Barron's: Wrong on Housing

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 totally and utterly exceeded all previous home construction booms. Its 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 assumes there won't be a significant 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 every 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.

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:

Table via Barron's>

Chart via Federal Reserve Bank of San Francisco

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. (See Case Shiller chart above)

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:

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)

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)

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)

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. But while the market has fallen since these stories came out, they are all down 40-50% -- far worse than the overall 20% drop the S&P500 has suffered. And while the Financials and Retailers have fallen even more than the SPX, one must question the wisdom of constantly suggesting buying those sectors under the greatest 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 . . .

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

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