Posts filed under “Valuation”

Why Barron’s Housing Cover Is So Terribly Wrong

New Home Completions, 1968-2008
click for ginormous chart

Major New Home Building Housing expansions since 1968 are marked as a red horizontal line at bottom. They previously lasted 2-4 years (71-73; 76-79; 83-87) The most recent boom far exceeded all previous expansions, running form 1992 – 2003 — then exploding upwards for another 3 years til 2006.

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During the Bull Market of the ’90s, I used to read Barron’s for their hard edged, skeptical look at many of the excesses on Wall Street.

During the past 5 years or so, that skepticism seems to be fading. Sure, Alan Abelson is still a curmudgeon, and Randall Forsyth is no cheerleader. The trader column is always worthwhile, and Santoli is usually interesting. Lately, the magazine seems to be drinking the same Kool-Aid my pal Larry Kudlow seems to enjoy so much.


The latest evidence of this is the wrong headed cover story on Housing, declaring “Home Prices Are About to Bottom,” and why “This Real-Estate Rout May Be Short-Lived.” I expect this cover to suffer the same ignominious fate as the recent cover story on General Motors (Buy GM) will.

The reason a bottom is in the offing, argues the article, is based upon specific data points:

• The U.S. housing market typically begins to improve after housing starts have fallen by a million units (which has now happened);

• Prices rose rose slightly in April in eight of the 20 markets covered by Case Shiller index;

• Sales activity seems to be picking up. NAR reports sales rose 2%
in May from April’s levels, the second month in the past 10 to have seen an
increase.

• The ratio of sale prices to per-capita income in various locales — already has improved affordability.

• $300 billion congressional bailout is coming for troubled subprime mortgages;

• A government takeover of loss-ridden Fannie and Freddie is possible;

• Several analysts expect home prices to be steady by years end;

• NAR economist Lawrence Yun is optimistic home prices will stabilize in the next five months and begin to recover next year;

We’ve covered each of these in great detail over the years, but what the hell, once more won’t hurt:

• The explosion in home construction this cycle has totally and utterly exceeded all previous home construction booms. Its so much larger than any expansion over the past 40 years as to make the prior 1M drop meaningless (see chart at top);

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

• An unprecedented 10% of homes built after 2000 stand vacant, according to Stansberry & Asssociates Investment Research;

• In just about every area of the country, the ratio of sale prices to per-capita income remains significantly elevated over its historical averages. And, that assumes there won’t be a significant economic downturn. As of July 12 2008, a significant recession is looking increasingly likely;

• 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.

• 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;

• By nearly every traditional metrics, Home prices remain extremely elevated; Median Price to Median Income or Homes vs. Rentals. All of these imply further price adjustment towards the historical norms;

• These same analysts who are calling for
stability in second half of 2008 have been incorrectly expecting home
prices to stabilize for years; why will the recession make home prices
stabilize?

• A takeover of Fannie and Freddie is somehow a positive? All that would accomplish is restoring mortgage purchases back to where it was in March 2008. So what?

• The bailout will only delay the inevitable repricing that needs to take place;

• NAR economist Lawrence Yun? Puh-leeze! He’s been optimistic housing would stabilize for years now.

Home prices rose 86% in the 10 largest markets, and 72% in the 20 largest. Incomes lagged so badly behind, that a mere 15% housing price decrease has failed to return the income to house price ratio towards normalcy. Look for another 10-25% over the next few years — or the inflation adjusted equivalent, sideways action for the next decade . . .

Change_in_price_table

Case_shiller_index_2

Source: Federal Reserve Bank of San Francisco

Finally, the author of the Barron’s piece notes: “With the benefit of hindsight, one can discern a concatenation of developments that made the latest cycle almost inevitable.”

What nonsense. Plenty of people — including yours truly — were warning about the inevitable housing collapse and pricing correction in real time. Dismissing those who made timely warnings is an ugly form of historical revisionism . . .

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We can easily dismiss this article based on the simple Housing facts we know to be true. But this article discusses what might happen in the near future. (See Case Shiller chart above)

Perhaps this author is seeing things the present facts obscure. Maybe he has an ability to see what others miss. How has his track record been in making these articles forecasting improvements in weak companies or sectors?

Short Answer: Not so good.

Longer answer:  Here’s a few excerpts from the past year:

Aig_feb_08_2
1. AIG’s Selloff: A Huge Opportunity (FEBRUARY 18, 2008)

http://online.barrons.com/article/SB120312653758273245.html

Excerpt: Last week’s plunge was way overdone ($44.10). The stock could jump nearly 50%. (Yesterday’s close: $23.08)

Mbia_jan_08
2. MBIA: Priced for Catastrophe (JANUARY 21, 2008)

http://online.barrons.com/article/SB120071150488302379.html

Excerpt: MBIA’s shares were savaged anew last week, and now its stock looks
cheap. It trades for about $8, well below a conservative liquidation
value above $30 a share.
(Yesterday’s close: $3.90)

Shld_oct_07
3. Sears: A Storied Name on Sale? (OCTOBER 22, 2007)

http://online.barrons.com/article/SB119283873785565563.html

Excerpt: Money-management wunderkind Eddie Lampert is likely to succeed in turning around Sears. For investors, the big payoff lies in real estate.  Sears Holdings sells for $134 a share, but could have a break-up vaule of more than $300. If Lampert turns around its retail operations, the shares could rally to 200 or more. (Yesterday’s close: $70.91)

Macys_july_074. Macy’s: Miracle on Private-Equity Street (JULY 23, 2007)

http://online.barrons.com/article/SB118497718683573586.html

Excerpt: The shares, now about $42,  could fetch more than 52 in a takeover. And there’s ample room for the current management to improve marketing and cut costs. (Yesterday’s close: $15.51)

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To be fair, this has been a very difficult environment — particularly for financials and retailers. But while the market has fallen since these stories came out, they are all down 40-50% — far worse than the overall 20% drop the S&P500 has suffered. And while the Financials and Retailers have fallen even more than the SPX, one must question the wisdom of constantly suggesting buying those sectors under the greatest pressure.

The famed Barron’s Bounce has become become a bit of a misnomer — it is looking more and more like the Barron’s Trounce . . .

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Previously:
Housing Price to Rent Ratio (May 2008)

http://bigpicture.typepad.com/comments/2008/05/housing-price-t.html

How Far Might Housing Prices Fall? (January 2008)

http://bigpicture.typepad.com/comments/2008/01/how-far-must-ho.html

Sources:
Bottom’s Up: This Real-Estate Rout May Be Short-Lived
JONATHAN R. LAING
BARRON’S COVER JULY 14, 2008

http://online.barrons.com/article/SB121581623724947273.html

Don’t Buy Housing Bubble Propaganda
Barry Ritholtz
RealMoney.com 5/26/2005 2:04 PM EDT  http://www.thestreet.com/p/rmoney/barryritholtz/10225437.html

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Category: Data Analysis, Financial Press, Real Estate, Valuation

Quote of the Day: Hey, its cheap!

Category: Psychology, Valuation

Same As It Ever Was

Welcome to the second half of 2008.

We begin the second half pretty much the same way we finished the first half:  Equities under pressure in Asia, Europe, and judging by the futures in the US, domestically as well.

One of the things that us foolish idealists hope for is that the current set of crises will force the fantasy brigades to actually start interacting with that hypothetical construct known as reality. Perhaps by confronting the actual problems facing the economy, we can actually begin the process of repairing them by taking the painful write-downs and instituting the medicinal policies that make sense.

Such hopes are misplaced. The latest evidence of such comes from no other than Blackstone Group (BX) CEO Stephan Schwarzman. On the occasion of the private equity firm’s one year IPO anniversary, Schwarzman places the fault for the current crises squarely on FASB 157.

You read that correctly: This was not the fault of incompetent lending to borrowers who could never afford to pay back mortgages; nor was it the fault of the rating agencies that slapped AAA on paper that turned out to be garbage; nor was it the responsibility of an MIA Fed that utterly failed in their responsibilities as the chief supervisor of the banking system; nor was it the liability of fund managers who in a misguided grab for yields bought billions of dollars worth of securities that they had no idea of the specific details contained therein.

No, it was the accountants’ faults. 

You see, those persnickety bean counters forced banks and brokers to actually write down paper for which there was no market.

Therein lies the foible of Schwartzman’s Folly, for if you own marketable securities for which there is no market, then by definition, these are not really marketable securities.

How then to price all of this paper on the books? Why, just rely on the people who bought them in the first place! Never mind that they don’t understand what they own, they failed to do their due diligence before buying this garbage in the first place. Do not acknowledge these folks have an enormous personal incentives NOT to mark this junk down.

You can trust them! They’re good people.

Perhaps this helps to explain why Blackstone Group’s stock is off nearly 50% since the IPO: The foolish shareholders of BX have been making the mistake of marking the stocks-to-market. My suggestion: Forget that they are a private equity firm, and consider instead your own approximate fair value interpretation of what the company is worth!

Attention fund managers: Here is my new Stephan Schwarzman inspired idea. Y’all should be buying Blackstone in the open market today at $18, and at the four o’clock close, be marking it at $36. That will be not only be your fair value interpretation of what it’s worth, but it reflects a 100% gain instantly.

And, that’s before the $.30 dividend.

Indeed, for those investors struggling with the current selloff, I suggest you forgo mark-to-market accounting at present, and instead start implementing mark-to-subjective-self-interested valuations. Your portfolio returns, and you’re outside investors, will thank you for the immense improvements in your performance.

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The Blackstone Group, Since IPO
(daily chart, one year)

Bx

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Musical reference and soundtrack via the Talking Heads


Previously:
FASB 157 — Delayed, or Not? (November 15, 2007)
http://bigpicture.typepad.com/comments/2007/11/fasb-buncha-bit.html    

SFAS 157: Market Prices Too Low? Just Ignore Them!  (March 31, 2008)
http://bigpicture.typepad.com/comments/2008/03/sfas-157-market.html

 

Source:
Are Bean Counters to Blame? 
ANDREW ROSS SORKIN
NYT, July 1, 2008      
http://www.nytimes.com/2008/07/01/business/01sorkin.html   


Related:
Summary of Statement No. 157
Fair Value Measurements
http://www.fasb.org/st/summary/stsum157.shtml

Mohamed El-Erian Argues for Propping Up Asset Prices
Naked Capitalism, MARCH 18, 2008

http://www.nakedcapitalism.com/2008/03/mohamed-el-erian-argues-for-propping-up.html


 

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