What Happens when Everybody is Talking About Housing?

"Housing Decline" was the most talked about news item of the year in 2006, according to a recent AP article. This probably comes as a surprise to nobody. But to what extent does consumer sentiment about housing have an impact on the underlying values? Or is it just a good way to get a barometric reading on the financial aspects of the market?

Back in 1999 when I was working as a financial advisor, I remember reading several articles that discussed the relationship between news reporting frequency of key terms and the financial performance of the related commodity. Back then, all the talk was about the stock market, and mutual funds, which had become so prolific that they outnumbered the number of individual stocks listed in the US Market. Inexperienced investors were being drawn to the stock markets in droves, and prices were flying with the influx of new money. On occasion, even hip-hop music - historically boastful about financial prowess - made mention of mutual funds amidst its more commonly urban references.

The significance of this was that the more there was mention of a sentiment in the news media and pop culture, the more likely it was that momentum was being driven to an unsustainable level. We saw it come in 2000, when the stock market hit a major correction. The worst of the decline was felt in the NASDAQ, where most of the new investors had been drawn to the recent fast-paced technology company returns.

We saw it again last year in housing, when everybody seemed to be talking about buying houses, with 'no money down' and making 'positive cash-flow' from the start. All of these infomercial testimonials with the 'average couple' sitting by a pool at a resort in Orlando, discussing how much passive income they received in the previous month... it was a sign that the market was over-heated.

Charles Kindleberger notes in his famous anatomy of a crash Manias, Panics and Crashes that "when the world is mad, we must imitate...", capturing the essence of the fuel that is the consumer in pursuit of ROI. Even when we know something is too good to be true, there can be an urge to get involved. If you don't, you risk getting left behind. To this end, the American consumer has the ability to self-fulfill its own prophecy, but it typically leads to excesses, and the last guy in gets left holding the bag. So far the 'housing decline' seems to be moderate in most markets - but not all. Its going to be easy to see in retrospect where the market got overheated. I've discussed it here before, and I will continue to as we cycle through this market.

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Heres a link to some economist sentiment for 2007