Housing Through the Eyes of a Contrarian

I am a contrarian by nature. When everyone starts jumping on the proverbial wagon, I typically look to jump off. Why do I do this? Well, history has often served as a guide. At the height of the dotcom bubble, investors were wiring their paychecks to online trading accounts as quickly as they received them. At the bottom of the gold bear market, central banks (ala the Bank of England) declared gold a worthless and barbaric relic; the only people buying gold were fanatical gold bulls ... or contrarians.

By and large, this strategy has worked relatively well for me in the past. Several years ago, I wrote a piece in which I said Palladium was a value-oriented contrarian investment. At that time, Palladium declined 80% from its highs and was trading at $180/ounce. Today, Palladium is trading at $350/ounce. When gold prices escalated to new highs last year and Jim Cramer and his following stated that gold was headed towards $1000, I felt gold prices were due for a correction. And sure enough, the price declined to the $570 levels.

But there are some times in which markets continue to decline, regardless of market sentiments. And those times typically occur during the bursting of bubbles.

Thus, when it comes to housing, I am throwing my "contrarian" philosophy out the window.

If you pick up the paper, turn on your television, or simply start chatting with an old friend, it is highly likely that the topic of housing will come up. Everyone and their mothers are now talking about how bad the housing market has become. Whether it's the sub-prime mortgage meltdown, the record foreclosures, or simply the fact that prices have come down to 2005 levels, it's becoming clear that people are finally starting to realize that bubbles eventually burst. If I continued to be a contrarian, this would be a great time to buy. With this housing market, however, it's different. It is going to get a lot worse before it gets any better. 

At the center of this continual decline in housing is the simple fact that most of the appreciation that has occurred in housing over the past several years has been artificial. In other words, it has been a bubble. And as is the case with bubbles, the move down has to be just as prolific as the move up. You can read my views on the housing market in an article that I wrote in January of 2006. My arguments are the same today as they were back then.

Therefore, while I am currently throwing my contrarian sentiment out of the window, there will be a time (most likely in mid- to late 2009), where housing will once again become a buy. If I were to predict what things would look like, it would look something like this:

-Housing Prices would have depreciated by at least another 30% to 40%.

-Investors will shy away from even buying foreclosures that have come dramatically off their highs.

-Mortgage companies will offer incentives that include them paying your mortgage for a whole year.

-The person who owns the home next door might be a non-US investor (or fund) who simply bought the property as an investment.

-The apartment buildings that were turned into condos will turn back into apartment buildings.

Until then, I will look elsewhere for my contrarian investment.