Housing: Retrospect & Prospect
Well it's New Years Day, traditionally a time for celebration, football and convivial congenialty. Let me wish everything for you then that you wish for yourself, now and in the New Year. It's also traditionally a time to look back (retrospect) look forward (prospect) and resolve - that is to decide where things are headed and you'd like to be.
Perhaps the key thing in retrospect we'd like you to think about is two critical points:
2. While not a surprise it was a surprise in fact because almost everybody ignored, not just the good advice, but the sound analysis of CR and his like who presented most of that analysis in thoughtful, reasoned, grounded and graphically easy to grasp form. Cast you mind back to this time last year. There was some slight worry about the Economy and Housing but in fact the latter was expected to bottom in '07 and the Homebuilders stocks were in recovery.
Now we ask you in thinking of Prospect and Resolution what data, tools and analysis is available to you to improve your thinking. We'ver tried to provide as complete a tool kit as we can manage on other issues in prior posts and will follow up later on but let us put this quote to you, from of all sources of wisdom, the Buddha ! :) From Paul Ferrell's recent Marketwatch column:
Remember Buddha's advice: "Believe nothing, no matter where you read it or who has said it, not even if I have said it, unless it agrees with your own reason and your own common sense." You are the only "expert" you can trust: All brokers and money managers, newspapers, magazines, online and newsletter pundits, all television anchors, and every other special-interest guru is "selling" you something. Don't buy "it."
Below you'll find some charts we've "borrowed" from CR to summarize our interepretation of the Housing outlook and it's relationship to the Economy. Hopefully in a way that allows you see and judge for yourself. Just to put a point on it we'll ask you to look at, carefully review and more carefully think about the chart at right on the Homebuilder's stocks over the last two years. Notice the ear-marked period when "everybody" was convinced things were recovering.
UPDATE (1/1/08 @22:30): couldn't resist in my late night browse of the WSJ (can I rest my case now ?):
Somebody tell me they're kidding right ?Stock Bulls' Five Cheers The market's optimists are increasingly treated like wallflowers at a high-school dance. Upbeat views are scoffed at as out of touch with reality. "Haven't you seen the latest housing numbers?" the skeptics howl. Pessimism has become so prevalent that investors may have a hard time remembering that stocks posted a respectable advance in 2007.
The housing market stabilizes. A bottom in the housing market remains a distant fantasy for many investors. Still, some argue it may not be as far away as the skeptics think. One indicator: stocks of home builders.
Now let's dig into the strategic outlook for Housing and the implications for the Economy based on
our friend CR's charting and strategic outlook.
I'm not truly sure that it needs much interpretation but let's try anyway. The second sub-chart shows Residential Investment (RI) as a % of GDP. Notice that a) it stayed in a predictable range for a long-time and b) rose out of that range in the late 90s boom but c) bubbled beyond the limits with the credit-enabled housing bubble in the last few years. Most importantly notice that EVERY downturn in the economy has been triggerred by a downturn in RI. Which if it falls to historical norms, let alone bottoms in proportion to previous experiences, has a long way to go.
In the first sub-chart you can New Home Sales as a major component and leading indicator of the overall Housing cycle. Here you can particular see the late 90s upturn and the bubble. But what should leap out at you is the severe downturn as it "falls off a cliff".
The thing that has caused so much mis-perception about Housing is that it has a lag structure and that structure stretches out over quite a few quarters and years. In other words we've got a long way to go before Housing normalizes. More importantly Prices don't reach a bottom, nationally or in local markets, until long after RI picks back up. You can do your own comparisons but let me ask/suggest. If RI doesn't bottom until late '08 or middle'09 won't that mean that prices will keep falling for several years afterward ?
What implications does that have for mortgage holders being under-water ? For loses on mortgage-based debt instruments ? For the economy in general.
Think about it, please !