I have been stating for quite some time that we are only halfway through the Housing downturn, if that. The huge inventory overhang, increased mortgage rates, tightening credit regulations — and a lack of new buyers — are conspiring to make this cycle at least a 5 year or so process from the top (August 2005).
Now, we have heard many many erroneous Housing bottom calls from all manner of interested folks: former NAR economist David Lereah was a notorious bottom caller, as has been Treasury Secretary Hank Paulson, and even in CNBC/RealMoney’s Jim Cramer (November ’06).
All those prior bottom calls turned out to be dead wrong.
Now, before you run out and buy Toll Brothers (TOL) or Beazer Homes (BZH), quite a few caveats are in order.
First, magazine covers are notoriously imprecise to use as a Buy/Sell timing signal. We often do not see the true results — did a cover story truly mark the top or bottom of an issue – for many months if not years. Consider the Time Magazine Cover "Why we are going gaga on real estate" — it was a mere 2 months from the peak in the housing cycle. Shorting the Home Builders then would have been painful for a few months, but then become highly lucrative.
Second, the jury is still out on a more recent BW cover: It’s a Low, Low, Low, Low-Rate World: Why money may stay cheap longer than you think. That came out in February, and since then rates slipped lower, moved much higher, and then retraced some of those gains. As the author of that cover story, Mike Mandel, noted "Magazine cover curse had been evaded–so far." That is mostly true in terms of interest rates, it is far less so in terms of the availability of credit (see The Credit Window is Now Closed).
Still, its premature to claim that particular cover was a great indicator (yet).
And its worth noting that BusinessWeek may very well be a less reliable contrary indicator than mainstream publications like Time or Newsweek — if only because BW covers these sectors anyway.
When an economic issue makes the cover of Time, its guaranteed to be already very late in the game. With BW, that’s not necessarily true. I suspect BusinessWeek gets lumped into this group — more so than Barron’s or Fortune, or Forbes — because they have never lived down the Death of Equities cover article . . .
UPDATE August 8, 2007 3:12pm
I see in comments that Calculated Risk (coincidentally) covered the same story yesterday, but reached a somewhat different conclusion. We are sympatico on the macro picture, but I think this bounce will be high enough to sucker some EMH believers back in . . .
A nice table accompanies the issue, showing the Home Builders performance
click thru for full table
For more on the Magazine Cover Indicator, see these articles
Bonfire Of The Builders
Mara Der Hovanesian
Businessweek, AUGUST 13, 2007
Home Builder’s performance Table
There were a couple of great graphics in the New York Times recently, explaining in some degree of detail, the machinations of the RMBS, CDO and CLO markets.
These are the packaged (and repackaged) holdings that are based upon the sub-prime mortgages that have been defaulting in such large numbers, and have been leading to hedge fund blow ups.
First up: todays front page article by Gretchen Morgenson: Mortgage Maze May Increase Foreclosures.
Graphic courtesy of NYTimes
Next up, the accompanying graphics to Floyd Norris’ The Loan Comes Due: