Look What They're Saying About the Housing Market

by: Toro

Every bubble spawns a certain amount of idiocy, but some ideas are so ludicrous, you have to wonder about certain investors' cognitive abilities, especially when such mantras are spoken by professionals.

Housing prices aren't falling. Only the prices of houses that are being sold are falling. Prices have not fallen for those who have not sold their houses.

During the Tech Bubble, the dumbest thing I ever heard was the argument that rising interest rates and rising oil prices do not effect tech stocks because tech stocks have no debt and do not use much energy. This was even purported by a well-known Wall Street strategist/tech cheerleader employed by a large bulge bracket firm whom shall remain nameless. Never mind that the latter is outright wrong, considering the amount of power server farms require. Even those who attend Podunk U learn in the second class of Finance 101 that the value of an company is the future cash flow generated by the company discounted back to the present, and higher interest rates lowers the value of future cash flows and thus the value of a stock. But during a time of mass delusion bred by easy money, even Wall Street's best and brightest, educated at the world's finest universities, take leave of their senses and become unhinged regarding the most basic aspects of finance.

That is no doubt true today, as the perma-bulls have foisted the above quote onto the market, one that I have now heard several times over the past few months. It is staggering in its stupidity when it is articulated by those who should know better.

For in the housing market - as in any market - it is the marginal buyer and seller who sets the price. What matters is not what those who have not sold the asset think the the price should be, since the price is the price set in the market place.

The whole point of a market is price discovery, the clearing prices at which buyers and sellers agree in which to execute a transaction. Yet, the above argument is propagated by those who claim a belief in free market capitalism. What is free market capitalism if not a mechanism by which prices are freely set by those who enter a mutually beneficial transaction?

To say that prices have not gone down for those who have not sold their houses is tantamount to saying that stock prices have not fallen for those who have not sold their stock. Did you buy JDS Uniphase at $1000 and still own it? Fear not, because that is its true price to anyone who has not sold the stock but bought it at that level, even though today, it trades at $14.