A Conspiracy of Hammers

We're not much for conspiracy theories. If Bahamian coroners think Anna Nicole Smith died of an accidental overdose, we won't disagree—hard as it may be to believe young Anna could misunderstand the prescription bottle label. We're reasonably well assured there's no vast right-wing conspiracy, Area 51 is home to cacti and not much else, and we're pretty darn certain Tupac is, has been, and will continue to be dead.

Conspiracy theorists are classic examples of confirmation bias gone awry. There may be no discernable, data-driven evidence for a belief, but darn it, if an expert as credible as Rosie O'Donnell says Karl Rove and the Saudis planned 9-11, that's all the evidence some folks need.

Conspiracy theories abound in investing. High P/Es are risky—most everyone believes that. High oil prices drive stocks down—you can read that nearly every other day. Debt of all types is bad—who doesn't believe that? These beliefs continue, despite the broad availability of data contradicting them. Why? We might sound paranoid, but perhaps it's a conspiracy.

The media does seem very well organized around today's version of Elvis sightings—the housing bubble. The housing bubble is here, it's real, and it's going to bankrupt you, steal your job, run off with your wife, and kick your dog. We've commented at length why the housing bubble isn't much concern; so instead, let's examine the anatomy of a media conspiracy.

New home sales: Slowest in 6 years
By Chris Isidore, CNN-Money
https://money.cnn.com/2007/03/26/news/economy/new_home_sales/index.htm?postversion=2007032612

Sales of new homes sank to the slowest pace in more than six years in February, with the government's latest reading on the battered real estate market showing the glut of homes on the market reached a 16-year high.

Sank? Battered? Glut? It sounds super bad. In case you miss the point, there's this tidbit:

Last month's pace was the slowest for new home sales since August 2000, just before the nation fell into a recession.

In the event you're not already terrified, this headline seals the deal:

Stocks Knocked by Housing Woes
By Alexandra Twin
https://money.cnn.com/2007/03/26/news/economy/new_home_sales/index.htm?postversion=2007032612

Except, we have a few problems. The 2001 recession was not caused by a slowdown in new home sales. The first article intimates that was the case, but it wasn't. Saying new home sales were at this pace prior to the last recession is just a statement of two unrelated facts. You can play that game lots of ways. Unemployment hasn't reached these levels since just before the last recession. Yuck! I hate low unemployment! The tech bubble peaked in March, and it's March now. Ooh! March is scary!

The part about the "16-year high" isn't quite right, either. The total number of new homes for sale is actually down from last July, i.e., not a glut and not a 16-year high. What is at a 16-year high is the supply as measured in months, which we'd expect given the slight slowdown in sales. Meanwhile, the article glosses over the median price for new homes being up in February. Odd.

The second headline doesn't mess around: Stocks are down today, and new housing sales are too. They must be related! Stocks cannot be down for any other reason. Cannot possibly be because of a brewing international crisis over Iran's kidnapping of 15 British sailors. No way are investors fearful of looming tax hikes or the socialization of medicine. And it cannot possibly be that stocks are just down—normal volatility—no other reason. Nope. Today, stocks are down because of the housing report.

But which housing report? Existing home sales were up more than expected in February—for the third month in a row. And, there are far more existing homes than new homes. Shouldn't existing home sales be massively more impactful than new homes? Not if you've got a conspiracy to sell.

Why this particular spin? Why not choose to make this good news? After years of growth, it looks like the housing market is taking a breather, allowing more folks to buy in. Conveniently, mortgage rates are still historically low, incomes are up, unemployment is down, and economic growth is healthy. Guess what—it's a buyers market! Everybody in the pool!

But maybe it's not a conspiracy. After all, conspiracy theorists are irrational and bitter and Rosie O'Donnell. Maybe, when all you've got is a hammer, everything looks like bad news.