Tuesday, September 07, 2010

Here They Go Again: “The Death of Housing”

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.

—“Home Sweet Home,” Time Magazine, June 2005

Buying a house is supposed to make us better citizens, better investors and better off. But that American Dream may well be a fantasy.

—“The Case Against Homeownership,” Time Magazine, September 2010

Longtime readers of NotMakingThisUp know exactly where we’re going with this—or at least the general direction.

But before we get there, let’s recap the story so far.

All human beings—and especially those creatures residing on Wall Street—operate on the basis of pattern recognition.

Pattern recognition can be employed in the form of using a computer to analyze second-by-second trading patterns in whatever one happens to trade, looking for profitable ways to buy and sell; or it can be just sitting in a meeting listening to a CEO talk, keeping an ear out for things that remind you of similar, past investment ideas that worked or didn’t work.

And one of the things that Wall Street types pay attention to when they look for patterns is something called “Cover Story Syndrome,” which is a shorthand way of saying that when investment themes get so popular they appear on the cover of a major news magazine—a dying breed, but the basic idea is still there—then that investment theme is, by definition, too popular to succeed, and maybe popular enough to start betting against.

It is a pattern that occurs more often than you might think.

The Cover Story of all Cover Stories, as any investor with grey hair will tell you, is the fabled “Death of EquitiesBusinessWeek cover story from August 13, 1979 (“How inflation is destroying the stock market”), which hit newsstands smack-dab at a market bottom—and indeed helped create that bottom by giving readers the intellectual stimulus to finally bail out.

Fast-forward to June 2005, the peak of those balmy home-buying days of Housing Bubble: Time Magazine publishes a front-cover story on the joys—at least, investment-wise—of owning your own home.

Here’s how we began our report on that Cover Story:

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.

—“The Last, Best Hope For Prosperity,” JeffMatthewsIsNotMakingThisUp, June 2005.

Well, five years later, they’re at it again: the editors of Time have given us another Cover Story—this one being possibly the gloomiest assessment of the worth of owning a home ever to hit the press:

Rethinking Homeownership: Why owning a home may no longer make economic sense.

Five years ago, Time’s “Home Sweet Home” cover showed a drawing of a man hugging a house; t
his summer’s Time cover shows a gloomy color photo of an empty-looking house in an empty-looking development, baking under a hot summer sun, with not a human being, or a dog, or cat or a tree or a bike or a car or a bird in sight.

Five years ago, Time pushed the benefits of owning a piece of the dream (“Real estate isn’t so much about nesting today as it is about nest feathering”), offered a trivia “test” with questions such as “Which of these entertainers has sold at least seven homes in the past 10 years?” and declared—and we are not making this up—the following:

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…—Time Magazine, 2005

Now, that same magazine—with prices down, oh, 25% at least from those “giddy” years—offers up gloomy anecdotes and a stark litany of the horrors of that very same Bubble it once celebrated:

Yet by idealizing the act of buying a home, we have ignored the downsides. In the bubble years, lending standards slipped…. And we ignored longer-term phenomena too. Homeownership contributed to the hollowing out of cities and kept renters out of the best neighborhoos. It fed America’s overuse of energy and oil. It made it more difficult for those who had lost a job to find another. Perhaps worst of all, it helped us become casually self-deceiving…
—Time Magazine, 2010

Yes, the same editors who five years ago gave us the self-deceiving picture of a no-risk, no-money-down housing bonanza at the absolute peak of the Housing Bubble today lecture about the fallout from those days.

Now, there is one other pattern that tends to shows itself in Cover Story articles of the type Wall Street finds useful in marking peaks and valleys in the landscape of investing, and it is this: the same Cover Story itself invariably contains certain facts that a detached reader would say heralds changes to come.

In the 2005 “Home Sweet Home” article, for example, Time’s editors included a number of happy charts and graphs which were really not so happy, if you looked closely at the data. Here’s how we described some of that data:

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.

—“The Last, Best Hope For Prosperity,” JeffMatthewsIsNotMakingThisUp, June 2005.

And, indeed, in this summer’s cover story, Time’s editors have done it again:

Until February, Star [one Star Korajkic, described as “one of America’s newest homeowners”] lived in a rented apartment in Burlington, Vt., with her husband Danijal and daughter Alina, 6. Now the family lives in a modest Cape Cod, which they own. Danijal works 11-hour shifts as a truck driver, and Star works two jobs in order to make the mortgage, but the sacrifice, she says, is worth it. “It’s amazing. We can do whatever we want… We can live a normal and nice life.”

—Time Magazine, 2010

So it is that, like all really good—and by that we mean really bad—Cover Stories, “Rethinking Homeownership” contains the seeds of a housing recovery in the very same paragraphs it declares the Death of Housing.

Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


wcw said...

Owning makes sense again in a lot of markets. The guy who sits in the cube next to me saw his landlord raising his rent 10% a year (really), so he bought one stop further out on the train for a total PITI significantly lower than his erstwhile rent.

Owning does not makes sense yet in other markets, which set includes substantially all the high-cost, coastal/urban markets that make Time headlines. Cap rates here are punk, but the owner-occupied demand even at elevated prices is strong. Sure, things could appreciate 5% a year in real terms and make current prices fair.

We rent, so I think we are betting they won't.

Gordon said...

One of my favorite covers is from early 2000. The cover of the Economist said "Awash in Oil". It was accompanied by an article that discussed the fundamental reasons why we were in store for an extended period of constantly low energy prices.

Anonymous said...

While I agree that popular media is a good contrarian indicator, I think you need to note that real estate trends and pricing are localized. While Las Vegas might have hit a bottom in housing prices, I believe that the Bay Area and Southern California still have a ways to go, given the disparity between rental rates and home prices as well as the massive inventory of foreclosures and REOs.

But What do I Know? said...

Agreed, Jeff, but there's usually a lag--the housing thing didn't blow up until two years later in 2007, and the stock market didn't begin rising in earnest until 1982--and for some reason it seems to me that the Awash with Oil Cover was in 1998.

Jeff Matthews said...

All true: big trends don't turn on a dime, and they don't end the day the cover story hits.

But what those stories do is they help fuel the capitulation of those who have been on the outside looking in. It gives them reasons to join the herd.

And eventually this is what leads to the cover being, in hindsight, dead wrong.


Anonymous said...

It Was "Drowning in Oil" and it was mar 1999

Gordon said...

@But What Do I Know--we're both wrong; a look back on my book shelf shows that the Economist in question is from March of 1999, which is a mere three months AFTER the bottom in crude.

One thing is quite contrary to this whole hypothesis, though--we remember those covers precisely because they are dead wrong. We do not remember the covers that are on the ball. So while you can point to these covers as signaling something, it might just be anecdotal evidence and not much else. Just look at the Economist cover from March of 2007--"The Trouble With The Housing Market" is says. And that was right before the widespread price declines started to occur. That was prescient, not dead wrong. And if you prefer something a bit earlier, there is the Economist cover from 2005 that showed a brick dropping with "House Prices" written on the brick. The lead line of the article says "Soaring house prices have given a huge boost to the world economy. What happens when they drop?" That is practically simultaneous with the Time magazine article you reference, Jeff.

(I tend to reference the Economist a lot only because I keep them. It's a carryover from my younger days when I kept all my Sports Illustrateds, I suppose.)

Which is a long way of saying that this game is fun to play, but it doesn't provide any substitute for the old fashioned search for value.

Timothy said...

Jeff, long time, no speak. I hope the Bay Area (aka God's Country) is treating you well. I agree that housing in some of the hardest hit areas is probably bottoming (although a big spike in rates, even if unlikely near term, could affect that). The question that I think is harder to answer is what the recovery might look like. I remember speaking one time with the management at NVR (far and away the best and smartest of the homebuilders, in my opinion), and they discussed a long period of little home price appreciation in the Washington, DC area years before the boom (even with population increasing at a decent clip, if I remember correctly). I wonder if this is what we are in for in many areas, which would make some sense after the craziness we had, or whether Mr. Bernanke's increasingly easy monetary policy might crank it up a bit at some point.

Anonymous said...

Just as in every trader's heart lives a wannabe John Paulson, in every journalist's lives a wannabe Tom Friedman -- who's often wrong too.

There is a human tendency for grand pronouncements, finding the patterns that fit all the points in the cosmos. So often, so wrong. Especially those with the soapboxes.

max yarmouth said...

I am gray haired to remember that famous BW heading as published on Aug. 13, 1982. They also did a great one on IBM with the title:"And the Winner is: IBM" in 1987 when IBM was around $176, which predictably was the top for IBM at least 10 years.

PhillipCharles said...

I, for one, enjoy 'Cover Story Syndrome' and it never gets old. But I thought the infamous cover story from '05 was titled 'Why We Love Our Homes'.

Regardless, an enjoyable read and as always, a great perspective.

Dan Ferris said...

There was a Newsweek story called Married to the Market in April 1998. There was a research piece too, which I can't find now, that said most stocks peaked in 1998, not 2000.