Conventional wisdom seemed to think the US housing report was positive this week. But analysis of the data makes it hard to see why.
One confusion comes from media use of the ‘seasonally adjusted’ number. But why do we need an adjustment, when we have data going back to 1959? It simply creates more potential for error. The chart on the left, for example, uses the raw data to give a 10-year view of the monthly pattern:
- Momentum has clearly been waning through 2014 (red line) versus 2013 (green)
- Starts are up 7% so far this year, after a 16% rise in 2013 and a 21% rise in 2012
- November’s decline suggests the market has already peaked, rather than being in recovery mode
A second confusion comes from focusing on just a monthly number, and not seeing the bigger picture.
The right-hand chart shows developments in home ownership since 1995, when records begin. It shows very clearly that ownership peaked at 69.2% in 2004. Q3 Census Bureau data shows it is now back at 1995 levels of 64.4%.
Neither chart therefore supports the idea that this week’s data was positive. Not does analysis of US home price developments, which shows prices have plateaued in recent months. The reason is that a strong market would need large numbers of young people to be buying first homes. But today:
- The relatively wealthy white BabyBoomers are now moving ever-closer to retirement
- The youngest is now 50 and the oldest is 68
- The key to future house sales lies with the younger demographics – who are mainly Black and Hispanic
- But they earn much less than whites on average, so their ability to afford today’s prices is much more limited
The problem, of course, is that financial markets don’t really care about this level of analysis. The average holding period for a stock is now only 3 – 4 months. So players are simply looking for a trading buzz – a quick headline to make the indices jump up or down.
This creates a very dangerous environment for companies and investors, as price discovery is not taking place in the market on the basis of real supply and demand fundamentals. Instead, it is being driven by random headlines.
We’ve seen the consequence of this in oil markets in recent months. Conventional wisdom said these would always stay at $100/bbl. And now people in the real world are having to pick up the pieces from this mistake.