There are few important distinctions between the housing bubble rally and the bubble reflation rally worth noting. First, the housing bubble rally was fueled almost entirely by ordinary mom and pop speculators given dangerous loan products that allowed them to borrow double what their incomes could support. The bubble was built entirely on leverage. Everything about the housing bubble rally was unstable — loan terms, borrower capacity, credit history, collateral value — all bogus.
The bubble reflation rally of 2012-2013 was driven by cash investors, a group that never defaults or faces foreclosure, and artificial interest rate stimulus; however, this time the stimulus was delivered through stable 30-year conventional loans, and the income of borrowers was rigorously verified. While it can be cogently argued the mortgage interest rate stimulus may have hangover effects, the way this stimulus was applied was safe and effective.
When should pundits admit their mistakes?
Is it better to be widely known as a permabear or permabull? Or is it better to change with the times and gain credibility through being right?
Pundits who issue forecasts want to be right, and they want to be acknowledged as being right. In the world of punditry, credibility is everything, and the best forecasters really are right more often than they are wrong — or at least they convince people that’s true. The ability to shamelessly revise history is the mark of a truly successful
Paul Krugman and Peter Schiff
If you read either Paul Krugman or Peter Schiff, both write from the opposite ends of the political and economic spectrum. They often make predictions diametrically opposed to the other, but both of them claim near infallibility and vehemently claim they were right — about everything.
I recently came across an article where Peter Schiff claimed to be right about everything. Since he makes this claim so often, these articles aren’t hard to find. However, he’s been a consistent gold bug, and over the last four years he’s been consistently wrong — and he will likely to continue to be consistently wrong about gold. At what point does he throw in the towel and admit he was a fool?
I was wrong too
I’ve been wrong about many things over the eight and a half years of writing in the public realm. I am completely clueless when it comes to the direction of interest rates. I don’t think I’ve made a single correct prediction about rates. It’s so bad that now when I write about rates, I simply state what I believe will happen if rates move one way or the other. I suck at predicting interest rates.
I was wrong about the housing bottom in 2012. It took me until October of 2012 to change my mind. I didn’t believe a cartel of lenders could succeed in their effort to dry up the MLS inventory. I was wrong. Those six months of 2012 from March through September were the low point in my writing.
I would like to believe I get more right than wrong, but more importantly, I like to believe I am strong enough to admit my mistakes and change my mind when the facts support a different position. I remain true to what I believe, and I have the courage to change. It’s surprisingly difficult to admit mistakes, particularly if your opinion is deeply entrenched and widely known.
Mark Hanson denies it, but he is a permabear with regards to housing. Like clockwork, every October he gets in the news with another bearish prediction about housing.
On October 7, 2013, he predicted a 20% decline in house prices over the next 12 months. At the time I stated the following:
No matter how bad market conditions get, the only way I see prices going down is if must-sell inventory comes to market. We could see a dramatic drop in sales volumes as buyers and seller reach an impasse, but for prices to go down 20% in such a short time, it would require massive sales of distressed inventory. Further, it would require the private equity funds to remain on the sideline while this happened. I don’t believe either will occur. There is no source of must-sell inventory, and the hedge funds would likely pick up their buying if prices came down again.
From October 2013 to October 2014, prices went up nationally more than 5%. Mark was off by at least 25%, and most importantly, he was wrong on the direction of prices.
Undaunted by the previous bad call, on October 7, 2014, he didn’t make a specific prediction, but he stated the stimulus hangover would be a doozy. In that post he claimed the removal of stimulus would lead to a crash. At the time, I made the following observation:
In early 2015, rather than admit a mistake, he doubled down: “It simply isn’t different this time around. I am in full-blown, black-swan look-out mode over here. And Bubble 2.0 could end up being a lot more volatile than from 2008-10 due to the sheer amount of capital and liquidity in the sector that blew the bubble …”
Diana Olick, October 6, 2015
While home prices nationally have not yet returned to their peak of the last housing boom, some local markets have surpassed it. Now, some claim the housing market is in a bubble far worse than the devastating one in 2006. The argument: Housing is far less affordable today than it was back then, and the home price gains are driven not by healthy, end-user demand but by a lack of construction, artificially low interest rates, and institutional and foreign all-cash buyers.
“In the days of ‘anything goes,’ ninja financing caused housing prices to lurch higher, which forced people to rush in and buy, which in turn pushed prices higher, thus increasing volume more, and so on. But when it comes to the new-era, end-user buyer, that can’t happen any longer, as buyers actually have to fundamentally ‘qualify’ for the mortgage for which they apply,” wrote housing analyst Mark Hanson in a note to clients.
If buyers must qualify for mortgages on stable loan terms, how can affordability possibly be worse than 2006? My reports clearly show otherwise.
Hanson, often criticized for being a housing bear, points to the institutional and foreign buyers who have flooded the market since 2012, buying up distressed and lower-priced homes, as well as some new construction, all with cash. He calls it an exact replay of the last housing boom, “when unorthodox demand with unorthodox capital would pay any price it took to hit the bid.”
This particular form of unorthodox demand is based on both all-cash buying and 30-year fixed-rate mortgages. Neither source of demand is prone to foreclosure, so even if that demand were to vanish, it won’t result in must-sell inventory, a requirement to push prices lower.
California-based real estate analyst John Burns, of John Burns Real Estate Consulting, called Hanson’s premise “ridiculous.”
John Burns, the local darling of the MSM, once said of Mark Hanson, “I give him zero credibility.” Ouch!
He said you cannot compare affordability today to the heady days of the housing boom when anyone could get a loan with no money down and artificial — now illegal — teaser rates.
“That was an awkward, unusual period that is not coming back,” said Burns, who claims 90 percent of the nation’s local markets are “affordable” when home prices are weighed against income.
I don’t have the national data to confirm his statement, but given that Coastal California is always among the most expensive markets, if prices are affordable here, which they are, then it’s likely prices are affordable everywhere.
That said, rising mortgage rates are a concern, Burns said, admitting home prices have been inflated in part by artificially low rates.
“We will have a problem if rates go up,” he added.
A candid admission from an analyst who is usually overly bullish.
“In short, end-users today are being handed a red-hot potato market already in a bubble larger than 2006,” noted Hanson.
When will Mark give up on these bearish predictions? Is he too far gone to turn back? If he admits he was wrong now, will he no longer get interviews on CNBC or from Diana Olick? Perhaps house prices will crash and Mark will be vindicated. Personally, I’m not holding my breath.
Why I believe many like my writing