Wisest of the crowds

Yesterday the NYT’s David Leonhardt wrote an interesting piece covering new research from Christopher Malloy of London Business School, Andrea Frazzini from University of Chicago, and Lauren Cohen of Yale. Entitled “The Small World of Investing: Board Connections and Mutual Fund Returns,” the research basically finds that mutual fund managers are more likely to buy stocks and take larger positions in companies that are in their academic network. Further, these money managers perform substantially better than funds that dont buy stocks in their network.

The data:

Yowza! Over 8% per annum difference! These guys beat themselves up for small fractions of a single percentage point return.

The authors conclude thats its either insider trading, ease of information gathering by being in the network, and better manager selection by investors due to network relationships. Intuitively all seem correct but the split is, of course, the rub. (I blog about this some more here.)

So I find this really interesting because it assigns dollars to the value of networking. We all know its important but who would of though that the difference was so large? Sure some of this data includes illegal activity but I think we now have a solid benchmark of networkings value. How does 70% more money sound to you? Its easy to see why social networking sites have been all the rage and why it is imperitive that all you old-schoolers who think your physical network is all you need, need to think again - especially if you are selling lofts to hipsters and not mansions to grand ma. Come on, get connected and get rich!

The National Association of Realtors reported existing homes sales today (the press release). The data was scary and probably indicated the first quarter activity was a knee-jerk reaction by consumers who were sidelined the previous quarter. Of course this didn’t stop the NAR from spinning it as Matt Carter at InmanBlog noted in his excellent post, “Again with the weather”.

Here are the facts:

- Nationally, sales declined 8.4% versus last month and is down 11.3% versus last year.
- The West was hit hardest, being down 9.1% versus last month and down a whopping 16.7% versus last year.

- Median prices were up 1.6% nationally but down 1.8% in the west versus last month

- Inventory declined 60k units (1.5%) to 3.75 million units but because of faster declining sales, the number of months of supply actually increased to 7.3 from 6.8 a month earlier.
- This monthly decline was the largest since 1989 according to the Associated Press via MSNBC and the NYT

What does this all mean? Probably just that there was a “dead cat bounce” in interest in the first quarter of 2007 after the unbelievably slow fourth quarter of 2006. This happens all the time in financial markets where people attempt to bottom pick a falling market resulting in a series of rapid, but ultimately unsustainable, bounces. If this is in fact a dead cat bounce, look for prices to go substantially lower. From my experience as a trader, it will only be when people loose hope that a bottoms in prices gets set. Did you know that more people lost money in the 1929 crash buying stocks 50% below their peak?
Having said all this, markets are hyper-local and what’s true generally can be completely untrue for your neighborhood or street. If you live where new supply is negligible and high-paying jobs abundant and secure, don’t sweat it. If you live in a place where new construction in plentiful and excessive credit rampant, look out (sorry Florida)!

Side note: My-Currency markets are predicting lower prices in many san francisco zip codes over the next 3-6 months. An example for 94117 (Haight, Alamo, Ashbury Heights, Cole Valley)

Today, Easter Sunday, the New York Times takes advantage of its prominence in the psyche of the educated and well read by putting Real Estate front and center. The first article sits in the right hand column of the front cover and discusses the impact of the housing contraction on State tax revenues.

Entitled “Housing Slump Pinches States in the Pocketbook”, Abby Goodnough’s article was thorough, some highlights follow:

Florida is projected to have tax revenues drop for the first time since the energy crisis of the 1970’s.

-NJ could have a budget shortfall of $2.5 billion by mid-2008

-California could have a $2 billion shortfall this year and next

-16% of Floridians and 30% of californians use home equity loans to buy cars

The second article, from a NYT regular (and a personal favorite), Gretchen Morgenson, is on the cover of the business section. Entitled “Home loans: A nightmare grows darker”(premium), the article discusses the sub-prime mess and suggests that well intended social engineering led by the Clinton administration is the cause of the mess. Highlights:

• Sub-prime accounts for one-eight’s of mortgages and 60% of foreclosures

• -President Clinton and HUD Secretary Cisneros encouraged the private & non-profit sectors to find solutions to increase homeownership. Outcome: ownership rose to 69.2% from typical range of 60-65% but was built on mis-leading “innovations” such as teaser interest rates that are resetting substantially higher, extending maturities out to as much as 50 years, interest only loans , and discontinued use of escrow accounts to collect real estate tax and insurance expenses.
• -Best quote: “We’ve created a society that loves the term homeownership, yet we can’t allow people to understand that they are being taken advantage of by the term” - Josh Rosner, MD at Graham Fisher.

On a local front, the Real Estate pull-out of the SF Chronicle Examiner’s lead story entitled Boom and Gloom by Marni Leff Kottle

• -Places like San Francisco, Palo Alto, Marin County are doing well while cities further out are doing poor

• -2.2 million Americans could wind up losing their homes to foreclosure over the next several years.

• -Quote: “People are paying a lot for schools and for shorter commutes on the west side of Silicon Valley and up the Peninsula toward San Francisco,” said Mark Burns, president of the Silicon Valley Association of Realtors

Real estate markets are hyper-local and now that the bloom has come off, this will become more and more apparent. Sub-prime versus Super-prime. City center versus suburb. SOMA neighborhood versus SoBe neighborhood. Bush Street versus Jackson Street. The house at148 Jackson versus the house at 156 Jackson. Talk of a “market” needs to be cleaned up and better described because it doesn’t really exist as a market.
Having said all that, there are common touch points that make real estate a market from a macro-economic perspective: Cost of money, local employment and income, demographics, and population changes. Of course one of the biggest is buyer and seller psychology of the future prices.