Running of the Bulls Analyzes Ben Stein v. Goldman Sachs

I was perusing DealBreaker today, looking for some dish on people I know, when I came across this post about Ben Stein's column in The New York Times.

I had thought about commenting about Stein's column last night, but I was too busy watching the Ravens and the Patriots on Monday Night Football.

For those who aren't in the know, Stein is an economist, comedic writer and Republican hack best known for his role in Ferris Bueller's Day Off.

In what year did collateralized debt obligation structured products comprised of subprime mortgages used to speculate in an overheated housing market bring down the global financial system? Bueller? Bueller?

Apparently, whilst observing the Baltimore Ravens blow yet another one last night, I was caught unaware of the kerfuffle Stein's column caused in the blogosphere. And since I'm a leading light in the blogosphere - well, okay, not exactly "leading" (and not exactly a "light" either - ed.) - I felt somewhat compelled to comment on this brouhaha. Plus, I didn't know what else to write this evening.

Essentially, Stein slammed Goldman economist Jan Hiatzus for being too bearish on the housing market, accusing Hiatzus of taking a negative position position because Goldman's trading desk is short subprime mortgages, amongst other things.

Now, correct me if I'm wrong, but I somehow recall Goldman Sachs and the rest of Wall Street being raked over the coals after the collapse of The Bubble c1999 for being too bullish, with a gazillion buys on everything under the sun - including the Talking Sock Puppet Companies which had no profits or cash flow to speak of - and exactly zero sells. So now, when Goldman recommends investors sell garbage mortgages, they are accused of pimping their book. Goldman says "buy" and they're criticized. Goldman says "sell" and they're criticized. Can Goldman ever win? (And it's cold comfort the employees of Goldman Sachs are paid a mere $5 million a year on average in which to deal with the harrowing accusations under the intense glare of an economist-turned-comedian.)

It also seems to not have dawned on Mr. Stein that Hiatzus's call has generally been correct. But since when did being right matter, particularly to those trained in the dismal sciences (including yours truly - ed.)? The prognosticatory ability of economists make weatherman appear to have the precision of a mathematician calculating to the thousandth decimal of pi.

Further proving my point, Stein applies rigorous analysis to the housing market by proclaiming

So I started an e-mail correspondence with Dr. Hatzius, pointing out what I believed were a few flaws in his paper. Among them were his hypothesis that home prices would fall an average of 15 percent nationwide (an event that has never happened since the Depression [emphasis added], although we surely could be headed in that direction)

Thus, Stein's position is that since it hasn't happened in a really, really long time, it is unlikely to happen again.

The problem is that it already has happened, and is continuing to do so. According to the latest release from the National Association of Realtors

The national median existing-home price for all housing types was $207,800 in October

compared to a recent press release from the same organization

The national median existing-home price for all housing types was ... down from July 2006 when the median was $230,200, the highest monthly price on record.

Indeed, July 2006 was and still is the highest monthly median price on record. Thus, my abacus and counting sticks tell me that housing prices have already fallen 10%. Tell me again what flaw Stein sees in Hiatzus's research?

Yes, yes, home prices have fallen 10%, but they could never fall 15%. That ... that ... that's just crazy talk.

Of course, like any good market cheerleader, Stein fails to acknowledge the nutty valuations house prices had reached.

Stein sort of reminds me of George Gilder, someone with little experience in market analysis telling us that markets should not go down.

Investors heed the advice of market cheerleaders at great risk. (And of the über-bears, too.) Concluding that something won't go down simply because it hasn't in a really long time is not a sound base for your investment decisions, and utterly bizarre given all we know about the history of finance.

Comments

Toro, I did an analysis of where prices should be if we allow (by we I mean the gov't) prices to fall where they historically would be versus incomes - answer = $135K in 2006. Vs the $206K

Full analysis:
http://www.fundmymutualfund.com/2007/12/analysis-what-should-median-housing.html

Posted by: TraderMark | December 06, 2007 at 12:17 PM

One flaw in your analysis is you compared June versus October in a market that has a well-known seasonality to it. Another flaw is that it is useless to compare median prices anyway, since they only show the prices of houses that have "changed hands" - this is an especially big problem now that sales volume has dried up, because the less liquid a market is, the less efficient it is and the less believable it's pricing over short periods of time. One final point: when comparing "drawdowns" in housing equity, it is important to look at inflation-adjusted changes rather than nominal, especially when comparing an inflationary period (today) with a deflationary one (the depression). A very likely scenario for the US housing market "bust" is a prolonged period of slow nominal declines accompanied by inflation, thus deflating the bubble in real terms without ever generating headlines regarding a 15% "crash".

Posted by: Doug | December 09, 2007 at 08:10 PM