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Tuesday, September 21, 2010

"Insider Buying" & the Housing Market

The Housing Market's
Flashing Green "Buy" Signal

In the stock market, open market purchases of company stock by senior management ("insiders") is considered to be bullish.

After all, executives may sell stock for many reasons -- to diversify, to raise money for things like real estate purchases, college tuition, etc.

Presumably, however, there's only one reason insiders buy: they think their company's stock is going to go up.

Is there anything analogous in the housing market?

Housing Market "Insiders"

There is, kind of: Realtors.

Of course, unlike senior executives who now receive much of their compensation in stock, Realtors do not get paid in houses.

However, Realtors are still the closest thing the housing market has to corporate insiders.

After all, they're the ones who are in the trenches every day, representing Buyers and Sellers, noting which way prices are going, prospecting for new listings, potential Buyers, etc.

And presumably, knowing when something's a deal.

Contrarian Indicator

So, is it a "buy" signal when Realtors start buying homes as investments?

On the contrary, such activity is more typically associated with a market top.

That's because to buy, Realtors need not only the requisite incentive, but the wherewithal.

When are Realtors are flushest?

When prices are appreciating strongly and there are lots of transactions.

Conversely, when the housing market is slow, and prices are soft (or declining), Realtors' income collectively takes a big hit.

In a tough housing market, just paying the bills becomes a challenge -- forget about socking away money for retirement (or buying that languishing bungalow at a fire sale price, fixing it up, and flipping it).

Guess which environment we're in now??

P.S.: moderating the foregoing cycles a bit: the number of practicing Realtors.

In boom times, the number expands, meaning the total commission pie is divvied up more ways. Too, more homes sellers are tempted to sell homes without using a realtor (called "For Sale by Owner," or "FSBO").

In lean times, FSBO's disappear and Realtor ranks decline, making it (relatively) easier to eke out a living.

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