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Fortress of Denial (October 10, 2006) 
Consider, if you will, the general optimism (dare we say euphoria?) of homeowners
in these poll numbers from the current issue of Barron's.
The operant phrase here is "state of denial," but this doesn't quite capture the robust, indeed, fortified nature of homeowner denial. I humbly suggest the more accurate term would be a Fortress of Denial--impervious to attack by reason, statistics or indeed any fact-based battering ram. Given the widespread stories in the media about declining sales and prices, it is truly remarkable that a mere 6% of homeowners--approximately the same number who believe the Earth is flat, and that oil has nothing to do with why we are in Iraq--anticipate the rather obvious consequence of declining prices: that my house, too, will decline in value. Isn't this reminiscent of the general optimism which reigned in the post-bubble decline of the Nasdaq in 2000-2001? As a trader/shareholder in a number of tech and Internet stocks, I recall with painful clarity how analysts of all stripes--and not just the known hacks and hypsters--predicted that the "bottom was in" around August 2000--two full years before the decline from 4,000 hit actual bottom at 1,100 in October 2002. Those were heady times, to be sure. In the months before the peak in March 2000, I bought some shares in a small semi-conductor company with the ticker HIFN for about $40 a share. To my glad astonishment, within a matter of weeks it had run to $105, at which point I sold. I would like to report I avoided the subsequent meltdown, but alas, I bought shares in doomed companies like Razorfish and Doubleclick "at the bottom" (August 2000, not the real bottom in October 2002), and suffered the fate of all hopeful shareholders in tech companies--gigantic losses. And unsurprisingly, we already hear voices calling "the bottom" in housing stocks: Whistling Past Housing's Graveyard? (Wall Street Journal) This will go down, I believe, as the analog of the market analysts' serene calls that Nasdaq "had bottomed" at 4,000 in fall of 2000--two years and 2,900 points too early. Let's look at some charts which suggest the bottom is nowhere in sight in the housing market: 
Check out this display of rising inventories--not exactly evidence that "the bottom" is in: 
"Values" are of course relative--but look at the evidence that appraisers have been pressured to jack up valuations in excess of reality: 
This fortress of denial will be breached not by a direct assault, but by a painfully slow, stone by stone dismantling. Judging by this poll, the reduction of the bubble's housing euphoria has barely begun. If you need more proof, then read this story in the San Francisco Chronicle (the newspaper I contribute to) about a 24-year old who bought eight houses in three states even though he is unemployed. No spin is used as blog describes downward spiral. Unbelievable? Not at all--this young gent is just one of thousands of "flippers/floppers" in today's "can't lose" real estate market. For more on this subject and a wide array of other topics, please visit my weblog. 
copyright © 2006 Charles Hugh Smith. All rights reserved in all media. I would be honored if you linked this wEssay to your site, or printed a copy for your own use.
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