Friday, January 04, 2008

Turned Out the “Only Place to Go” Was Actually Down

An old adage on Wall Street is that by the time a fad, trend or national pastime gets plastered on the front cover of a major publication, that fad, trend or national pastime has peaked.

And so it was that NotMakingThisUp highlighted—during the bright, booming summer of 2005—what seemed to have all the earmarks of a mania-marking “Cover Story” courtesy of Time Magazine.

We continue our New Year's look back at past chronicles of NotMakingThisUp to determine whethere we have, in fact, not been making things up. You be the judge.

Sunday, June 12, 2005

The Last, Best Hope For Prosperity

I bought Time Magazine today for the first time since…probably since 9/11, when I bought every newspaper and magazine available with a cover story on the World Trade Center attacks. The relevance of a weekly “news magazine” these days is, after all, right up there with “Book-of-the-Month” clubs and the Sears Catalogue.

Nevertheless, I bought this new issue of Time Magazine because the front cover is titled “Home Sweet Home” (stamped in large letters, the “S” converted into a Dollar sign) with an illustration showing a man covetously hugging a house. The sub-title reads: “Why we’re going gaga over real estate.”

I bought it, quite simply, because this Time Magazine is as good a “cover story” kind of market-mania, surely-we-are-approaching-a-top indicator as I have ever seen.

Now, careful readers who’ve been asking about the promised follow-up to last Thursday’s piece on internet-jewelry retailer Blue Nile will have to excuse me. As fun as it is to chronicle the bizarre public musings of CEO Patrick Byrne and his company’s failure at pretty much every new venture he touts to Wall Street—the latest being a Blue Nile knockoff—the current issue of Time is both fecund and worth a good look.

After all, when a Time Magazine comes along declaring “Record home prices are inflaming passions—and pocketbooks—as never before,” well, as Willy Loman’s wife said, attention must be paid.

This is still a magazine with a circulation of something like four million, and its sole function in the world is to sell as many copies as possible before they get recycled into cat litter or something else.

Obviously, the editors of Time believe that a feel-good article about the joys of home-ownership—actually, more precisely, about the ability of average people to strike it rich by buying, flipping, or just putting down deposits on as-yet-to-be-built condos—will sell a lot of copies. Making it, of course, red meat to anyone who’s seen more than one cycle on Wall Street.

So let's take a look.

Opening the “Home Sweet Home” cover, one finds an article titled “America’s House Party” which begins with the Siren Song of all bubbles, whether the South Sea Bubble of the 1700’s or the Internet Bubble of the late 1990’s or the Tulip Bubble of the 1600’s or the Oil & Gas Bubble of 1980: the guy who sees his friends doing it:

“I saw so many friends and colleagues getting rich,” John Williams, a disc jockey from Long Beach, tells the magazine, “I wanted to get rich too.” So Williams is buying houses, fixing them up and, according to the article, “flipping them for a quick profit.”

Furthermore, unlike most of the Housing Bubble stories recently appearing in various newspapers and magazines, this article is a straightforward encomium to the financial rewards of buying, selling, trading or owning a house:

The stock market may be dragging, but home prices are soaring, fueling a national obsession with real estate.

Your house is now your piggy bank.

House gawking is a hobby; remodeling, both entertainment and an investment.

Folks brag about having bought their home in the ‘90s the way they used to brag about having bought Microsoft in the ‘80s.

Real estate isn’t so much about nesting today as it is about nest feathering.

And—I’m not making this up—that’s just in the first two paragraphs.

The article goes on, with the usual Time Magazine-ish snappy quotes from newly-minted tycoons; weirdly all-encompassing-yet-inane statements (“It’s about the giddy tabulation of how many plasma TVs your house’s appreciation could buy and the embarrassment of feeling too poor for your neighborhood as houses around you are torn down for McMansions…”); and, of course, simplified, happy graphics.

However, as in all manias and bubbles, lurking within the happy graphics are some potentially disconcerting statistics, if you really look at the Time Magazine charts.

They show, for example, that the number of second homes purchased in America stayed within a range of 300,000 to 400,000 a year from 1989 to 2002—then suddenly doubled to over 800,000 in 2003 and broke 1 million in 2004. Home equity loans have also spiked, at the same time that rates appear to have bottomed and are moving higher. And in several non-sexy, non-condo, non-second-home-inflated states, mortgage foreclosure rates have tripled.

But you will not read about all that in the article itself, for Time readers presumably do not want to read about anything except how much fun this house flipping thing is.

There’s a trivia “test,” although it is not designed to test the reader’s knowledge of issues that might have a bearing on whether they are familiar with ARMs and IOs and transaction costs—knowledge that might be useful as they toss their chips into the game.

Rather, it asks things like “Which of these entertainers has sold at least seven homes in the past 10 years?” (Answer: Courteney Cox, although why anybody would care about that is beyond me.)

More interesting than the graphics or the cute quotes is a look at a single block in a Chicago neighborhood, detailing how the real estate boom has affected seven different houses:

House 1 has a middle aged owner who did a tear-down/rebuild on the house, and is reinvesting the equity in other properties, the profits from which “will put my kids through college.”

House 2 has a long-time owner “using it as a piggy bank,” via home equity loans.

House 3 is an eventual tear-down whose long-time owner hates what has happened in her neighborhood.

House 4 was sold by its previous owner after property taxes rose 1,059% in 10 years.

House 5 is being sold by its long-time owner to support her retirement.

House 6 has been flipped twice in seven years.

House 7 was inherited; the owner did a recent tear-down/rebuild.

Further on, and like the dot-com stories from the late 1990’s, the article is chock-full of real-world people throwing off the shackles of benighted thinking and plowing their worldly savings into housing.

Maybe you’re like Mike Oakley, 43, who has poured $100,000 into redecorating his Chicago house, figuring it is already worth $150,000 more than when he bought it. “Rather than invest in stocks,” Oakley says, “invest money in your home.”

You shouldn’t get the impression that you can make six figures in real estate by snapping your fingers. Just ask Max Kaiser. It once took him a whole hour.

“Buildable land here [in Las Vegas] is running out. We have only one place to go, and that’s up.”“We might be riding that wave,” he [a General Mills operations manager considering switching to the real estate business] says. “But the wave is there. So I’m going to get on it.”

And it’s not just Young (and-never-seen-a-down-cycle) Turks grabbing for the gold who are being celebrated here; it’s the old-timers, too:

Of course, you don’t need a portfolio of condos to have made a pile. Average homeowners who bought in the ‘90s…are now, like modern-day Clampetts, sitting atop newly discovered gushers of wealth.

As I recall the “Beverly Hillbillies,” the kids were morons and Granny was a lunatic. The only smart one in the bunch was Jed Clampett, a cagey old redneck, and he had wisely sold his “newly discovered gusher of wealth” and put the money in the Jed the right to drive poor Mr. Drysdale insane.

Of course, nobody here in Time-land is doing anything of the sort, except a few renters, as the article notes in a brief piece called “The (Surprising) Case For Renting” appended to the end of the eight-page “America’s House Party.”

Yet buried within the “Case For Renting” is a cautionary paragraph containing the seeds of what will, I expect, mark the germination of the seed containing the eventual reversal in the Housing Bubble:

The Choes aren’t alone in finding value in the rental market. With so many people buying homes in the past few years, landlords in certain frothy markets, like San Diego, Miami, Las Vegas and Washington, have gone begging. Not a few are collecting less rent than they are paying in mortgage expense. Their bet is that in the end, rising values will make up for their losses.

They “will make up for their losses,” of course, because, as we have been told by a Las Vegas player earlier in the article, “We have only one place to go, and that’s up.”

Anybody who reads this article—and I mean anybody, whether they are the last remaining Communist still farming onions on a collective outside Vladivostok, or a jet-setting, highly-leveraged real estate mogul who pretends to be worth more than he is, like Donald Trump—will feel that internal sense of failure, jealousy and greed that they, too, are missing out on something more.

Gushers of wealth…nest feathering…piggy banks…getting on the wave…only one place to go, and that’s up....

It’s all here in Time Magazine, available on your newsstand today: The Case for Owning Real Estate in America.

You have to excuse homeowners for getting a little giddy. When they look at the rest of the economy, they see little else to be excited about. Employment has picked up, but wages haven’t [not true: just last week it was reported that wages rose 6.3% last quarter, the largest first-quarter increase in years]. Inflation has risen from the grave. The stock market is crawling to get back to where it was five years ago [also not true: most stocks are higher than they were five years ago]. Savings accounts throw off barely enough interest to feed a parking meter [also not true: short rates have tripled in a year].

So people see their homes as their last, best hope for prosperity—as not just houses but also lifeboats.

Compelling, is it not?

Very nearly as compelling as a previous Time cover story on a similarly widespread investment mania that also, according to many, looked like the “last, best hope for prosperity.”

You may recall that Time Magazine cover story. It was published in the fall of 1999—September 27th, to be precise. It was titled:

“Get Rich.Com: Secrets of the New Silicon Valley.”

I am not making that up.

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Lee_D said...

Beautifully done, thank you.

Anonymous said...

Jeff: I don't mean to be a downer on your prescient calls, but how about looking at one which you got wrong, which would be instructive for your readers as to what went wrong in your analysis?

Jeff Matthews said...

Aaron: all in good time. This is a look-back, not a selective series of puff-pieces.

Kevin said...

I appreciate these pieces - it is quite useful review past commentary and see what you got right. As I recall, there were quite a few folks calling the housing market top around the same time (if not sooner - the doomsayer Alan Abelson comes to mind). However, getting it right is only half the story -- especially when you're talking about an overvalued asset. The other half is calling the top with precision. As the saying goes, markets can remain irrational much longer than most people can remain solvent. It looks to me like Mr. Matthews' post in this case is timely. If I recall correctly, it was more like mid-2005 was when housing stocks actually peaked (I remember pondering the exact question - when do you sell HOV or KKB or any other home builder). That's not to say the housing market peaked in mid-2005, there's a lag between housing stock and house price performance (seems Wall Street is quicker to bail out of the game sooner than joe house buyer). But what I would REALLY like is some prescient advice on when the right time is to now BUY HOV or KBH or any other home builders!

Ross said...

Am I the only one that thinks this article is very irresponsible and misleading to the readers of this weekly rag? Putting on my foil cap, would there be alterior motives in publishing an article with this type of hype?

And did you catch the Parade magazine from this past weekend's paper about Benazir Bhutto- the article was completely out of date with no mention of her assasination, not even a by-line.