Pushy Bottom

Barron's' "us first" call on the housing market is weakly supported and almost certainly wrong

You’ve got to hand it to Barron’s. They don’t pussyfoot around when it comes to making contrarian market calls.

“Buy GM” it blared from its cover just last month. Hope you missed that issue. If you didn’t and followed the magazine’s advice you’ve lost nearly half of your money in six weeks.

Its current cover story similarly goes boldly against the grain, predictably counterintuitive, if that’s possible, saying “Home Prices Are About to Bottom.” At least this is a safer bet than GM—home prices aren’t going to fall by half in six weeks—but Barron’s piece has many of the negative elements of the here’s-what’s-coming genre of business journalism.

Ahh, the tricks of the trend story. First, call it “nascent,” as Barron’s does near the top of the story. That way you don’t look too bad if your prediction takes forever to come true, but prescient if you luck out (that’s what most market calls boil down to, anyway). Next: imply some big name is a skeptic when he certainly is not. (Barron’s says “even Treasury Secretary Henry Paulson” noted recently that housing supply numbers are turning around—as if the Treasury Secretary is a raging bear with little incentive to put the best face possible on the economy). Imply you’ve got more evidence than you really do and overweight it (“such pessimism appears overdone, based on much recent data.”). Quickly raise and dispatch that which is most contrarian to your thesis, just to show you’re not in cuckoo land (“the U.S. could be on the cusp of a painful recession.”)

Barron’s “much recent data” consists of a one-month downtick in housing inventories, which took supply from a large 11.2 months in April to a slightly less-large 10.8 months in May; prices rising (barely) in eight of twenty markets in the much-watched Case-Shiller Home Price Indices, which also showed the worst annual decline overall in the history of the survey, a whopping 15.3 percent; median sales prices rising 2 percent from April to May; and new housing starts falling below a million, a number similar to levels right before rebounds in the last two downturns, which Barron’s doesn’t acknowledge until later on were much less severe than this one.

The magazine also looks at average house price/per capita income ratio and finds it has fallen to what Barron’s says are historical averages (though some dispute that), meaning that prices are affordable by historic standards for an average wager earner. The problem is that prices during corrections invariably overshoot historic affordability levels and other metrics of reasonable value on the downside just as they did during bubbles on the way up, so there’s every indication these ratios have room to fall further.

As far as the economy, that’s the proverbial 800-pound gorilla here. People losing their jobs or worrying about losing them aren’t going to run out and buy houses, especially when they think they might be playing Catch the Falling Knife. But Barron’s barely mentions the grim big picture and then smoothes it over by saying “official measures of economic growth don’t indicate a recession yet.” Right, and that’s fine as far as technicalities matter. But you don’t need a long-after-the-fact committee vote to know that we’re in a big economic downturn though that’s severely impacting millions of Americans and businesses.

Barron’s tosses in a bit of media bashing to boot, in an unintentionally funny paragraph:

“Other than Larry Kudlow of CNBC, none of the journalists who interviewed me after the latest release seemed at all interested in any of the positive developments,” says David Blitzer, chairman of the S&P Index Committee. “They seemed focused on the bad year-over-year number.”

First off, Larry “Goldilocks” Kudlow doesn’t do anything but tout the Bush economy. Negative talk from him will have to wait for an Obama administration. Second, the media has indeed reported widely on the positive developments, sometimes over-emphasizing the more volatile monthly (and statistically manipulated, err, seasonally adjusted) numbers over the year-to-year ones.

The only thing funnier than Kudlow would be to quote the hacktacular National Association of Realtors. Barron’s does so, giving chief economist Lawrence Yun more column inches than the recession, though the mag does qualify it, noting that NAR are “typically cheerleaders.” Thanks, Barron’s!

Barry Ritholtz takes Barron’s to task as well, and has a good list of reasons why the magazine is just flat-out wrong, including several bad stock calls its author, Jonathan R. Liang, has made in the last year. About the below-a-million housing starts indicator Laing cites, Ritholtz says:

Housing completions passed the minus 1MM figure a year ago—you could have called a housing bottom in August 2007 by the same logic.

About the flickering up of sales here and there:

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.

And the upturn in the median sales price?

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;

Ritholtz also makes a sharp point about the huge number of vacant houses on the market. One study says 10 percent of all houses built since 2000 are empty. That’s a lot of overhang.

Another huge problem Barron’s overlooks is just how much prices rose in the bubble years. Even after taking into account the 16.6 fall in prices in the Case-Shiller indices twenty markets, home prices are up an average 72 percent from 2000. That’s nearly three times the overall rate of inflation, as calculated by the consumer-price index, which is up a total of 26 percent in that time. Looks like there’s still some froth in there that could be cut out.

There’s also the matter of financing. Standards have tightened tremendously in the last year, and it’s much harder to get loans—something I can attest to, believe me, after having just gone through the process. The banks are in bad shape, Fannie and Freddie need government backstopping and, yes, there’s a government housing bill coming, but any impact—and the degree of any benefit is itself in doubt—would be months and months away.

Along the way in its piece, Barron’s repeats some of the more ignorant and irritating blame-the-borrowers tropes trope that the mortgage industry and an unskeptical media have shoveled on the public for months now. “Jingle mail”, which the Los Angeles Times did a great job of debunking two months ago? Check. Greedy, lying borrowers? Check.

It’s rough (and probably pointless) work trying to call the direction of markets, but even if Barron’s is right, any recovery that will come is likely to be a slow, hesitant one.

One call we’ll make: this won’t be the last “bottom” call we see from some media outlet trying to be first.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.