"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.

Rays of Hope on Wall Street: Goldman Sachs Criminal Charges?

"Better Late Than Never" Dept.

No, I'm not wishing that the stock market goes down.

But at least it's going down today for a "good" reason: it's being pulled down by a sharp drop in the price of Goldman Sachs stock, which may now be charged criminally (it is already the subject of civil fraud charges).

While the criminal charges are long overdue, they are certainly welcome -- what's that line about "justice delayed is justice denied?"

Also heartening:

--Judging by the abrupt price drop today, nobody got tipped off early.

Unfortunately, it's now common practice to witness seemingly inexplicable moves in stocks ahead of significant news. So, maybe some honesty and propriety really is creeping back into the market.

--A drop in Goldman Sachs' stock -- everything else being equal -- means that the company has less money to spend on politicians, lobbyists, and defense lawyers.

Not to mention hiring (warping) the nation's supposed "best and brightest," who have responded to the siren call of Wall Street riches in record numbers the last, oh, 30 years.

To paraphrase Martha Stewart, "that's a VERY good thing."

"Really, Wall Street, Really??!!

"Learning to Love Insider Trading"!!??

Want to keep companies honest, make the markets work more efficiently, and encourage investors to diversify? Let insiders buy and sell.

--Donald J. Boudreaux, "Learning to Love Insider Trading"; The Wall Street Journal (10/24/2009)

Goldman Sachs director Stephen Friedman resigned from the New York Fed in May, after The Wall Street Journal reported he had bought more than 50,000 shares of Goldman stock following AIG’s takeover.

--Bloomberg.com (10/29/09)

One of the technology industry's highest-profile executives has become ensnared in an alleged insider-trading case that is shaking the corporate and financial worlds.

--"Ex-Chief of AMD is Linked to Galleon"; The Wall Street Journal (10/28/2009)

One has to conjure up Jon Lovitz' infamous Saturday Night Live character, "The Pathological Liar," to properly respond to Donald Boudreaux's assertion (above) that investors who put their faith in fair markets and "a level playing field" should, well . . . get over themselves.

"The market's perfectly fair to rank-and-file investors right now," The Pathological Liar would say.

"In fact, small shareholders have it too good.

Negative returns on their stocks for a decade?

Zero interest on their savings?

Why, the spoiled jerks. They should be grateful to get any of their capital back!"

"Really, Wall Street, Really??!!

Moving on to CEO pay:

"CEO pay, at 600 times the average worker's salary? Why, the employees are lucky to get paid anything. Make the pay ratio 1,000:1! Better still, 5,000:1. That'll teach 'em who calls the shots.

"In fact, executive compensation now is an insult! Executives should make even more money, by front-running other investors trading their own company's stock before publicly disclosing material news.

"Yeah, that's the ticket. Why should companies have to disclose anything?"

And so on.

About all I can figure out is that, the SEC's recent track record is so abysmal enforcing insider trading laws, it has decided to mount a rear-guard action arguing that insider trading is benign, or -- cue The Wall Street Journal article -- actually good for the markets (and average investors).

To channel another, more recent Saturday Night Live bit:

"Really, Wall Street?? Really??!!