Anyway, there were six other people at the bar and every single one of them was directly involved in real estate as their primary source of income. A coincidence of sorts, I suppose.  There was a realtor, a couple of contractors, a speculative renovator, and two guys who worked on two other different renovation crews.  the topic of conversation was real estate of course.  And everybody was feeling pretty flush.  One of the contractors joked: “These days I tell people who call me that I’m expensive... and that’s just an estimate.”   Roars of laughter ensued.

Anyway, back to The Economist. The cover story article on housing begins:

“PERHAPS the best evidence that America's house prices have reached dangerous levels is the fact that house-buying mania has been plastered on the front of virtually every American newspaper and magazine over the past month.”

I disagree.

While I do agree that housing is in a bubble stage, unlike The Economist I believe that perhaps the best evidence that America’s house prices have reached dangerous levels… but not yet the PEAK of those dangerous levels… is itself the fact that the house-buying mania has been plastered on the front of virtually every American newspaper and magazine over the past month. That alone is almost a guarantee that there is still a bit more frenzy left in the tank.

I’m not picking on the print media here. News, almost by definition, is popular when it reflects consensus opinion, and unpopular when it fades consensus opinion. It is not a negative reflection on the editorial standards of a magazine when it runs cover stories that coincide with the culmination of specific positive or negative financial events.  Rather, it's a positive reflection on their ability to discern the most wide-ranging interests of their target markets.

So, the fact that The Economist runs a negative story on, say, the U.S. dollar, just when the dollar is bottoming, means that the magazine is actually doing what its readers are paying it to do: report on things that are the most newsworthy, which typically means those things which are most widely known and discussed.

Below are some previous covers of The Economist that coincided with noteworthy turning points.

Dec. 04, 2004 – “The disappearing dollar”

Since Dec. 4, 2004, the U.S. dollar index is up 9.33%.

Oct. 25, 2003 – “The end of the Oil Age”

Since Oct. 25, 2003, NYMEX Crude is up 87.6%

June 14, 2003 – “Extinction of the car giants”

Sure, GM and F may be headed toward extinction, but shorting the stocks at the time this cover appeared would have crushed you by December of that year. Even now GM and F both are about flat since this cover appeared.

From June 14, 2003 to Dec. 31, 2003, GM was up a little more than 47% while F was up about 46%. From June 14, 2003 to now, GM is down about 1% and F is flat.

In October 1998 I was standing with some clients in the paddock at Keeneland Racecourse in Lexington, KY waiting for the third race to begin when my cell phone, and the cell phone of virtually everybody else in the paddock, rang.  A voice said, “The Fed just cut by 50 basis points, the market is up huge!”   The ripple of that news among the crowd there to watch horse races was one of the most surreal things I've ever seen.  Some people turned around and left the track, presumably to go see their broker, or buy or sell something online I don't know. 

That, in my mind, crystallized what we now know was a massive tech bubble and a frenzy of stock speculation. Throughout the remainder of that year, and for another 14 or 15 months thereafter, virtually every day brought something more bizarre than the day before.  Physicians and attorneys quit their practices to trade stocks (similar to one of the guys at the bar the other night who quit practicing law to buy and sell houses). 

Other financial professionals I spoke with said the same kind of thing over and over again… “It’s crazy, but what can you do? You gotta buy tech or get left behind. Clients won’t call me back if I don’t bring them a list of tech stocks.”

I’ve been reminded of that period for nearly two years now, only this time with respect to housing.  This kind of thing can last far longer than one could ever imagine.

I have no doubt that housing will again grace the covers of newspapers and magazines before this is all over, but I expect the headlines to be far different than the negative take via the Economist.

Maybe something along the lines of this:

“Housing: The market that can’t be stopped,” or,

“Real Estate: The Bubble Who Cried Wolf," or.

"Housing Resilience Astounds Economists!"

It may be a long wait, but at least for now I have no position in that market.