I just thought I’d send you all a quick note before the New Homes Sales numbers come out tomorrow. I think the Professionals are going to be very wrong regarding their forecast for New Home Sales. According to Yahoo Finance, the forecast is for an annual sales pace in July of 380,000 new homes. This would be roughly equal to the sales pace in June. I personally think the number is going to come in above a 400,000 home sales pace. Keep in mind, unlike prices, sales are seasonally adjusted so there is no claiming that any rise we see in home sales is just a seasonal thing. The professionals are having trouble accepting the possibility that housing is finally bottoming.
Human psychology plays a major role in the fact that the average American and the professionals are ignoring the positive signs in housing. We have seen time and time again in history that the opinion of the masses is similar to the direction of a huge oil tanker . . . it is difficult to change and almost impossible to change quickly. People tend to believe that whatever has been happening over the past couple years is likely to continue indefinitely or if it does change, it will change slowly and only by a little bit. This is the whole reason that markets trend a lot more than the efficient market hypothesis would surmise. For example . . . basic human psychology makes it much more comfortable for people to buy a home after prices have already gone up for many years like in 2005 but very uncomfortable to buy a home after prices have gone down for a few years (like now). The same is true with buying stocks. Ironically, human psychology will usually lead people to do exactly the wrong thing . . . it will instinctively guide people to “buy high” and “sell low”. There are numerous examples of this tendency to believe that recent phenomenon are likely to continue in history but here are a couple:
1. Remember the “Goldilocks Economy” in the media in the late 90s? This was basically the premise that we’ve become so good at managing our economic cycle through monetary and fiscal policy that we had essentially killed the economic cycle and were never going to have another recession or declining stock market. This thinking was created by the uninterrupted and abnormally long economic expansion we experienced in the 1990s. Well, shortly after the tech stock bubble burst and we experienced a recession and a large protracted bear market.
2. Then, in 2004-2005 you had a bunch of professionals including Alan Greenspan saying that there is no such thing as a housing bubble . . . that all housing markets are regional and that we have never and never will experience a year over year decline in home prices on a national level. Whoops? We all know how wrong that thinking was.
3. Then, when home sales started to decline in late 2005 and there was talk of a housing bubble, we heard almost all the professionals talking on CNBC about how housing was going to experience a “soft landing” . . . that basically the decline would be gradual and not too deep . . . again, people were refusing to acknowledge the possibility of a quick and drastic change. Whoops?? Not so accurate on that one either.
4. Then, after it became clear that housing was indeed experiencing a significant decline, people became convinced that home prices were going to drop forever and that we won’t see a recovery for many many years.
What’s interesting is that if you look at what the newspaper articles were saying at the end of past recessions, it is remarkably similar to what we’re seeing now . . . it tends to be very negative and talk of “double dip recessions” and “secular bear markets”, etc. People have trouble believing that recessions are actually ending and that things might be changing. Right now you have a lot of professionals still extremely negative . . . they are saying things like:
1. The U.S. Debt is going to destroy our Country and hold back our economy for years to come.
2. There is going to be tremendous inflation because of all the monetary and fiscal stimulus . . . that the Fed will not be able to “unwind” all the stimulus quick enough to avoid rampant inflation.
3. That we are going to experience a huge wave of foreclosures in the next two years that is going to make the housing market and our economy continue to decline.
4. We are going to have a double dip recession or a “W” shaped recession.
5. That there is no impetus for future US growth . . . that there are no new technologies or industries that will foster this new growth.
Well, I’m here to tell you that I think all these professionals are dead wrong. I’ve read a ton and have done a lot of research and there are many reasons to believe that housing and the economy are going to improve quickly and substantially over the next 12 months . . . Here are just a few reasons why I think this:
1. I’ve learned that the Professionals usually regurgitate what they think the public believes and wants to hear . . . this is how they generate a following and make money. So, I’ve learned that the Professionals are almost always wrong . . . just look at the list above.
2. This housing contraction has been longer and deeper than most previous contractions which makes me believe we are overdue for a rebound
3. Historically, the greatest predictor of how fast a market bounces back is how deep the contraction was . . . the deeper the contraction . . . the quicker the rebound. Think of it like as a spring being compressed . . . the farther you compress it, the more force it has to spring back. As I’ve shown in my graphs in some prior emails, this housing contraction was deeper than any we’ve had in recorded history . . . so, this tells me that the spring is very compressed, which tells me the rebound will be substantial.
4. This is still the same great Country it was a few years ago and to say that there is no driver of future economic growth is ridiculous . . . the truth is, unless you’re a psychic, we have no idea what’s going to cause future growth but I can assure you that something will. How many people predicted the late 1800s boom caused by railroads? How many people predicted the 1920s boom caused by automobiles and radios, among other new technologies? How many people predicted the 1990s boom caused by computers and the internet? So, what makes us think we would know right now what is going to cause future economic growth?
5. GDP growth is the largest metric used to measure the health of our economy. Well, what many people seem to be ignoring (or just don’t know) is that GDP is very much poised for growth right now. For the past 3 years, housing has been subtracting about 1.5% from GDP growth because of how fast it was contracting. So, even if housing just bottoms out and doesn’t get any worse . . . that creates a positive swing in GDP growth of 1.5%. However, I think housing will rebound and get much better and start adding to GDP growth by about 1%. So, this creates a 2.5% swing in GDP growth from housing alone. This same phenomenon will occur in manufacturing. As demand contracted, many companies were stuck with high inventories of goods they couldn’t sell. This caused a huge decline in manufacturing . . . also a very large component of GDP growth. So, for the past couple years, the decline in manufacturing has subtracted about 1% point from GDP growth. Well now, most companies have effectively cleared out their excess inventory and must start producing again to replenish their inventories. So, manufacturing should start contributing positively to GDP growth in the 3rd quarter. The point is, because GDP contracted so much, it is that much easier for it to grow now.
So, for what it’s worth, I think we are going to have a “V” shaped recovery that has already begun. I think the housing numbers are going to be much better than expected tomorrow and are going to leave a lot of the “Professionals” scratching their heads and trying to figure out how to dismiss the numbers or put a negative spin on them.
We’ll see. After the numbers come out, if I have time, I’ll update the charts and send you all out another email.
-Chris