Stock “Comp’s” vs. Housing “Comp’s”
If you want to buy 100 shares of Google or Amazon, what are the comp’s?
How much the last Buyer paid a fraction of a second ago.
After all, stock is fungible: every share (at least common) is the same as every other.
Nanoseconds vs. Weeks (Months?)
Now, assume you want to sell or buy a (unique) home.
How do you determine fair market value?
By identifying the three most similar homes that have sold nearby, in the last six months (or more recently).
Step #2: identify the key differences between each of the “Comp’s” (“Comparable Sold Properties”) and the subject property, then assign values (“adjustments”) to them.
See also, “More Than This, Less Than That“; “Real Estate Bracketing ” Advanced Beginner Version;” “The Science ” and Art ” of Doing Comp’s“; and ““Bracketing,’ Explained.”
CMA Shelf Life
Once that analysis (called a Comparative Market Analysis or “CMA”) is done, how long does it remain valid?
Until one or more of the Comp’s are superseded by better or newer ones.
Depending on sales activity and price point, that could be weeks or even months(!).
Even in a strongly rising or falling market, the incremental change in individual Comp’s is typically small, and outliers dramatically above or below trend can be tossed (for example, a home that sold in a bidding war, or an isolated foreclosure dumped by a bank).
Result: at least in the short run, home prices are much “stickier” than stock prices.
And that’s a good thing, as Martha Stewart would hasten to add.
Natural “Circuit Breakers”
Of course, buying or selling a home is also a much more laborious process, involving multiple steps (showings, inspection, appraisal) and parties (lender, appraiser, title processor, etc.).
To buy or sell a stock today . . . you hit “enter.”
Perhaps that’s why today’s hyper-liquid stock markets — lacking such natural circuit breakers on robo trading-driven price cascades — have had to design artificial equivalents (including temporary trading halts, bans on short sales, tweaking margin requirements, etc. — see, Chinese stock market).
Bubble-Resistant, not Bubble-Proof
So, why didn’t the housing market’s aforementioned dynamics prevent the just-witnessed boom and subsequent bust?
I see two reasons:
One. Wall Street, with the Fed’s blessing and encouragement, unleashed a financing bubble that infected housing.
When the price of something falls dramatically, people generally buy more: call it “Supply & Demand 101.”
By dropping interest rates to nothing, the Fed effectively put (mortgaged-financed) housing on sale everywhere in the country.
Step #2: Wall Street, by figuring out how to securitize (package and re-sell) trillions in mortgages globally, increased the “velocity” of easy money exponentially, further spiking demand for housing (lenders were able to sell their mortgages as fast as they could originate them, freeing up money for still more mortgages).
Disrupt Wall Street, Not Housing
Which leads to reason #2: inertia is a double-edged sword.
Housing’s undeniably greater inertia relative to stocks certainly slowed things down: the bubble inflated over the better part of a decade vs. perhaps 18 months for dot.com stocks in the late ’90’s.
However, once a full-blown bubble was underway, inertia cut the other way, causing prices to continue rising well past normal correction territory (while the bubble at first unwound slowly, the drop gained speed as foreclosures accelerated and the broader economy weakened).
Here’s hoping we’ve learned to keep Wall Street’s mitts off the housing market (and other things, too).
And let’s hear what the 2016 Presidential candidates have to say about making that a reality, starting with their position on “Too Big to Fail” financial institutions and regulatory capture.
