Landmark Links June 13th – Pretty Much Useless


Lead Story…

There are basically three types of economic sentiment indicators:

  1. Mostly Useful – I put the NAHB Homebuilder Survey in this category.  When builders are confident, it typically means that they have purchased lots or are in the market to buy lots.  It’s typically a pretty good gauge of where housing starts are headed.  However, there are some potential issues with methodology that I’ve pointed out before that make it less reliable than it used to be.
  2. Mostly Useful But for the Wrong Reasons – The Investor’s intelligence Survey is a classic example of this.  It’s a survey of financial newsletters that asks how bullish or how bearish they writers are on the stock market.  However, it’s often a contrarian indicator when respondents are extremely bearish or extremely bullish and often foretells a market move against the herd.
  3. Mostly Useless – I consider the housing question in the University of Michigan Consumer Sentiment Survey to be in this category.  Today, I’ll explain why.

Recently, The University of Michigan published it’s Consumer Sentiment Survey for May. It’s a survey of Americans and one of the questions is intended to determine whether or not they feel that it’s a good time to buy or sell a house.  The most recent survey showed a 6-year low among those who think it’s a good time to buy a house, while those who said it was a good time to sell were at a 12-year high.  Cue the inevitable financial media hyperventilating.  Danielle DiMartino Booth of Bloomberg interpreted this survey as confirmation that we are now in a buyers’ market in an article entitled The Housing Moment Investors Dread Is Here (emphasis mine):

The May University of Michigan Consumer Sentiment survey showed a six-year low among those who think it’s a good time to buy a house and a 12-year high among those who say it’s a good time to sell. Disparities of this breadth tend to coincide with break points and that’s just where we’ve landed in the cycle.

The beginning of May officially marked the advent of a buyers’ market, defined simply as sellers outnumbering buyers by a wide enough margin to trigger falling prices. Yes, it’s the moment buyers have been waiting for. It is also the moment private equity investors, those who’ve crowded out natural buyers, have been dreading.

So, if the above is true, one should easily reach the conclusion that home owners are listing their homes in droves, pushing up inventory and keeping a lid on prices.  However, out here in the real world, exactly the opposite is happening: prices are rising and inventory continues to fall.  How can the survey be so wrong?  I would suggest that it’s not a sample size error or people being dishonest about whether or not they want to buy or sell.  Rather, the question of whether or not someone thinks it’s a good time to buy or sell is a highly nuanced.  Kudos to the economists at Fannie Fannie Mae whose National Housing Survey resulted in nearly identical data  as the University of Michigan survey but came to a completely different conclusion due to real world observations: a strong sellers’ market (emphasis mine):

“High home prices have led many consumers to give us the first clear indication we’ve seen in the National Housing Survey’s seven-year history that they think it’s now a seller’s market,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “However, we continue to see a lack of housing supply as many potential sellers are unwilling or unable to put their homes on the market, perhaps due in part to concerns over finding an affordable replacement home. Prospective home buyers are likely to face continued home price increases as long as housing supply remains tight.”

Bingo.  Housing is a unique asset in that it represents a form of shelter, investment and consumption at the same time.  If someone prefers to sell as stock, bond or other investment, there is always a ready alternative: cash.  However, it someone sells a house they then have to find another place to live.  When both the rental and for-sale markets are characterized by a lack of available units, this is problematic.  Sure, the house that you purchased a few years ago may be worth substantially more than it is now.  In a vacuum, it may be a great time to ring the register, sell it and make a profit.  However, in the real world, you now have enter into a competitive market and pay up for another home or rental.  In a place like California this is doubly bad because the tax basis in your new home will likely be higher than it was in your old home.  If you only look at the sentiment data, you would conclude that we are in a buyers’ market but the conditions in the real world are much, much different.

The same concept applies in a bad market.  From 2007 – 2013, almost no one thought it was a good idea to sell a home, according to the index (see chart of the day).  It should stand to reason then that inventory would be low.  However, the market was flooded with inventory because people didn’t have a choice and were forced to sell due to personal circumstances, as shown in the chart below.  Again, the sentiment data was basically useless.

When looking at any sentiment index or survey it’s important to remember that life doesn’t happen in a vacuum.  The questions that surveys attempt to answer are often multi-layered and far more complex that what is actually being asked.  Models and indexes tend to show the world as a place where everything is black and white.  The real world is a far more nuanced and complex place.  Sometimes what is going on in real life is the exact opposite of what the model or survey suggests.


Because I Said So: The Fed is likely to raise rates this month despite falling inflation primarily because they already said that they would do so.  So much for flexibility.

Diminishing Returns: With low yields and rich equity valuations, the biggest problem that investors today face is the prospect of low future returns.

Not What It Seems: American household debt has risen to record levels.  On the surface, this looks bad.  However, income has risen even more.


Dragged Down: America’s dying malls are weighing down retailers as they continue to slide.

Tough Going: It’s really, really difficult to raise capital if you’re a new real estate fund manager right now.


Flipper: Home flipping loan volume is now at a 9-year high as developers cash in on low inventory.

Not How It’s Supposed to Work: Oakland should be building 870 affordable units a year.  Last year they only built 40 resulting in hundreds of senior citizens waiting in line for a shot at the subsidized housing wait list last week.  Just an unfortunate reminder that there are real life consequences to not building enough housing.


I Would Actually Try This: Despite my intense dislike of vegans and all of the crap that they spew I will try the Impossible Burger once it’s available.

If You Don’t Have Anything Nice to Say: Sam Panopoulos, the inventor of the Hawaiian Pizza, (who was Canadian and of Greek ancestry, by the way) a monstrous creation made with pineapple rather than decent toppings passed away last week.  So, if you like terrible toppings on your pizza, go get a slice in honor of him.

RIP: Adam West passed away this weekend.  Apparently he was Batman in the streets and Wilt Chamberlain in the sheets.

Unintended Consequences: Ultra-low rates fuel booming business for guarding cash in Japan.

Chart of the Day

Source: The Wall Street Journal


The Crappiest Place on Earth: A flock of geese shit all over a crowd of 17 people at Disneyland last week, resulting in a hazmat response when it was initially reported that someone had thrown human feces.  Welcome to 2017.

Bad Kitty: A bobcat broke into a New Jersey house and trapped a mother and her two young children in a bathroom for an hour until police arrived. This is how it begins….

When You Gotta Eat: A Texas woman called 911 to complain that a fast food restaurant took too long to get delivered at her local McDonalds.  She went home hungry.

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