No Lines, No Waiting

Is the economy nearing the bottom? Seeing through the smoke and mirrors

Here’s reason to think things might be looking up: perhaps the real estate market is nearing the bottom.

A recent issue of Barron’s trumpeted “Buy now!” and said some high-end summer homes are 30% below peak. This caught my eye, because a year earlier (before the collapse) I’d heard someone on the radio finally talking sense. And he predicted that housing prices would hit a new equilibrium: 30% below the peak.

When I first heard that my ears perked up (I’ll say why in a moment), though I didn’t realize who the speaker was: Martin Feldstein, architect of Reagan’s tax cut. (I’m not known for quoting Reagan advisors.) He also said prices might overshoot on the way down (to 40% below peak), before coming back up to the new equilibrium.

It was refreshing to hear an observer who didn’t seem to have his head stuck up his abstractions. I’d moved to Boston in the summer of ‘06, and my old house in the midwest sat and sat for months without even any showings, as idiots pumped out sunny prognosications about how better times were right around the corner. I’m all for the power of positive thinking, but when you’re steering something the size of the US economy, I also think it’s prudent to have a clear windshield. And these guys didn’t.

For instance, one day a Wall Street Journal analyst puzzled that “Job creation is strong, but we’re not seeing the corresponding inflation that we’d expect.” Well, anyone who read Kevin Phillips’ The Economy is Worse Than You Know (April 2008) knows that our definitions of economic statistics have changed dramatically, so the old rules don’t apply anymore. (Yes, gasp, I’m quoting a Nixon advisor and a Reagan advisor in the same post.)

For instance, when Wal-Mart uses three part-time workers (no benefits) to replace one full-time retail job (with benefits), the Bureau of Labor Statistics counts it as job growth, when it’s really job dissection. Because apparently BLS only counts W-4’s. When three W-4’s replace one W-4, they call it job creation. (Don’t believe me? Call your Senator. I did.)  This is like keeping the same game plan in football even though the rules have changed for what constitutes a forward pass. (I discussed Phillips’ excellent article in March on one of my personal blogs.)

Imagine that in your own company, a steady sales volume got broken up into many smaller orders, and someone tried to convince you that sales were strong because you received more POs. That’s pretty much what Phillips reports.

Yet month after month, year after year, the economic observers on air and in print said nothing about this. I presume they didn’t know, but in any case their advice was scarily ignorant.  So when I finally heard Feldstein speaking sense – that housing prices would still be dropping for a while – I thought “Here’s someone who’s connected to my reality.” Because when I’d liquidated that midwest house, it sold for less than I owed on it (I paid $18,000 to get rid of it), even as the sunshine dispensers were saying things were looking up.

Feldstein’s prediction was reinforced by news coverage last summer saying that to liquidate foreclosed houses, banks were selling them at 40% off peak. Aha: the bottom, where Feldstein said people would be confident enough to buy.

So when I saw Barron’s saying that some (non-foreclosed) properties are now selling at 30% off peak, I thought maybe we’re getting there: we’re at the point where real value has outlasted the smoke and mirrors of bogus stats. When values stop dropping, people will start to feel that it’s safe to go back in the water. The other shoe will have dropped, and we can get back to business.

So hold on, people. Stick to your values and take care of your customers.

Posted by Dave deBronkart