Donald
Rumsfeld, United States Secretary of Defense, commenting on Iraq in February,
2002
SUPPLY AND DEMAND
Just to quickly
review last month’s discussion, there are those (I’m a member of this group)
who look at the current set of circumstances in housing, primarily supply and
demand, and feel pretty certain that the market has no place to go but UP.
Housing is famously a “local” market, which our fascination with national
numbers sometimes obscures. In Orange County it continues to be a seller’s market—and
now a pretty strong seller’s market. As the attached graph continues to show
inventory is constrained, buyers remain strong and aggressive, and I don’t
see that trend reversing any time soon.
But, there are also
those wringing their hands and holding forth that such optimism simply fails
to grasp the clear and present dangers ahead—some combination of the “known
unknowns” and, even worse, the “unknown unknowns,” maybe even the Black Swan
events and their societal changing impact. (Nassim Nicholas Taleb authored a
book in 2007, “The Black Swan: The Impact of the Highly Improbable.”)
In the area of the
“known unknowns,” there are those very sure that there’s a shadow inventory
out there that is going to cause enormous disruptions on the supply side.
This “shadow inventory” remains a “known unknown.” There are those who
extrapolate and conjecture to quite specific numbers of the components of the
“shadow inventory,” but when you dig into it you find a surprising fuzziness
in the actual “known” numbers. I had planned to continue the discussion on
the “shadow inventory” this month because there have been some developments
that I think makes the forecast of major supply disruptions from shadow
inventory increasingly unlikely. (See the second attachment above for one
example.) Instead I’ll focus this month on a question, or actually multiple
questions, that seem to be scaring the socks off about half the people with
whom I talk regularly.
HOW BAD ARE THE
UNKNOWNS?
One of the things
that has struck me over the last couple of months is the sharp difference in
outlook among the people with whom I am blessed to converse with every month.
At one point I thought that the folks who think everything is headed UP must
be the ones whose income streams and standard of living were not impacted by
the events of 2008. They saw the pain of others “outside,” but suffered no
such pain inside their own walls. But, that clearly isn’t the driver. In
fact, I can’t see a pattern based on anything, not on the amount of economic
disruption suffered over the last four years, or by generational differences,
or by gender, or by any other criteria. Inevitably the folks wringing their
hands seem focused, or at least keenly aware of the headline worries, both
the “known unknowns,” and the “unknown unknowns.”
And, I can
understand why. I follow a great deal of “news,” or at least what passes for
“news” now days. There is no shortage of hand wringing worrisome news
stories; Europe—a vast field of the “known unknowns” and “unknown unknowns”
tied to the “great unknown,” how will the “wheels coming off the cart” of
Europe impact the U.S., and how soon? Same questions, somewhat different
worries as to the future of that great economic engine, China.
Add in the current
dual focus of the 24/7 news cycle; the elections, and the “fiscal cliff” and
it sometimes might seem too much a challenge to go ahead and open your eyes
and hop out of the bed every day. And, all the above collection doesn’t even
include the current or future antics of the Federal Reserve Open Market
Committee which, to me, seems to be a bunch of smart guys holding a handful
of “known unknowns” in one hand, and a handful of “unknown unknowns” in the
other hand clapping both hands together and pronouncing them as “known
knowns.”
HOW WILL YOU HANDLE
THE UNKNOWNS?
I was thinking the
other day about the similarities of the current worries to those of Y2K. Do
you remember the lists of “known unknowns” being creatively dramatized into
lists of enormous Black Swan type “unknown unknowns?” What happened as THE
EVENT came and went? The “known unknowns” became something of a yawn, and the
wild eyed “unknown unknowns” became sheepish embarrassment. The number of
puzzle pieces in today’s game, and the way the pieces fit together make it
hard to draw a direct correlation to Y2K, but I can sure see a lot of the
same sorts of mental gymnastics going on.
I was talking to
someone recently who was anxiously climbing “the wall of worry,” jumping back
and forth between the “I should really go ahead and do something now,” and
the “what if this, that, or the other thing really does happen in the next
six months,” and the stock market collapses, the housing market collapses,
and …on and on. If you find yourself in the same predicament he was in my
suggestion to you is STOP—DO NOT MOVE FORWARD RIGHT NOW. It just isn’t worth
battling that wall of emotion. The election is in a month. The fiscal cliff
will be handled in 2-3 months—or, more likely, postponed and handled over the
next 6-8 months. Then, in the light of a new year, a new Congress, a new
Administration, and a calmer you, you can move forward without driving
yourself crazy. (If you’re waiting for the unknowns of Europe and China to
become “knowns” before you move forward then buy some good books and settle
in for a long rest.)
For those who are
convinced that housing is headed UP, I agree with you. It probably won’t be a
smooth one direction trend line, but it never has been. The “knowns” that I
see in Orange County, California, point to UP. The “known unknowns” that I
see will absolutely make a difference over the next year, but I just don’t
see it reversing the supply and demand trends of 2012.
WHAT A COUNTRY!
I was thinking of
that famous line that the Russian immigrant comedian, Yakov Smirnoff, used in
his stand-up routine in the 80s. When we think back on the events of the last
five years, when we sort through the nonsense that passes as political
dialogue now days, we have to be awestruck that we are blessed to live in the
greatest country to have ever existed, a country that no matter how messy and
irritating it might be getting there, when we start our day on November 7th
we will have a President, and a Congress freely elected by free people. They
will assume their offices in an orderly and peaceful manner. Our businesses,
our homes, and/or our lives will not be endangered because of who won or who
lost or which side we were on.
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