Still Renting (After All These Years)

Money Management firm and Bond King PIMCO has staked out one of the most bearish positions on the Housing Market of any of the serious Wall Street players. Theirs is also one of the most well quantified. The thoughtfulness bears paying attention to. Pun intended.

PIMCO founder and CIO Bill Gross does a monthly economic outlook podcast which I look forward to the first week of each month. Intricate, playful, and self-referential, Gross constructs his essays in a mini version of the Hofstadter style. To grossly oversimplify, Gross has been generally bearish on the economy, primarily driven by his view of housing market recession for over a year. [aside: the article and podcasts are here. But I'm I the only one who finds Apple's iTunes UI absolutely horrible? It takes me hours to navigate through that morass.]

Today, I'd like to call attention to an article by PIMCO portfolio manager Mark Kiesel. He writes this month that he's "still renting." Citing the litany of housing bubble factors (affordability, excess money, rampant speculation, easy lending, inventories, vacancies, delinquencies, etc.) Mark assumed we'd hit a housing market peak and sold his home in 2006 (in Los Angeles presumably). He has been renting ever since. Mark considers that he'll be renting for another year or two. We'll posit here that Mark is wrong: he's looking at 5 or more years.

It turns out that Mark is one of the few who has the cojones to put his money where his bed is. We've had the discussion at the Casa Simonsen breakfast table. Here's how the scenario plays out:

Me: There's a reasonable chance that we'll lose maybe half a million dollars in home equity over the next few years.

The Wife: You think it's that much? Really?

M: Well, there are plenty of scenarios where the housing bubble pops in a catastrophic way. Or it could be flat for 10 years. Remember we never thought the NASDAQ could lose 80% of it's value.

TW: Well then, Mr. Smarty Pants, that business of yours better pick up the slack. 'Cause we're not going to go live in an apartment.

M: Righto. [goes to get coffee]

TW: No coffee for you. Coffee is for closers.

...And life goes on. (That Wife is a funny one.) Despite the fact that we're acutely aware of the capital at risk, we ain't taking any action.

Our situation underscores the trouble with Mark's plan. Even assuming that PIMCO's fundamental analysis is spot-on and the worst case bubble scenario happens, Kiesel faces the speculative problem of market-timing. What if Kiesel is right, but off by say, four years? In fact, Kiesel addresses the condition, but misses the implication:

Over time, housing prices and interest rates should decline, resulting in improved affordability. This adjustment, however, will take time and occur over a period of years, not months. Housing is illiquid and prices are sticky. As a result, potential buyers should exercise patience and not jump back into the housing market too early. A year ago, I described the state of the US housing market as “the next NASDAQ bubble.” The NASDAQ took over 2 ˝ years to go from peak to trough. I suspect that housing prices could display a similar pattern, and we are still over a year away from the bottom. Given these risks, I prefer renting versus owning, and an investment strategy which favors defense versus offense.

Home Prices as measured by ECRI

So now it's 2011 and your kids are half-grown, you're not in the school district you wanted, but you're a few hundred grand richer. Or maybe not, because a stable home environment has given you the opportunity to focus on building wealth in other areas (see The Wife's comments above).

Much Ado

So much of the housing bubble crowd is fueled by vitriol and schedenfreud, that PIMCO's fundamental analysis is refreshingly pure and compelling. But it doesn't address the problem of what to do about it.

That's why we're so bullish on the housing futures markets emerging. We've discussed some new fangled hedging strategies, but the fee structure makes them cost prohibitive. I'm just hoping some decent consumer-retail products develop before catastrophe strikes. It could be that in a few years, home value insurance products are part of every transaction. Like PMI, but for the buyer, not the lender.

In the end, maybe the housing bubble like Mark Twain with the weather: so many people complaining, but no one doing anything about it.