Why Barron's Housing Cover Is So Terribly Wrong
New Home Completions, 1968-2008
click for ginormous chart
Major New Home Building Housing expansions since 1968 are marked as a red horizontal line at bottom. They previously lasted 2-4 years (71-73; 76-79; 83-87) The most recent boom far exceeded all previous expansions, running form 1992 - 2003 -- then exploding upwards for another 3 years til 2006.
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During the Bull Market of the '90s, I used to read Barron's for their hard edged, skeptical look at many of the excesses on Wall Street.
During the past 5 years or so, that skepticism seems to be fading. Sure, Alan Abelson is still a curmudgeon, and Randall Forsyth is no cheerleader. The trader column is always worthwhile, and Santoli is usually interesting. Lately, the magazine seems to be drinking the same Kool-Aid my pal Larry Kudlow seems to enjoy so much.
The latest evidence of this is the wrong headed cover story on Housing, declaring "Home Prices Are About to Bottom," and why "This Real-Estate Rout May Be Short-Lived." I expect this cover to suffer the same ignominious fate as the recent cover story on General Motors (Buy GM) will.
The reason a bottom is in the offing, argues the article, is based upon specific data points:
• The U.S. housing market typically begins to improve after housing starts have fallen by a million units (which has now happened);
• Prices rose rose slightly in April in eight of the 20 markets covered by Case Shiller index;
• Sales activity seems to be picking up. NAR reports sales rose 2% in May from April's levels, the second month in the past 10 to have seen an increase.
• The ratio of sale prices to per-capita income in various locales -- already has improved affordability.
• $300 billion congressional bailout is coming for troubled subprime mortgages;
• A government takeover of loss-ridden Fannie and Freddie is possible;
• Several analysts expect home prices to be steady by years end;
• NAR economist Lawrence Yun is optimistic home prices will stabilize in the next five months and begin to recover next year;
We've covered each of these in great detail over the years, but what the hell, once more won't hurt:
• The explosion in home construction this cycle has utterly exceeded all previous home construction booms. As the chart shows, it is so much larger than any expansion over the past 40 years as to make the prior 1M drop meaningless (see chart at top);
• Housing completions passed the minus 1MM figure a year ago -- you could have called a housing bottom in August 2007 by the same logic . . .
• An unprecedented 10% of homes built after 2000 stand vacant, according to Stansberry & Asssociates Investment Research;
• In just about every area of the country, the ratio of sale prices to per-capita income remains significantly elevated over its historical averages. And, that's before we consider any economic downturn. As of July 12 2008, a significant recession is looking increasingly likely;
• Sales have ticked up several times, only to be revised lower in subsequent months. And, the selling season improves each month, from January (the slowest month) to August. Seasonal adjustments sometimes seem to not fully reflect this.
• Median Sale Prices are rising not because home prices are going up, but because less of the inexpensive homes are selling (i.e., smaller starter houses) . The mix of homes -- not price increases -- are skewing the numbers;
• By nearly all traditional metrics, Home prices remain extremely elevated; Median Price to Median Income or Homes vs. Rentals. All of these imply further price adjustment towards the historical norms;
• These same analysts who are calling for stability in second half of 2008 have been incorrectly expecting home prices to stabilize for years; why will the recession make home prices stabilize?
• A takeover of Fannie and Freddie is somehow a positive? All that would accomplish is restoring mortgage purchases back to where it was in March 2008. So what?
• The bailout will only delay the inevitable repricing that needs to take place;
• NAR economist Lawrence Yun? Puh-leeze! He's been optimistic housing would stabilize for years now.
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Home prices rose 86% in the 10 largest markets, and 72% in the 20 largest. Incomes lagged so badly behind, that a mere 15% housing price decrease has failed to return the income to house price ratio towards normalcy. Look for another 10-25% over the next few years -- or the inflation adjusted equivalent, sideways action for the next decade . . .
The table below is via the Barron's article. I read this as showing that housing prices are still way over where they were 8 years ago. The chart afterwards shows how much housing could fall, via the same Case Shiller Index:
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Table via Barron's
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Chart via Federal Reserve Bank of San Francisco
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Finally, the author of the Barron's piece notes: "With the benefit of hindsight, one can discern a concatenation of developments that made the latest cycle almost inevitable."
What nonsense. Plenty of people -- including yours truly -- were warning about the inevitable housing collapse and pricing correction in real time. Dismissing those who made timely warnings is an ugly form of historical revisionism . . .
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We can easily dismiss this article based on the simple Housing facts we know to be true. But this article discusses what might happen in the near future.
Perhaps this author is seeing things the present facts obscure. Maybe he has an ability to see what others miss. How has his track record been in making these articles forecasting improvements in weak companies or sectors?
Short Answer: Not so good.
Longer answer: Here's a few excerpts from the past year:
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1. AIG's Selloff: A Huge Opportunity (FEBRUARY 18, 2008)
http://online.barrons.com/article/SB120312653758273245.html
Excerpt: Last week's plunge was way overdone ($44.10). The stock could jump nearly 50%. (Yesterday's close: $23.08)
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2. MBIA: Priced for Catastrophe (JANUARY 21, 2008)
http://online.barrons.com/article/SB120071150488302379.html
Excerpt: MBIA's shares were savaged anew last week, and now its stock looks cheap. It trades for about $8, well below a conservative liquidation value above $30 a share. (Yesterday's close: $3.90)
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3. Sears: A Storied Name on Sale? (OCTOBER 22, 2007)
http://online.barrons.com/article/SB119283873785565563.html
Excerpt: Money-management wunderkind Eddie Lampert is likely to succeed in turning around Sears. For investors, the big payoff lies in real estate. Sears Holdings sells for $134 a share, but could have a break-up vaule of more than $300. If Lampert turns around its retail operations, the shares could rally to 200 or more. (Yesterday's close: $70.91)
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4. Macy's: Miracle on Private-Equity Street (JULY 23, 2007)
http://online.barrons.com/article/SB118497718683573586.html
Excerpt: The shares, now about $42, could fetch more than 52 in a takeover. And there's ample room for the current management to improve marketing and cut costs. (Yesterday's close: $15.51)
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To be fair, this has been a very difficult environment -- particularly for financials and retailers.
The market has fallen about 20% since these articles came out, but these stocks are down 40-60% -- more than double the S&P500. And while Financials and Retailers have been particularly hard hit, one must question the wisdom of constantly suggesting buying those broken sectors under the greatest selling pressure.
The famed Barron's Bounce has become become a bit of a misnomer -- it is looking more and more like the Barron's Trounce . . .
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Previously:
Housing Price to Rent Ratio (May 2008)
http://bigpicture.typepad.com/comments/2008/05/housing-price-t.html
How Far Might Housing Prices Fall? (January 2008)
http://bigpicture.typepad.com/comments/2008/01/how-far-must-ho.html
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Sources:
Bottom's Up: This Real-Estate Rout May Be Short-Lived
JONATHAN R. LAING
BARRON'S COVER JULY 14, 2008
http://online.barrons.com/article/SB121581623724947273.html
Don't Buy Housing Bubble Propaganda
Barry Ritholtz
RealMoney.com 5/26/2005 2:04 PM EDT http://www.thestreet.com/p/rmoney/barryritholtz/10225437.html
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Saturday, July 12, 2008 | 09:49 AM | Permalink
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Comments
Love the dividend column, and Abelson is OK, but I only read Barrons for the money manager interviews anymore. The insistence on having Abby Cohen on their all-star investing panel is irksome. I think the blogosphere is eating their lunch.
Posted by: Clyde | Jul 12, 2008 10:00:34 AM
How can you call for a bottom after the rumors swirling around Fannie and Freddie? I would also add that Bush's comments yesterday indicate that this is another can to be kicked down the road to the next pres., along with greenhouse gas emmissions, Iraq, etc. Logic tells you that a Republican government does not have high level discussions about rescuing these entities unless they are in serious trouble. Bush saw the price tag and said "not on my watch".
The bottom will come when the bank failures end, when Fannie and freddie are rescued, and when the mgt insurers are euthanized.
Posted by: larster | Jul 12, 2008 10:05:43 AM
Mainstream media is gratuitous schlock, not worthy of consideration.
Famed? Perhaps to baby boomers who are used to respecting public figures.
I'm 30. Until proven otherwise, I believe everything I see on TV or in print.. is pure spin, and factually incorrect.
Posted by: Unsympathetic | Jul 12, 2008 10:08:38 AM
Back in the 90's I called it the "Barron's Curse." It seems to be back in full force. Citing Yun as a source was really stretching credibility.
Posted by: Bob G. | Jul 12, 2008 10:22:31 AM
When I was trying to figure out the game I read Barron's religiously. Now I can't really stomach it at all. Don't know if I've gotten smarter or it's gotten worse, but not reading it has not hurt me a bit. Perhaps it is like Cramer and only good for fading????
Posted by: lurker | Jul 12, 2008 10:23:01 AM
Beautiful takedown. See, this is the kind of thing I wish the MSM would do: when someone says something, and they've been objectively terribly wrong in the past, we should be reminded of that. I'm told the Daily Show does it from time to time, but why not real news shows?
Posted by: tranchefoot | Jul 12, 2008 10:40:15 AM
My wife just got back from pickup at summer camp and some of the mothers were talking about their monthly payment for home heating oil which the heating oil companies send out to their customers around now. Many people lock in their heating oil costs around now but many more agree to a monthly payment that remains the same year round. They were "shocked," their 450 payment went to 900. The "SUV" house is going to become as hot a potato as the Ford Explorer and most of the "middle class" houses built in the past five years are indeed proportionally SUV's.
This is going to be just like those stimulus checks but in reverse and multiplied by four... Home prices have bottomed? Reminds me of when BAC upgraded homebuilders to a buy in 2006. (At which time I had one third of our capital on a short of Pulte and Beazer Homes and my stops were hit. Still cursing myself for "the one that got away.")
Posted by: Fenner | Jul 12, 2008 10:44:06 AM
To Fenner's point, natural gas is around $12. That will be a disaster this fall when people start receiving their bills. They have no idea what is in store like the heating oil folks are now finding out.
Posted by: me | Jul 12, 2008 11:09:53 AM
I see a future in which homeless suburbanites cluster around trash barrels, warming their blue, chapped hands over blazing piles of Barron's, old broker confirmations, and moldy mutual fund statements.
Of course, with Barron's down to 16 pages by then, and the cover price having reached 75 dollars, it'll take a whole bundle of them just to make a decent fire. Maybe we can use discarded Bernanke portraits as firestarters. GOT MATCHES?
Posted by: Jim Haygood | Jul 12, 2008 11:12:47 AM
This article is classic DennisKnealerie ! A completely glib, polyannish viewpoint operating under the mindset that what has fallen in price must eventually go higher. Thanks, BR, for exposing the author of this article as a serial wealth destroyer.
Why is it so difficult to understand that asset classes have long cycles due to changing dynamics in the economy, and that due to permanently higher oil prices it has enormous ramifications on things like housing?
Here's the inconvenient truth: Until we solve the oil dilemma and get energy costs down to an affordable level, stuff like housing can't go up in price because fewer people can afford them. At a certain price housing will stop falling, but it certainly can be an L shaped recovery where housing prices simply flatline.
George W. Bush looks more and more like a modern day Herbert Hoover with each passing week.
Posted by: Todd | Jul 12, 2008 11:12:54 AM
Fenner
-- hope you re-established those shorts higher!
Posted by: Barry Ritholtz | Jul 12, 2008 11:13:21 AM
You Like Santoli?
His column today was total garbage . . .
Posted by: Its not the shoes | Jul 12, 2008 11:15:20 AM
For your next trick, BR, could you please take down Fox News for their Bensteinery headlines. This is so long overdue !!!!
Forbes on Fox right now with this headline:
FANNIE & FREDDIE TROUBLES: GOOD NEWS FOR HOME PRICES !!
Posted by: Todd | Jul 12, 2008 11:18:12 AM
One statistic that I have never seen in analysis of the housing stock is the number of housing units lost. I would assume these would be due to condemnation, tear-downs for commercial property or higher and better use (there is a large grouping of older apartments about 4 miles from my house in Dallas that has been leveled and will be replaced with much lower density homes), and natural disasters (e.g. Katrina/Rita). Does anybody have a source for this valuable data?
Posted by: ndallasj | Jul 12, 2008 11:19:22 AM
Next Fox News headline:
IS THE SLOWING ECONOMY SAVING MARRIAGES?
You can't make this up. They must have hired former employees of Pravda and Tass to be so imaginative.
Posted by: Todd | Jul 12, 2008 11:23:31 AM
you lied BR, that did hurt!
Posted by: Sebs | Jul 12, 2008 11:23:55 AM
Barron's was once a great rag. Isn't Santoli the senior editor? Therefore, isn't he really responsible in large part for the quality and depth of the journalism? He seems like a geniune guy but he doesn't come across as a critical thinker. That's a skill he should be consciously nurturing in that role. If he can't find it, he shouldn't be senior editor. Of course, the counter argument to that is those doing the writing also need to have better understanding of what they are writing about. We have a crisis in journalism and I wonder if it has to do with pell mell corporate buying of media assets. Corporations are more concerned about the bottom line than hiring the old-fashioned hard-nosed journalists. Some of the authorship names in Barron's makes me cringe.
Posted by: bdg123 | Jul 12, 2008 11:30:40 AM
Barry, thank you, that article was so simple minded it made me angry. The most important omission was any mention of inventories. Homeowner vacancies are now at an all-time high 2.9%. During the 1990s downturn, the peak was 1.8%. That's a million empty houses, there's never been anything like that before.
Not only that, rental unit vacancies are also elevated, at 10.1%, compared to the ca. 7-8% range in the early 1990%.
(Census Bureau: Housing Vacancies and Homeownership)
I'm starting to think Barron's isn't worth the extra $20/year.
Posted by: Bob_in_MA | Jul 12, 2008 11:36:29 AM
Back in the day Barron's was pretty good and, like Byte in its' hayday, if you were getting up to speed a good place to start. It's been several years since it's struck me as reliable, though Santoli and had several constructive exchanges on Technology. He's a sharp guy who paid attention and dug in behind the charts, stats and arm-waving. At least then. But that string of articles should never have seen the light of day - as you imply each was a disastrously poor call. And each was disastrously poor for the same reasons - not understanding and investigating the fundamentals of the business and bouncing it against changes in the environment. The chart you posted yesterday on F, GM, Leh, et.al. makes the same implicit point - you've got to understand the business and its' drivers. For example Detroit has three major challenges post the cash crunch - new smaller and desirable models then re-doing manufacturing then a deep structural makeover. Right now they're still in denial the same way Citi was until Pandit. This is sad if it didn't make you want to throw-up. A partial dissection of Detroit is this: http://tinyurl.com/6rqyxx
Posted by: dblwyo | Jul 12, 2008 11:48:20 AM
Actually, while we're dumping on Barron's be sure to check out the story on how their picks did in the first half. There's bullish picks fell 4.24%, but hey, the benchmarks chosen for each stock fell 4.45%!
Ironically, there bearish list only fell 2.15%.
They essentially made the case for index funds and not wasting time reading Barron's.
Posted by: Bob_in_MA | Jul 12, 2008 11:48:32 AM
I only read Barron's intermittently on train or plane journeys and suchlike. I thought for years they had a touch of WSJ ed page disease but I agree broadly with BR that back in the nineties there was a bit more scepticism around. This seems to have disappeared completely over the past seven years. I don't want to sound paranoid but I basically put it down to the fact that in the nineties there was a democratic administration in office so it suited their book to be more critical in the broadest sense but once we got a Republican admin the objectivity went out the window. I've read stuff in there over the past six years that was totally laughable and I remember a couple of the cases Barry cites. As for the story about housing it's bizarre. Someone above mention Forbes whose another joke as an objective source of info about the economy. These people like Forbes, Kudlow, Cramer et al are so totally discredited it's laughable. Why does anyone pay attention to this crud.
Posted by: John | Jul 12, 2008 11:52:28 AM
"See, this is the kind of thing I wish the MSM would do: when someone says something, and they've been objectively terribly wrong in the past, we should be reminded of that."
"I'm 30. Until proven otherwise, I believe everything I see on TV or in print.. is pure spin, and factually incorrect."
Tranchefoot and unsympathetic, you've identified one of the most fundamental problems we have in the country today: a virtually useless class of allegedly professional mainstream "journalists."
Sure, there are notable exceptions, but if you were to catalogue one month's list of: (1.) incredibly shoddy and inaccurate reporting; (2.) brainless, sycophantic, stenographic cheerleading, (3.) astounding laziness; and, most importantly, (4.) a complete and total lack of interest in getting to factual truth, you'd end up with a volume dangerously heavy to lift.
And this applies to virtually every sphere of our lives: politics and public affairs, economics and business reporting, sports, science, law, medicine, and whatever else you want to throw in the pot. IMHO a big part of the problem is found in the gradual corporatization of the media, but I also have concluded it's also a product of crappy journalism programs at the collegiate level. And you can also include our rotting and decrepit public education system.
For obvious reasons, an adequately functioning democracy absolutely requires the voting public to be well-informed, and a crucial link in that process are people who work at furnishing the truth to the public. Today's class of journalists are, by and large, more suited to an authoritarian state than a democracy. The trouble is, I doubt that your average mainstream "journalist" would be able to write a coherent paragraph describing the functional and legal differences between the two systems. As long as they have a nice lunch and get to quit work at 5, it's all the same to them.
Which is why the dirty, filthy bloggers laboring amongst the internet tubes are so important. Yes, there's plenty of crap on the internet, but if you know where to look (this site, as an obvious example), the truth — and real, hard, information — is available.
Posted by: bluestatedon | Jul 12, 2008 12:02:22 PM
"George W. Bush looks more and more like a modern day Herbert Hoover with each passing week."
It's an easy comparison to make, given Hoover's reputation, but if you take a look at the entirety of Hoover's career and life, one thing should be obvious: George W. Bush wouldn't be qualified to be Hoover's personal butler and errand boy.
Posted by: bluestatedon | Jul 12, 2008 12:09:24 PM
Here in Chicago I know real estate investors that can't rent out condos they have bought. Yet they are still building 90 plus story condo high rises in the downtown area. I'm afraid the supply of housing will last for years. Aren't local governments supposed to regulate the amount of building happens in a town/city ???
Posted by: Greg | Jul 12, 2008 12:13:44 PM
Barry will have the 'poor' guy fired. Good stuff.
Posted by: YA | Jul 12, 2008 12:15:50 PM
