A Case for Dr. Shiller
Big Builder senior online editor Bill Gloede previews tomorrow’s monthly release of the S&P/Case-Shiller index. But Gloede does so in inimitable and unexpected fashion.
In a fit of apparently propitious timing, MacroMarkets, LLC, the developer and seller of structured financial products co-founded by Dr. Robert Shiller, on Tuesday will introduce its new MacroShares Major Metro Housing Shares to trading on the New York Stock Exchange.
Why propitious? Well, in California at least, it looks like prices are starting to firm up and even rise. The early second-quarter view from Lennar and KB Home earnings ;last week also seems to indicate better news, or at least market movement, ahead.
The new housing shares will trade under the symbols UMM, for housing market up, and DMM, for housing market down. The shares will track the S&P/Case Shiller Composite 10 home price index, a value-weighted average of the 10 original Case-Shiller metro area indices, which include Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington.
Dr. Shiller’s aim is to generate liquidity and stability around residential real estate, outcomes he says will occur if there’s a natural futures market for it.
Shiller on Commercial Real Estate
Yale economist Robert Shiller likens commercial real estate’s meltdown to the dynamics of the earlier residential collapse. The housing bubble, he says, wiped out more people, but risk to commercial real estate exposure should also be revealed via a futures market.
Statistics, More Statistics, and Damned Lies
“They’re lying.” This is what Yale economics icon Robert Shiller told Builder 100 Conference executives about experts who claim they know how the housing economy will behave in the months ahead. “It’s impossible to know.”
This would suggest that a positive outlook and a negative one are equally viable. So why not believe the more optimistic take?
Shiller is one of the smartest people today commenting on what makes the housing economy tick, and he’s the first to say he doesn’t know when it comes to predicting where it’s going to go. Mind his phrasing in an op-ed piece from the New York Times this past Saturday. He carefully uses the word “may” to say, “hey, it could go the other way, too.”
Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.
We’re ever concerned about predictions. We heard a lot of anecdotal good numbers for April, and have gotten word from a number of builders that May was just as good or even better. We heard of one home builder in the D.C. metro market who closed on 55 homes in May, a good 20% ahead of plan. In Phoenix, monthly sales in some communities are better than they’ve been dating back almost two years.
At the same time, the gathering financial storms of nonperforming commercial mortgage back securities and unrepayable credit card debt coupled with an expanding black hole of unemployment remain abstractions whose risks to forward planning may be too hard to calculate.
Have investors who’ve restored more than 40% of value to stocks from their low-point and gotten the Dow Jones in positive territory for the year factored in these forces already? Have government and Fed policies actually begun to find traction in the financial system that have started to slow the bleeding?
Here’s what we think. For most privately held home builders, especially the ones on life support who are one letter from the bank short of doom, there’s no gain whatsoever from a negative scenario. These companies are beyond scenarios altogether, and just pumping to get another sale done to keep working their way through their bank obligations for another month.
Housing prices–especially national ones–bear little relationship to the realities of these companies. They’re focused on the small ball. Build quick. Beat existing, distressed, and foreclosed properties to the punch somehow, and make it so that the monthly payments make sense to a home buyer exactly the way these companies’ own monthly payments to their lenders stay on course.
More macro financial shocks are coming. More job loss will put a drag on local economies. More household deleveraging will take money out of circulation as consumers curb their spending.
Even so, Shiller says, what happens time and time again in the history of economics is that people’s behavior frequently defies logical supply and demand behavior.
All of these people could be made to change their plans if a sharp improvement in the economy got their attention. The young couple could change their minds and decide to buy next year, and the elderly couple could decide to further postpone their selling. That would leave us with a buyer and no seller, providing an upward kick to the market price.
Can the 87% or more of people who may stay employed offset the negative feedback of those who’ll continue to swell the ranks of those involuntarily out of work during the next 12 months as the economy grapples for recovery?
Will those who are able to hang onto their jobs be confident enough in their income stability to strike while the pricing, interest rate, and Federal tax credit incentive irons are hot?
The expression one real estate/housing player uses to offer an answer to these questions is this: “You’ve got to fake it to make it.” There’s no upside to believing the downside outlook.
For the moment, getting to ”the other side” of this mess means staying in business through tomorrow.
Dr. Shiller’s Animal Spirits
Yale economist Robert Shiller will keynote the proceedings of the Builder 100 conference for home building’s leading executives next Wednesday, May 13, in Chicago.
In this past Sunday’s New York Times, Shiller accentuates the positive as he takes on the question of whether the current economic crisis has begun slowly to subside, or whether we’re due for even heavier weather.
In his Depression Scares are Hardly New essay, it’s as if Dr. Shiller is giving a patient news that he’s very sick and the prognosis could go either way, but there’s plenty of cases that don’t wind up going to hell in a handbasket.
Shiller, these days, is preoccupied by psychological factors that impact human behavior in the financial and other markets–”Animal Spirits,” he calls them. He’s surprised, in fact, that people at large seem to be less daunted by economic conditions than experts with specific technical insight into what is so woefully wrong with things right now.
He writes in the Times:
This time, the reasons to fret about a possible depression may seem less concrete. For most people, the worries that consume economists and accountants, about things like bank stress-test results or the “OIS-Libor spread,” are rather hard to comprehend.
As Franklin D. Roosevelt famously said during the Great Depression, “the only thing we have to fear is fear itself.” Let’s hope that is true, and that the relative complacency in the general population is good news for the economy.
In a sense, the term “complacency” may serve as a kind of methadone treatment for an economy that seems bent on fixing its balance sheet cold turkey, from the household to the global economic complex.
In “Animal Spirits,” a book Dr. Shiller has written with George A. Akerlof, we get a take on economics and an explanation of what is going on now, in down to earth terms that anybody can grasp.
Dr. Shiller introduces us to his theory and where it applies in this video from The McKinsey Quarterly, taped last month.
Robert Shiller Pitches a Fix
Slightly absent-minded Yale economist Dr. Robert Shiller is reminded that he’ll be speaking to a roomful of home building executives the morning of May 13, in Chicago, as part of the Builder 100 proceedings.
“I’d very much like to do that,” he says. Why is the renowned housing expert so passionate about wanting to talk to residential construction business leaders? He does because he feels he has a fix for two parts of what ails them right now.
“We want to get some liquidity into the market for single family housing, which it so desperately needs right now,” says Professor Shiller in an exclusive interview with HousingCrisis.com. “People have their life savings in their houses, and many of them are overleveraged, and many of them have every penny of their wealth tied into what happens with their home,” Shiller says.
“The home builders made mistakes. They overbuilt. That’s because they didn’t have a good indicator of what was going to happen to demand,” Shiller notes.
He wants to talk especially to home builders because in the next couple of weeks a private enterprise company he founded is introducing a way he says will allow home builders to concentrate more on what they’re good at–manufacturing, marketing, and selling the American Dream to home buyers–and get out of the business of what they’re not good at. Namely, the real estate speculation business.
Dr. Shiller is now on a mission. He wants people and companies to be able to invest in housing not as flippers or speculators on the roofs over their head, but via highly transparent securities that they can predict the behavior of.
MacroShares Major Metro Housing Up (NYSE: UMM) and MacroShares Major Metro Housing Down (NYSE: DMM) ETFs are designed to deliver 300% of the return (up and down) of the S&P/Case-Shiller Composite 10 House Price Index, which measures the average price of a house in 10 major metropolitan markets.
The funds don’t actually own houses, of course. The only asset they hold is Treasuries. They track the index by working like a teeter-totter: When house prices go up, assets are shifted from the Down Macro to the Up Macro, and vice versa. (As a result, the funds can only be offered in pairs, with equal numbers of Up and Down shares.) This unique structure is what allows the funds to track something like house prices, where there is no underlying asset.
It is important to understand, however, that the funds will not directly track the price of the index. The S&P Case-Shiller indexes are reported monthly with a two-month lag; that is, the June index price reflects house prices for the three months ending in April. The funds’ net asset values will be based on this lagging index price.
“Home builders should do what any smart business executive should do with respect to the ups and downs and unpredictability of house prices and real estate values,” says Shiller. “They should hedge their bet that prices will appreciate.”
Here’s Wall Street & Maine analyst Bill Gloede’s recap on the news Shiller’s creating this week.
Click on image for access to FAQ on Dr. Shiller's new enterprise.
It is of note that these ETFs will soon begin trading. Back at the beginning of 2008, Dr. Shiller, the Yale economics professor half of the Case-Shiller Home Price Indices, told Les Shaver in a Big Builder cover story that builders ought to be able to hedge their inventory to guard against wild swings in the housing market (see a related Q&A here).
Starting May 11, anyone, builders included, will be able to trade UMM, for “up” major metro housing, and DMM, for “down” major metro housing, both of which will track the S&P/Case-Shiller Composite 10 Home Price Index. This will mark the first time investors will be able to play the national housing market without actually taking a stake in futures or swaps or issuers with credit risk.
“Home builders should focus their skills on what they’re best at,” says Dr. Shiller. “I can’t wait to tell them about the ways they can get a lot of risk out of their business models related to real estate so they can keep resources where they need to be in their companies.
Here’s a short CNBC segment on the whys and wherefores of Dr. Shiller’s plan.
For more of the lowdown, home building leaders can come to Builder 100, Wednesday morning, May 13, at the Peninsula Hotel in Chicago at the Builder 100 conference.
Shiller Theater
Hat tip The Big Picture. Here Yale econ icon Dr. Robert Shiller tells an audience the reason–animal spirits–people were unable to see the foreclosure crisis’s approach.
Robert Shiller: We’re Not there Yet
Yale’s Robert Shiller stops by with Yahoo Finance’s Henry Blodget for a discussion on you-know-what.
This is the Stress Test financial institutions need to endure, plus the collateral impact of home price deflation on credit cards, and eventually commercial real estate.