Apocalypse trilogy, part 1: Did the bears and bubbleheads get it right?
Not as dumb a question as it sounds.
Record numbers of foreclosures. Home prices dropping like stones. A global financial market in crisis, shaken by weakness in the U.S. housing market.
An apocalypse long predicted in the bubble blogs and by the most bearish of economists. Obviously these guys (and gals) saw something the mainstream missed. Obviously these guys (and gals) are geniuses.
But look more closely, and you wonder if the bears and bubbleheads aren't so much geniuses as Johnny One-Notes who finally hit their one note at the right time. Here's ultra-bear economist Christopher Thornberg, with his flexible numbers, sweeping generalizations and headline-seeking predictions of doom, denying that all real estate is local. He's got to, or his theory that Menlo Park buyers cross-shop Modesto won't hold up outside the textbooks. And here's the everything-but-the-kitchen-sink throw-it-against-the-wall 49-point manifesto of Sage, America's #1 Bubble Blogger, which gets a few points, including foreclosure and financial collapse, right, and everything else wrong.
The high percentage of misses isn't nearly as surprising as the random bull's eyes. The fallibility of the economist or bubblehead, with his weighty pronouncements on a real estate marketplace duct-taped together from theory, old wives' tales and wishful thinking, is well-documented.
Yet I'll admit I didn't see the apocalypse coming. Why not? For one thing, I wasn't working the right neighborhoods. The neighborhoods in which my clients usually buy and sell weren't fueled by subprime lending and, until recently, they'd held up relatively well, much as they would in any "normal" downturn. Was I too close to these markets to see disaster stalking others? Maybe, but as we'll see in a moment, other, presumably competent observers, very much outsiders to real estate, with very much an arm's length relationship to the real estate industry, missed it too.
So what gives? How did the people least likely to get it right get the most important part right and nothing else?
I have a few theories:
1. We should forget the experts and listen to the people with no experience, less insight and much agenda.
2. Real estate has cycles. Say "real estate will tank" often enough and eventually you'll hit the mark. You just have to be "ahead of your time" (translation: "dead wrong") for years. Your fans will remember only that you "predicted the bust", and if they don't, your curriculum vitae will helpfully remind them.
3. But theory number 2 still doesn't explain why the ultra-bears and bubbleheads saw apocalypse coming. But it does. Because over the years the predictions of what would happen to real estate, once the boom was over, were never as binary as "good outcome" or "bad outcome". No, they filled a spectrum that ranged from "what bust?" to "yeah, it'll never happen here" to "gentle letdown" to "serious dislocation" to "build your real estate bomb shelter" and all points in between.
And that's the point: no one knew, and it's hard to believe anyone could have known. And when no one knows—and in the marshmallow-soft science of economics, where your guess is as good as mine unless it disagrees my guess, and where no one knows for sure what will happen until it does and not even then—people get to pick their own truth and outcome, depending entirely on their own outlook. So we have the irony of subjective gut feel leading us unerringly to "correct" "objective" "scientific" "truth".
Which explains this lead-in to a November 19, 2008 Los Angeles Times article: "With the median price of Southern California homes down more than 40% from its peak, the housing market has now slid further than most economists expected." UC Berkeley economist Thomas Davidoff is quoted as saying that "he and others underestimated the drop in value because it was tougher a year ago to know just how many people had mortgaged their homes for more than they could really afford. The earlier forecasts were off because 'it was hard for people to get their arms around just how bad lending standards had gotten'".
That's a revealing comment, because it tells us that other, equally qualified economists (and Berkeley has one of the leading schools of real estate economics), looking at the same data as the ultra-bears, couldn't see apocalypse looming as recently as a year ago. So are the ultra-bears just better at doing whatever it is economists do? And should we all be taking our real estate advice from bubbleheads?
The record suggests that we don't need to do anything quite this drastic. It also suggests that, for once, juvenile cynicism and dour, often agenda-driven pessimism led, not to their usual dead ends, but to the actual outcome. Worst-case scenarios don't often pan out, and those who make a living predicting them (and those who plan their lives around them) usually find it unrewarding in the long run, although in the short run it seems to meet some need.
Yes, friends, this is one of those rare and historic moments when a gloomy outlook makes you prescient. A recent comment by a Wall Street Journal reporter reminds me that those who predicted this debacle are usually called "crackpots", known for calling nine of the last three recessions. But every once in a great while their cataclysms come to pass. The numbers tell us it's 26 years since the economy was this hammered, 77 years since the stock market took these kinds of hits, and at least 41 years since overall consumer confidence was this shaky (although it's significant that the Present Conditions sub-index "is now close to levels last seen in the months following the 1990-91 recession, but is not as low as levels reached during the 1981-82 recession").
If I'm capitalism I look back on this streak with a certain pride, but the most recent reminder that bust follows boom and that some busts hurt more than others means that the "crackpots" will have more credibility going forward in alarmist quarters, that tinder of every panic, than cooler heads and dispassionate history can give them. Then add the fact that collective memory should check itself into a Memory Unit—most of us who lived through the recession of the early 1980s seem to have forgotten the boom times that followed, perhaps because we have more to lose now than we did 28 years ago—and you have an up-close look at how the bust mentality shows up and settles in.
Speaking of which, Thornberg predicts a further 15 percent decline in home prices, while Davidoff says "we're probably seeing an over-correction" in the areas hardest hit by the subprime crisis. Not necessarily contradictory statements but, typically, one is dire and strictly quantitative while the other offers a more nuanced and optimistic outlook. Should you buy a home now or wait, assuming that buying, not pounding your chest in triumph over the collapse of markets, is the goal? Just pick the expert prediction you like. Glass half empty? Glass half full?
But looking for oracles in real estate is a losing game. See the ultra-bears and bubble bloggers for what they are—not disinterested prophets, but spokespersons working the glass-half-empty crowd, just as the real estate industry is so often the sunny messenger of eternal optimism—and this bitter ideological contest, fought everywhere except where it matters, in the marketplace, might make more sense.
Next, Apocalypse trilogy, part 2: Leading the industry out of the wilderness.