What NOT to Believe About the State of the Housing Market
The Wall Street Journal says it’s time to buy a house. Time magazine says houses are still for selling. Which distinguished publication has the right call?
To begin answering that question, a brief retrospective may be helpful. Time magazine – like its kindred spirits, BusinessWeek and The Economist – is infamous for its epic wrong calls. So much so that Legg Mason strategist, Paul McRae Montgomery, came up with the “Magazine Cover Indicator.”
The logic behind Montgomery’s unique contrarian indicator goes like this: By the time a particular investment trend reaches the cover page of a major publication, it is so widely embraced by the public that “everyone is in” – i.e., there is no one left to perpetuate the trend. Therefore, the trend is close to reversing…often with a vengeance.
No one can say for certain when Time, BusinessWeek and The Economist began establishing their “indicator” credentials. Examples of very poorly timed cover stories date back to the 1930s. But BusinessWeek holds title to the most infamous cover story ever.
In August of 1979, the cover of BusinessWeek proclaimed, “The Death of Equities.” As it turned out, equities were far from dead. In fact, they were on the verge of a major rebirth. Stocks bottomed early in 1980, before taking off on the biggest bull market in history. Just three years after this cover story appeared, the S&P 500 index had doubled. And three years after that, the S&P 500 had tripled.
But in the dark days of 1979, after equities had languished for more than a decade, no one wanted to touch the things.
“The masses long ago switched from stocks to investments having higher yields and more protection from inflation,” The BusinessWeek article observed. “Now the pension funds – the market’s last hope – have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition – reversable someday, but not soon.”
Twenty-three years after the “Death of Equities” cover story, BusinessWeek cemented its “indicator” credentials for all time by running a cover story entitled, “The Angry Market.” During the two years that preceded this story, the stock market had been very angry indeed. An epic bear market had erased nearly half the S&P 500’s value. But during the two years that followed this story, the S&P soared more than 40%. Three years later it was up 60%, five years later it was up 100%. In fact, the S&P hit the exact low of its 2000-2 bear market on the day “The Angry Market” cover story hit the newsstands!
But BusinessWeek cannot claim all the accolades for poorly timed cover stories. Time magazine also deserves a dishonorable mention…particularly when it comes to stories about the housing market.
In September, 1977, Time’s cover story lamented, “Sky-High Housing.” And while it’s true that the median price of an American home had doubled over the preceding decade, the median home price would double again over the following decade…and would quintuple between September 1977 and September 2005!
Then, just as this once-in-a-lifetime housing boom was ending, Time hit the newsstands with a cover story entitled, “Home Sweet Home – Why We’re Going Gaga Over Real Estate.”
“Ah, the blistering real estate market,” the Time’s story gushed in June of 2005, “where dreams of big bucks come wrapped in aluminum siding… Your house is now your piggy bank, ATM and 401(k)… Folks brag about having bought their home in the ’90s the way they used to brag about having bought Microsoft in the ’80s. Even if you’re not contemplating buying or selling anytime soon, the amazing lift in home values is changing the way we think about the roofs over our heads. Real estate isn’t so much about nesting today as it is about nest feathering.”
But at that very moment, the spectacular American housing boom was already on its way toward an equally spectacular bust. Condominium prices topped out in the identical month this Time cover story appeared – June 2005. Single-family home prices topped out shortly thereafter.
“Homebuilding Stocks went a bit higher during the month or so subsequent to that cover story,” Paul MacRae Montgomery relates. “[But] from that point they crashed 78%-90%… Housing prices per se [have fallen] a more modest 28%… But this drop was still enough to constitute the worst drop ever in home prices – worse than in the Great Depression.”
Now comes the Time cover story of last September, “Rethinking Homeownership: Why owning a home may no longer make economic sense.”
“Homeownership has let us down,” the cover story lamented. “For generations, Americans believed that owning a home was an axiomatic good… A house with a front lawn and a picket fence wasn’t just a nice place to live or a risk-free investment; it was a way to transform a nation… [But] The dark side of homeownership is now all too apparent: foreclosures and walkaways, neighborhoods plagued by abandoned properties and plummeting home values… If there ever were a time to start weaning America off the idea that homeownership cures all our ills, now…would be it.”
“According to the Magazine Cover Indicator,” Montgomery relates, “this dour treatment [of the housing market] suggests that it is now time to begin considering investments in real estate related assets.”
The Wall Street Journal’s Brett Arrends agrees. In an article entitled, “10 Reasons to Buy a Home,” Arrends proclaims, “Enough with the doom and gloom about homeownership. Sure, maybe there’s more pain to come in the housing market. But when Time magazine starts running covers to declare, ‘Owning a home may no longer make economic sense,’ it’s time to say: Enough is enough. This is what ‘capitulation’ looks like. Everyone has given up…”