Enron, stock options, deficits, trade deficits, gas prices, oil prices: each of these during its time was the big financial story. The big financial story du jour is about housing. As the story goes, an alleged housing bubble allegedly burst and (it is alleged) caused a crisis among sub-prime mortgage lenders. This just might spread from sub-prime lenders to prime lenders to the Fed and from there to Moscow and Beijing, flowing out in allegedly intensifying waves of destruction until the sun collapses in on itself destroying large swaths of the known universe — allegedly.
All of this depends on one simple and false premise: that home-builders are morons. They just build and build, ignoring their betters at newspapers and cable news until the market is so utterly glutted that the construction industry is rendered irreparable for the foreseeable future.
Here’s the problem: Home builders aren’t morons. They don’t work in huge bureaucracies, and they are most assuredly not out of touch with market forces. I’ve worked with these people for almost a decade. Our company has done a great deal of business with the Pennsylvania Builders Association, and I’ve interviewed literally scores of entrepreneurs in the field. They’re smart. They watch interest rates closely and local market conditions even more closely. My friend Scott Elliot from the Pennsylvania Builders Association put it best when he told me that his members are among the most market-driven business people he knows. They have to be — most of them build four or five houses per year. A miscalculation of even one unit per year could leave them with a net financial loss. They put their livelihood on the line and live by the consequences. They don’t deal in abstractions like general national demand, etc. They plan from the bottom up, following the peaks and troughs of individual neighborhoods. They don’t get their insights from the New York Times or the annual Davos summit. They get it from their own eyes.
That’s why I’d bet on them, not the pundits. Six months ago I was in a debate with the panel of Fox News Channel’s “Cashin’ In” on this topic. I predicted that in 2007 the housing sector would outperform the Dow. They all thought I was nuts. I felt like Henry Fonda in 12 Angry Men.
Recently I was in the same debate again, but this time on CNBC’s “Kudlow & Company.” The perma-bear was Doug Kass. He was absolutely sure that the housing market was in tatters and that the sub-prime thing would destroy the world as we know it. As the show was ending, I managed to shout out defiantly (like William Wallace in Braveheart): “Buy housing stocks!”
After the show, I told the lovely Mrs. Braveheart-Bowyer that I thought it was time to sell some Dow and buy some Toll Brothers. Given Doug Kass’s track record, I should’ve taken out a second mortgage and sold some blood plasma to increase my bet.
When a group of small entrepreneurs who put their livelihood on the line every day go long and the pundit-acracy goes short, I know which way to go. In other words, I’m calling the bottom.
Now, where’s the nearest blood plasma place?