As we enter the peak political posturing season we are seeing that the subprime debacle may have some teeth with Joe and Susie public. Senator Dodd, who seems to be taking the lead on this economic juggernaut, had this to say regarding the subprime fallout today:
"we need answers very quickly."
He also mentioned that regulators “have been asleep at the switch” and need to enforce the regulations already on the books. This is all well and good but these are things that many bears have been discussing for years and now they need answers quickly? How quickly? By November of 2008 sounds good I would think.
The Chatter Begins
If anything, I’m glad a few politicians are shedding light on this monstrous train that is barreling down to main street USA. But when the talk shifts to bailing folks out that is where I put my foot down. In addition the connotation of all this chatter is that somehow we’ve seen the worse of the subprime implosion. Need I remind folks that the first week in March 2007 was when we had the subprime meltdown spread into Wall Street? Didn’t hear too much complaining in 2004, 2005, or 2006 when even a 102 year old man was able to get a 25 year mortgage. Maybe he can refinance when he is 120 into a 50 year mortgage. This credit bubble epidemic is global and as such will have far reaching ramifications.
Wall Street is Owned by Housing
Notice how intertwined Wall Street has become to housing? Last week sales moderately went up and Wall Street reacted with a positive jump. Yesterday further housing reports show that the market is weakening, today Lennar projects lowered revenues, and the market is down nearly 100 points. Amazing how all the pundits talk about the massively diverse US economy and housing being a tiny sliver of it, so any housing impact will be a drop in the bucket according to their reasoning. This will not happen when consumers, the bulk being the middle class, have most of their net worth tied up directly into housing. The perception of lower housing prices and tighter access on credit does not bode well for a credit addicted American public. Don’t take my word for it. Now that we are set to have $1 trillion in loans reset this year, a pace of approximately $100 billion a month, we are definitely at the behest of the housing market. Taking a play out of the book of the permabull camp we’ve heard such things as “housing never goes down” or “if it goes down it is only temporary” and this had been the case for seven decades. However, we’ve had a national median drop in price; only the first time since 1933 has this ever occurred. No longer is this bubble localized or even tiny in the scope of its impact. Considering that the entire US mortgage market is $6.5 trillion we have a big elephant in the room that is finally being given some attention. The US Mortgage market is larger than the US Treasury market for some perspective. Keep in mind when the NASDAQ fell it lost $9.3 trillion. But again, when we discuss the large scope of the mortgage market we see it spreading into every sector because 98 percent of the population either owns or rents. Not everyone was a dot-com junky and we all know how that played out.
Malcolm Gladwell and Snap Judgments
I’ve been reading Malcolm Gladwell’s book Blink and find amazing correlations to what is occurring in the housing market. The Getty was fooled in the 1980s into purchasing an ancient Kouros (Greek sculptures) because expert scientist were looking too much at the data and not at the overall historical context of the item. Art experts had a gut reaction when they saw the sculpture and knew immediately that something was funny about it. It conjured up a repulsive reaction even though they couldn’t put their finger on it. Was it that it was too perfect? Too great of a find? It was hard for these experts to articulate their feelings but after two years it turns out that they were right, the Getty had been fooled. The ten second visual response was accurate and the 14 months of expert analysis was wrong.
Now what does this have to do with housing? In the beginning a few years ago, many housing bears knew something was going on and we weren’t exactly sure what it was – maybe it was a confluence of many factors but we knew something was up. In the infancy of this bubble we were pushed to the fringe. We would try to explain to our friends and families that something about Collateralized Debt Obligations didn’t sit well with us. We couldn’t justify a 600 square foot home for $300,000 in a bad part of town. And each year, sure as the sun rises, the house would appreciate another 20 percent. We were left with our gut feeling of something being wrong and these folks looked at housing bears as from another planet because at that moment, we were wrong. Any investor will understand how to objectively view an investment no matter what it is. A car company will need a steady income stream and solid leadership. A strong newspaper will need to balance solid editorials with a staff of writers who can simplify complex issues into a front page article. These are givens. But as a society we sometimes dig too deep into the data and forget the overall picture; in this case many bears missed the fact that housing psychology + low regulations + behavioral economics led the way to this housing bubble we are currently in. As we were swimming in our data folks jumped into the game.
We need data all the time but the market doesn’t. However at the end data and facts will win. They always do. There may be a temporary glitch but overall things revert to a steady drumbeat. We need to trust our gut, just like those folks who saw the fake Kourous and knew something was wrong, and believe in our data. Sometimes snap judgments have a profound impact and we should learn to trust them; for example many looking at a condo costing $450,000 knew deep down that something was wrong. Now the facts back that assumption up. I hate to boil it down to common sense but never let these expert pundits guide you off a cliff; just look at yesterday’s housing data and how off these expert economist were. They are economist and not psychologist or computer scientist. Each of us are fallible to other areas of expertise but we need to realize that housing spans into countless areas. Now looking back at many housing bear articles we can chime in and say we had Nostradamus type insight but deep down even our gut was saying “maybe it is different this time, maybe debt is the new gold standard.” At that moment we need to have the courage to go against the grain and stick with our expertise. We live in a country of 70 percent homeowners, I’m included. But this time the homeowners, lenders, agents, and real estate complex all got it wrong. The bill is forth coming.