From the annals of wrong comes this article, published 6 years ago today (2005): The Housing Bears Are Wrong Again.
Here is a quick excerpt:
“Homebuilders led the stock parade this week with a fantastic 11 percent gain. This is a group that hedge funds and bubbleheads love to hate. All the bond bears have been dead wrong in predicting sky-high mortgage rates. So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.
None of this has happened. The Federal Reserve has effectively mopped up excess cash and calmed inflation expectations. That’s why bond rates are hovering around 4 percent, with most mortgage rates about a point higher . . .” (emphasis added)
This is a fascinating study of how hard people fight to retain their preconceived belief system, their notions of what they already know — and what challenges that information.
Some of this may be the result of ideological bias, but I suspect most of this is a case of the Sunk Cost dilemma. When you have spent so much time and energy and money –indeed, your entire professional career — acquiring information and a supporting belief system, it is rather challenging to reverse course from that.
Hence, the difficulty in getting someone to recognize events that are outside oft heir experience. Consider this paragraph:
Meanwhile, the homebuilders index has increased 76 percent over the past year, with particularly well-run companies like Toll Brothers up about twice as much. The bubbleheads missed all this because they haven’t done their homework. If they had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades.
If you looked at home-building relative to Income, or to Household Formations, or to GDP, by 2005 it had was already 2 standard deviations away from the historical mean. It is very challenging to convince people what the norm is int he midst of bubble. And in 2005, we were in the middle of the world’s biggest credit bubble.
What fascinates me is how reasonable the arguments against the bubble sound. Read the whole article without the benefit of knowing how it all crumbled, and you will find it is surprisingly persuasive — just as the housing boom reached its peak.
The Housing Bears Are Wrong Again
This tax-advantaged sector is writing how-to guide on wealth creation.
National Review, June 20, 2005