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.

—“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 Equities” BusinessWeek 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; this 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, 2010Yes, 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.