Real Estate Conspiracy

Is the housing market in a bubble? Not according to David M. Michonski, CEO of Coldwell Banker Hunt Kennedy. In an article published today at Inman.com he argues that the popular press is wrong about the significant run up in real estate prices over the past several years being irrational and unsustainable. This is perhaps a reasonable assertion, but the evidence he offers does not support his claim.

Mr. Michonski’s arguments against a housing bubble are not based on any sort of fundamental analysis of current as opposed to historical values. In fact, he doesn’t even bother with analyzing today’s real estate or mortgage markets, nor does he make reference to interest rates or lending practices. Instead his argument is based on two claims: 1.) That the financial press has been wrong about housing bubbles in the past, and 2.) that on average, U.S. house prices have never gone down.

Mr. Michonski makes reference to several articles appearing in prominent publications such as Barron’s, The Economist, Forbes, and Fortune during the period ranging from 1989 to late 2003. Each of the quoted articles claimed that for one reason or another, house prices were over-valued and ripe for a crash. He then cites the favorable record of the housing market during that period to show how wrong these articles were. From this he asserts that since much of the financial press is currently bearish on housing, they must be wrong again.

This is an irrelevant conclusion. He hasn’t even begun to address or analyze the real situation. Predictions and warnings do not prove or disprove anything with regards to real events nor do they provide us with evidence about the probability of their occurance. Only real analysis of the question at hand can do that. This reminds me of the old story of the boy who cried wolf. The fact that the boy had been wrong numerous times in the past caused the Michonskis of the town to believe that the wolf would never come. They were wrong of course and many were taken by surprise when he did.

But Michonski is not content with this superficial analysis alone. He then goes on to explain that the reason that Wall Street seems to be “perennially bearish” on real estate is that there is some sort of conspiracy afoot. Wall Street pundits, in an attempt to halt the flow of money out of equities and into real estate, are trying to convince the public that real estate is not a good investment and that they should come home to stocks. He also suggests that part of their motivation may be to cause a downturn in real estate in order to “buy the dip.” Now I’m not one to scoff at a conspiracy theory on principle, and this one may hold some water, but the exact same argument can be applied to Mr. Michonski.

As CEO of Coldwell Banker Hunt Kennedy, a company that specializes in New York real estate, he has a vested interest in seeing the current housing boom continue. It seems his article is an attempt to strike back at Wall Street for attacking his home turf. This is quite evident in the sarcastic remarks he makes about 401ks, IRAs, and Wall Street in general. It would seem that what we have here is business men intent on furthering their own interests rather than engaging in an objective debate about the possibility of a housing bubble.

His second argument, as stated above, is that home prices in the U.S., on average have not gone down since the end of World War II. The evidence here is a little unclear since he does not explain how this data was averaged or whether it took into account inflation etc, but we’ll give him the benefit of the doubt and assume that it is true. The fact that something has not happened in a long time, or even that it has never happened, does not rule it out as a possibility. Also, it does not take into account the somewhat unique situation we are currently in. A situation caused by over a decade of extremely loose money and credit and artificially low interest rates combined with recent geo-political instabilities. Again, his argument skirts the issue rather than tackling it head on.

So what’s the moral of our story? Don’t let stock brokers or real estate agents tell you when or what to buy. Doing so is a little like letting the fox guard the henhouse. Instead it pays to look at the current situation, anyalyze information from a variety of sources, evaluate where you are most likely to make money, and then make moves accordingly. Also, Michonski’s evaluation of a home as an asset is restricted to homes as residences. He talks about buying a home being a very emotional decision and says that homes are status symbols. This is only true for people who are planning to live in the house. The prospect of a bubble in housing is only trouble for those who want to sell. If you own a home you can afford with a fixed rate mortgage and you plan on living in it, then even if the housing market did crash you should be okay. It is those who are in houses they can’t afford, and those who have speculated in additional real estate other than their primary residence that will probably feel the crunch.

One of the main reasons I’m bearish on real estate is that so many people are not buying houses to live in them. They are buying them to get rich. They plan on doubling their money by flipping them in a few years time. Not only that but they are doing it with lots of borrowed money, and often without getting a fixed interest rate. The past few years have seen an explosion of seminars, books, and schools dedicated to teaching people how to get rich by buying and selling real estate. You can turn on the TV at virtually anytime of day or night and find an infomercial promising you instant real estate riches. To believe that everyone can be successful doing this is to believe that Americans can get rich by selling houses to each other. They are not investing in factories, technology that increases productivity or anything else that actually creates real wealth. They are speculating on prices.

As far as I’m concerned, the signs in the real estate market seem to point to a bubble. In fact, a few of the comments made in the article serve to strengthen my conviction. Mr. Michonski states that “Common knowledge asserts at parties and on street corners that ‘my house was the best investment I ever made’." It is right after this comment that he says that since World War II “the average price of a U.S. home has never gone down.” To those familiar with the history of financial manias, bubbles and crashes, these phrases sound eerily familiar. While I believe it is still possible to make money in real estate for those who know what they’re doing, this party cannot continue indefinitely.

As to the extent of the overvaluation or how far we still have to go before values come back down to earth, I’m not willing to make a prediction. Doing so would open me up to all the Mr. Mochinski’s out there who would use my timing to try and prove that I am wrong about the trend. You see, that is the trouble with trying to time markets. As the late economist John Maynard Keynes (whose economic theories unfortunately refuse to die with him,) once said, “The market can remain irrational longer than you can remain solvent.”

The point is that it is one thing to identify a trend. It is another thing to accurately predict its timing. There are just too many variables at work. That’s why at the first sign of a bubble I would move on to something more promising. Buying a home to live in is one thing. Make that choice wisely and make sure it's one you can afford. Buying homes as investment properties however is a whole different ball game. Every asset class has its day in the sun, but when prices are high I want to be selling not buying. As a contrarian, I want to buy something when it is out of favor and cheap as dirt. Then when it has regained its popularity and everyone else wants in, I want to sell. That my friends, is how you make real, long-term money in any market. You buy low and sell high. So as an investor, if you think housing prices right now are low, then I say go ahead and buy. Eventually someone will be laughing all the way to the bank.