Picking a Bottom in the Housing Market - Or Not

There's an old trading aphorism that is worth following for both veteran fund managers and market neophytes: picking bottoms gives you stinky fingers. The point, of course, is not to catch the falling knife, not to stand in front of the runaway train, and not to say that "enough is enough" before clear signs of reversal emerge.

So it was with some trepidation that Macro Man read a couple of analyses of yesterday's US data that attempted to put a positive spin on new home sales. Mind you, the authors, among whom included Goldman Sachs' US research team, didn't have the temerity to say that "the low is in." However, they did suggest that a bottom is, in the words of Goldman's Jan Hatzius, "coming closer."

After perusing the data, Macro Man can't help but wonder if these chaps aren't about to experience "stinky finger syndrome." While yesterday's new home supply actually fell slightly when expressed in months' worth of sales, the recent figures on the supply of existing homes (far greater, obviously, than the supply of new homes in terms of number of units) reached a new high. No signs of a bottom here!

Another of Macro Man's favourite tricks is to look at the 6m/6m change in certain indicators. And while it's true that the six month change in existing home sales has recently ticked a bit higher (or, to be precise, a bit less low), the rate of change for other metrics- new home sales, starts, and permits- remain at their nadirs.

Call Macro Man crazy, but the experience with credit and the financials since last July have been lesson enough in the folly of calling the bottom in anything. In a world where being early is the same as being wrong, picking a bottom in the housing market would appear to be a low Sharpe-ratio enterprise, to say the least.

It's not as if Joe Sixpack, the putative buyer of houses that would help establish a bottom, is feeling terribly rosy at the moment. Last night's ABC consumer confidence survey printed an all-time low, and the Conference Board measure was similarly dire earlier in the day. So naturally the S&P rallied on the day; don'tcha love window dressing week?

Macro Man retains the view that consumers are feeling the squeeze from low real incomes, a phenomenon partially but not totally explained by rising energy costs. Clearly, rising gas bills are beginning to impact drivers' behavior; the year-on-year decline in March vehicle miles traveled was the lowest since records began in 1942.

You'll pardon Macro Man if he tries to avoid picking bottoms in anything at the moment....

Comments

[WAKEUP:]

"...March vehicle miles traveled was the lowest since records began in 1942." Yep, and in 2011, you'll be able to buy a house at 1942 price.

2008 May 29 01:59 PM