Sunk Costs Dilemma: “About Those Housing Bears” . . .
From the annals of wrong comes this article, published 6 years ago today (2005): The Housing Bears Are Wrong Again.
Here is a quick excerpt:
“Homebuilders led the stock parade this week with a fantastic 11 percent gain. This is a group that hedge funds and bubbleheads love to hate. All the bond bears have been dead wrong in predicting sky-high mortgage rates. So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.
None of this has happened. The Federal Reserve has effectively mopped up excess cash and calmed inflation expectations. That’s why bond rates are hovering around 4 percent, with most mortgage rates about a point higher . . .” (emphasis added)
This is a fascinating study of how hard people fight to retain their preconceived belief system, their notions of what they already know – and what challenges that information.
Some of this may be the result of ideological bias, but I suspect most of this is a case of the Sunk Cost dilemma. When you have spent so much time and energy and money –indeed, your entire professional career — acquiring information and a supporting belief system, it is rather challenging to reverse course from that.
Hence, the difficulty in getting someone to recognize events that are outside oft heir experience. Consider this paragraph:
Meanwhile, the homebuilders index has increased 76 percent over the past year, with particularly well-run companies like Toll Brothers up about twice as much. The bubbleheads missed all this because they haven’t done their homework. If they had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades.
If you looked at home-building relative to Income, or to Household Formations, or to GDP, by 2005 it had was already 2 standard deviations away from the historical mean. It is very challenging to convince people what the norm is int he midst of bubble. And in 2005, we were in the middle of the world’s biggest credit bubble.
What fascinates me is how reasonable the arguments against the bubble sound. Read the whole article without the benefit of knowing how it all crumbled, and you will find it is surprisingly persuasive — just as the housing boom reached its peak.
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Source:
The Housing Bears Are Wrong Again
This tax-advantaged sector is writing how-to guide on wealth creation.
Larry Kudlow
National Review, June 20, 2005
http://article.nationalreview.com/276028/the-housing-bears-are-wrong-again/larry-kudlow
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June 20th, 2011 at 7:43 pm
Hence, the difficulty in getting someone to recognize events that are outside oft heir experience…
what IS Kudlow’s expertise?
Sure as hell isn’t economics or finance, maybe politics cum entertainment
CNBC should come with a warning label
June 20th, 2011 at 8:00 pm
He is so repetitive. And so wrong.
CNBC has to fill the hour. They have tried others who
were worse like Melissa Valley Girl.
June 20th, 2011 at 8:38 pm
I guessLarry bought 5 pin-striped suits in ’05 and paid cash for them. That way, after he lost everything else in the housing bubble, he could at least still be on TV 5 nights a week.
My wife and I new there was going to be a housing collapse back in ’05-’06, and I’m a geologist and she works at the Post Office. How did we know? We watched HGTV. Shows like Houseflippers showed people buying 60 and 70 year old two bedroom one bathroom dumps in crappy LA neighborhoods for $400 grand, putting $150 grand into them, then selling them 30 days later for $750 grand. This went on, show after show, week after week. Having been through a housing boom-bust myself in West Texas in 1986 (lost it to FDIC) it was pretty obvious what people were doing. Get a second mortgage on an overpriced first house, buying up dumps at speculators prices, and flipping them for a fast profit. Other people bought first houses with no intention of living in them for more than 12-18 months, just long enough to sell out for a 30%-50% profit. It was like the game of musical chairs, you new the music would eventually stop, you just didn’t think that when it did you would be the one without a chair.
June 20th, 2011 at 8:40 pm
Out of curiosity I looked up the FRED data for housing starts. Kudlow was correct to state, “Although year-to-date housing starts have kicked up to 2 million, average new construction since the early 1970s has hovered around 1.5 million to 1.75 million new starts per year.” So, this alone would not seem to be an extreme data point. Indeed, housing starts later peaked at 2.5 million per year.
I do not like Kudlow, but he is no worse than most economists with regards to being trapped by simplistic measures and narrow data analysis. Barry provides two simple and seemingly obvious metrics that could have been easily calculated to identify the problem in real time, but no economists seemed capable of that level of analysis as the crisis was building. Not surprised the Wall Street economists failed to get it, but why did the Fed and US Government economists also fail?
June 20th, 2011 at 9:02 pm
OK, give me an fng break already – Kudlow is a moron shill…anybody with half a brain knew this was/is BS – FU and your mother too…
June 20th, 2011 at 9:06 pm
Who would believe Larry could be so wrong?
Today I was flipping and came across a segment he was hosting pushing the idea of letting all those poor, upright tax-paying corporations bring home all their untaxed cash tax free. As is usuall with the propaganda press, the title told you what to believe: “End The Overseas Profits Tax Attack?” Better yet, he suggested, why not just stop taxing any overseas profits since the government won’t need any money to operate after Medicare, Social Security and Medicaid are eliminated.
June 20th, 2011 at 9:16 pm
I have another Kudlow Klassic that he posted on the Corner, the National Review blog:
Wednesday, December 05, 2007
The Recession Debate Is Over [Larry Kudlow]
There ain’t no recession.
Today’s ADP private jobs survey of 189,000 could produce a 200,000 non-farm payroll job gain for November. I don’t know — these wacky BLS numbers are subject to huge revisions. But the ADP was a huge number. In fact, jobs seem to be picking up major steam from their August low, rising in September and October. And now I’m expecting a good increase in November to be reported by the BLS this Friday.
Plus, profits are stronger than people seem to understand. The ISMs are fine. Productivity, reported out today, soared to over 6 percent annually in the third quarter. That’s the best number in four months for output per person.
On top of that, business inflation is zero. Flat. Nada.
The recession debate is over. It’s not gonna happen. Time to move on.
At a bare minimum, we are looking at Goldilocks 2.0. (And that’s a minimum). The Bush boom is alive and well. It’s finishing up its sixth splendid year with many more years to come.
12/05 04:04 PM
That’s right – December 5th, 2007. According to the NBER, Kudlow declared the recession debate over just about the day that it started.
June 20th, 2011 at 9:18 pm
Even then the arguments were ridiculously easy to shred: “Meanwhile, the home builders index has increased 76% over the last year”
So…. uh.. that provides you what information about the future?
At least we know from the TV ads that gold WILL continue to climb at its rate of last year for all time.
June 20th, 2011 at 9:58 pm
Home prices up 6.5% per year over the past 8 or whatever years, but 12% the past year?
And home builders up 75% over the past year, with Toll up twice that?
And this is not considered a bubble?
Kudlow, puh-lease!
June 20th, 2011 at 10:04 pm
Is the preconceived belief system now that the only way to fix this problem is to ignore it?
June 20th, 2011 at 10:18 pm
Are people still buying the Toll Brother McMansion?
I thought that with $4 diesel/”home heating oil”, we’d finally see some real innovation in the housing market: Zero Energy Homes.
What fool would buy a McMansion, with no guarantee that you could be able to afford heating it in 10 years!
June 20th, 2011 at 10:33 pm
i’m the most bearish bull you will meet and my analysis of why the market should not have been going up since November consisted of hyperinflationary monetary policy (wrong), a housing market getting ready for a second leg down (seems correct) and when mixed in with Fukushima, the totally minsnomered “Arab Spring” and the collapse of the European Union “seemed like getting clobbered in here would be a slam dunk.” And of course–and happily of course–i am wrong. Don’t even get me started on the most important institution on the face of the earth: the US Army. (Apologies to my Navy friends and family. As they say “never get out of the boat” of course.) There really is nothing that says “the market goes higher just because.” My only complaint both with Mr. Kudlow and Mr. Keene is they both need to study Bushido–and I am being serious when i say this. Basically “things happen for reason but it is not for us to discover why” is my rough take on “the most sorely needed peace process there is.” I prefer to talk movies rather than how’s and why’s anyways so what do i know.
June 20th, 2011 at 10:36 pm
“What fascinates me is how reasonable the arguments against the bubble sound. Read the whole article without the benefit of knowing how it all crumbled, and you will find it is surprisingly persuasive — just as the housing boom reached its peak.”
___________
Other than prices going totally freekin’ insane and throngs of completely unqualified buyers purchasing more house than they could ever realistically afford, the housing bubble was very stealthy.
June 20th, 2011 at 10:40 pm
Yup, I 2nd the “Really, really bad calls” categorization.
June 20th, 2011 at 10:50 pm
What fascinates me is that EVERY SINGLE person in DC, on WS and in the media who laughably missed the entire bubble (ALL of them!) is STILL yapping away and collecting 6, 7 or 8 figure paychecks for pretty much having been wrong an incredibly high % of the time. Ben Stein, Kudlow, Bernanke, Fuld (still working on the street), Paulson….
I mean – WHEN IS ENOUGH ENOUGH?!?!?!?!? Where is the wave that will wash all this MUCK away once and for all?!
June 21st, 2011 at 12:06 am
“What fascinates me is that EVERY SINGLE person in DC, on WS and in the media who laughably missed the entire bubble (ALL of them!) is STILL yapping away and collecting 6, 7 or 8 figure paychecks for pretty much having been wrong an incredibly high % of the time. Ben Stein, Kudlow, Bernanke, Fuld (still working on the street), Paulson….”
Well put! The same goes for the busted neo-con FP establishment. Friedman, Goldberg and many of the Iraq war architect/ cheerleaders are still spouting their “wisdom” years later. Many of these “very serious people” will start shilling for a war w/ Iran when the time is correct.
June 21st, 2011 at 12:57 am
The first google link on Case Shiller comes up as: http://dailybail.com/home/case-shiller-chart-home-prices-have-at-least-20-more-to-the.html
From June 2005 to June 2006, do my eyes see an increase? Of course it ended spectacularly badly, but aren’t you the one who is always blabbering about putting aside your ideological blinkers and following the data? If you had invested in some magic home index tracking ETN for one year from Kudlow 2005, you would have made money.
Similarly, you babble able how great it was to have made ~95% on your money from Mar 2009 to now, even though the same structural problems that _were_ in the economy are _still_ in the economy. You get to brag because your gamble paid off. People who were long the mythical abode index past 2006 got slaughtered.
Are you providing a case study confirming your Sunday column that luck plays an extremely important role in becoming wealthy?
June 21st, 2011 at 1:39 am
He whose bread I eat… his song I sing.
Kudlow has his meal ticket. Lots of ad dollars to be made by repetitive conversation with no endgame: Democrats bad, free market capitalism for the win, drill baby drill, etc.
Nevertheless, he’s no fool.
He’ll keep pumping the same “optimism or bust” meme b/c someone has to keep putting lipstick on the proverbial pig.
June 21st, 2011 at 3:43 am
I thought those quotes were from Canada, from this year. Heh.
June 21st, 2011 at 7:11 am
Kudlow is a perfect example of telling it as he sees it, not as it is.
The Supply side meme has tremendous sunken costs since it has been the predominant idea for so long.
Much like the Iraq war, Reaganomics, Deficit Spending ( Keynesian policies), Efficient Market Theory, The Laffer Curve, American expectationalism.
June 21st, 2011 at 7:54 am
In his defense, house prices didn’t peak for more than a year later. Not saying he called that though – the bloke is clearly a total moron who knows nothing except to say everything will always go up.
I know loads of people like this – total idiots who know nothing about anything and just tell you what has just happened. I totally predicted the whole crisis – I used to bore my wife to death. I didn’t buy a house, made sure I had no debt and in 2008 left a job at a broker to go to a hedge fund where I knew I could make money on the downside. It started okay – I made money in 08, even more than I got in 2007. And what happened? Investors pulled their money out because the fund wasn’t gated, everyone who had leveraged themselves to the hilt on a floating rate suddenly found themselves paying zero while I forked out loads on rent and then everyone who stayed in a bank found their salaries doubled. Who’s the idiot?
June 21st, 2011 at 8:10 am
That was an easy one, the proverbial fish in the barrel. How about singling out the many who still don’t believe we are in a “double dip”, or, hey, how about all of the smart guys who use the term “double dip” when the so called recovery barely existed in most of the country? Or, let’s just list all the geniuses who say that housing will bottom in six months, who were probably the same who said housing would bottom in six months six months ago?
June 21st, 2011 at 8:48 am
Thank you for posting this egregiously embarrassing piece of Bensteinery, published by Kudlow. That took some balls to do, considering that you’ve been a guest on his show many times. This is what the blogosphere is for – to expose the so-called experts that contributed mightily to the devastatingly bad policy that got us into this awful
mess. Given how awfully wrong Kudlow’s opinion was on this issue, why should any of his core economic
beliefs have any credibilty whatsoever?
I want to highlight one particular excerpt from Kudlow’s article:
” Which leads to a final thought: Why not apply the same tax laws (the $250,000 individual exemption on capital gains on the sale of a house, $500,000 for married coupels) that have benefited home owners to stock market investors and home buyers? If this were to come about, even more wealth would be created in America, leading to even more new business and job creation.”
So…… Lawrence Kudlow, had he been George W. Bush’s Treasury Secretary, would have advocated tax policy changes that would have created bubbles in every investable sector of the investing world. Thank goodness we had Paul O’Neill as Secretary Treasurer for a couple of years, and when he was fired for being fiscally responsible he was replaced by the inept yes-man John Snow, and not Lawrence Kudlow.
Why is this charlatan still polluting the airwaves of CNBC??? Well, I have the answer. Just like in the rest of America, there is no accountability whatsoever. No one responsible for the credit/housing bubble ever gets investigated, prosecuted, exposed.
Nothing to see here, move along.
June 21st, 2011 at 8:57 am
Whenever this subject comes up, I have a simple question for the writer/poster/blog comment:
When did you last buy / sell YOUR OWN house?
June 21st, 2011 at 1:04 pm
Barry,
It’s great the housing bears have done victory laps, but Kudlow is a talking head media type. At the end of the day fundamentals matter, and you rightly poined out the fundamentals in 2005.
So the question I have for you and the board today is:
“What do the fundamentals tell you about housing prices today?” Are you using the same methodology to value property as you did then? In other words, is your process consistent?
I consider myself pretty knowledeable in the subject as I invest in property and real estate private equity funds. I was also a housing skeptic post 2003. I never personally owned property until 2010. I was a poor graduate student until 2004 and by then valuations made no sense to me. I rented in one of the top areas of Long Island until the end of 2009, when I bought. I have now bought a property in a top area of South Florida and will continue to buy prime properties. So you now where one reader of this blog stands.
June 21st, 2011 at 3:57 pm
For me, South Florida is evidence that the whole nation’s market is frozen, because the Boomers can’t move down there, even with the candy store of incredible bargains, and snap them all up. Wasn’t that what all of the developers thought would happen when they were building out since the 90s? Now, the only people who are buying are “investors” hoping they can play the landlord game and foreigners taking advantage of the cheap dollar and corruption back home. 10,000 Boomers a day turning 65, and hardly any of them can afford to move to Florida. Yeah, yeah, YOU wouldn’t want to live there, but that doesn’t excuse such a lousy market. Besides, winters are awfully nice down there……….
June 22nd, 2011 at 12:07 pm
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