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Homebuilder CEO Pokes Holes In Gary Shilling’s Bearish Housing Thesis
Recent housing data has got many analysts and investors to come out and say that housing has turned the corner.
Shilling who thinks housing is a bad investment and expects home prices to fall another 20 percent understandably disagreed with Yearly.
Unlike Yearly who argued that housing had bottomed, Shilling insisted that the overhang of inventories was still worrisome, as was the fact that people are for the first time since the 30s aware that home prices “can and do fall on a nationwide basis”.
Yearly didn’t necessarily disagree with Shilling’s argument about nationwide home prices but pointed out that housing is a regional story and that investors should be cautious of macro-data that combines distressed sales with markets sales:
“What we do in Princeton, New Jersey, what we do in Northern Virginia, what we do in New York City has nothing to do with foreclosure overhang or problems that may exist in the inland empire of California or in Las Vegas.
We’re happy that the investors are leaving the market. We’re happy that the blackjack dealers in Las Vegas are no longer buying three houses as investment, that’s not who we ever intended to sell to. That’s not healthy for our business. What is healthy is to sell to families that want to take advantage of home ownership, that want to raise families in our homes, that want to buy second homes from us.
That’s the American Dream, that’s why 1.5 – 2 million homes are produced a year through good times and bad. Right now we’ve been producing 500,000 there’s huge upside, there’s huge opportunity to grow market share and that’s what we’re seeing.”
He also argued that conversation about housing being expensive and unsafe is typical after housing bubbles, but they end when the housing market rolls back since the American dream is to own a home.
But Shilling took offense with this line of reasoning and Yearly’s argument that housing is a local story:
“I can remember back in ’05, ’06 we were one of the few that was forecasting that there was a big housing bubble that would crack. And then it started cracking in ’07 first in sub-prime and what did all the bulls say? ‘Oh well those are loans that are made to people that luckily I’ll never have to meet, sub-prime people’. And then it moved beyond that, and said its bi-coastal, and its like Tip O’Neill said about politics, ‘all housing is local’ which is your argument. And the next thing you know the whole thing is nationwide and it collapses and it drags Wall Street down with it.
Now you’re talking about the upside as though there never was a downside, as though that was something that never existed.”
The debate had no clear winner but Yearly stuck with his guns that demand is growing and Shilling insisted that “the shadow knows whether we’ve really seen the bottom in housing or not”.