Posted by: wtfwjd? | September 23, 2008

Glass Houses

Kind of funny to go back and read AEI Senior Fellow James “Dow 36,000” Glassman’s piece from 2005 on the silly people who thought there might be a housing bubble:

In his book Bubbleology: The New Science of Stock Market Winners and Losers (Crown Business, 2002), economist Kevin Hassett defines a bubble as “a period when the price of an asset (stocks, real estate, tulips, etc.) suddenly soars for irrational reasons and then collapses.” The key word is irrational. Prices often rise for good reason. … In a bubble, prices get divorced from reality — though reality, in financial terms, is often in the eye of the beholder. One measure is affordability. “If people are paying a realistic portion of their income for housing,” Marc Louargand of Babson Capital writes in a letter to clients, “it is hard to see conditions as a bubble.”

Louargand cites the housing-affordability index calculated by Economy.com. If the median family income in a market is exactly the amount needed to qualify for a loan to buy a house at the median resale price, then the index is 100. If the median income is more than sufficient, then the index rises above 100. Louargand found that of the 318 metropolitan areas tracked, only 29 had affordability indexes less than 100. “In fact,” he writes, “the average index value as of year-end 2004 was 180, which indicates that the median family income can qualify for nearly twice the median home value.”

How can so many Americans afford houses at a time of rising prices? High incomes and low interest rates.

Or, mortgages were being written under ridiculous terms, for huge amounts, to underqualified homebuyers. Which was totally obvious to anyone who was paying even a little bit of attention in 2005. So the maximum amount of money you could borrow was not a very reliable measure of affordability.

But the funniest bits are yet to come:

If you’re convinced that prices will continue to climb, it’s better to join the experts than to try to outsmart them.

You can, for example, buy stock in homebuilders, a course I’ve advocated for several years now. Ferguson notes that many of these builders “have strong balance sheets” and own “a large supply of land in a relatively land-constrained business.” The home-building sector ranked number one in early March among the 98 industries Value Line covers.

Among the stocks rated 1 for timeliness by Value Line are Beazer Homes USA (symbol BZH), which concentrates on entry-level and first-move-up buyers; KB Home (KBH), because its PEG ratio (the price-earnings ratio divided by the rate of earnings growth) is just 0.6, and anything below 1.0 is generally considered a bargain; and Ryland Group (RYL), which has seen its share price triple in two years but still trades at a P/E of 10.

Some advice that was: all these homebuilders have seen their stock prices plummet since Glassman wrote his article.

So I would suggest that when James Glassman talks, people listen. And if they have any sense they then run, quickly, in the opposite direction.

Oh, and in the “Where Are They Now” file? C’mon, you knew it: idiocy on this scale could not go unrewarded.

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