Sunday, February 1, 2009

The Housing Market is not Like the Stock Market

If you own some shares of Microsoft, you won’t have any trouble selling it - on average, more than 80 million shares of Microsoft trade every day the market is open. If you own a home, the situation is completely different.

Here are the Microsoft numbers:

Trading Days in 2008


Microsoft Avg Daily Volume (1)


Annual Volume 20,101,731,250
Shares Outstanding


Annual Volume/Outstanding Shares


(1) 50 day average as of 1/30/09  

The market for Microsoft stock is thick. The housing market, to understate, is thin. Here are the equivalent numbers:

Existing Single Family Home Sales


Existing Single Family Homes




Everyone learns in Investing 101 that thinly traded markets are relatively illiquid. The homes being sold now are overwhelming not voluntary sales. They are being sold out of foreclosure, are forced sales as a consequence of the owners situation, and are new homes working their way through the development pipeline. It is no surprise these homes are subject to dramatic markdowns given the lack of buyers in a market that is thin to begin with.

Fortunately, the vast majority of homeowners do not view their housing investment like a stock; homes are first and foremost places to live. Those unfortunate enough to have to sell in this market or who are overleveraged and can’t service the debt will experience losses. The rest of us are just like long term investors with a dividend stream, but in this case the dividend is living in a home we like paying an amount we can afford.

The sales estimate is from the National Association of Realtors as of December, 2008, and the number of homes is from the Census.