How many of us don’t know what we should know? What an education we would get just by hanging out with those that have been around the business for years, trained in the old S & L traditions of taking Institute or Society classes, long tenures with “old school” chief appraisers, hoping to reach the target of a level one from FNMA.
What lessons you could learn by spending a year or two with the mentors of your mentor?
From the things I read on forums or in the media each day, it makes me wonder who trained some of these analysts, agents, appraisers, economists and others and how is it that they seemed to have skipped so many fundamentals. As an industry we need to get back to basics. We’ve forgotten what we learned or perhaps many of us never learned it in the first place
With the market changes that have taken place in the past few years, it’s no wonder that economists and analysts are rattling their sabers and hawking one position or another. The market has changed, with it comes uncertainty and that breeds the forecasts of doom, gloom and depression.
When looking over housing, economic and demographic reports; projections, statistics and forecasts of the past 25 years, how often did the experts get it right? Perhaps as often as they got it wrong or even less. The experts often don’t agree on the numbers nor can they dispute them in a manner that makes one of them the clear-cut winner. There’s no Super Bowl, World Series or Wimbledon of forecasting and therefore no “champion.”
So whom do you place your bet on? Who is the ranking member of the “expert fraternity” and why are these other pretenders to the throne getting press at all?
Read on . . .
After all, we deserve to know who’s the best because we (and our clients) are betting our futures on the advice we get in the business sections of the nation’s newspapers and magazines. Our dollars, spent on their advice makes the economy roll and yet there’s no consensus, let alone a guarantee that our investments will remain safe.
Newton had it right … for every action there is and equal and opposite reaction, however in a global economy, there are so many actions and reactions, that no one seems able to zero in on which ones do or do not make the difference. With all of the information available, computer modeling and experienced analysts, we’re still left with someone’s “best guess.”
The problem with forecasting … there are too many variables that can affect the outcome and some of those variables (ones that can snowball the numbers in any direction) cannot be indexed in a quantitative manner for analysis.
As an example, forecasters use the median family income as a benchmark of affordability (the Affordability Index or AI, a ratio of income to housing costs). In an area like Las Vegas (or any city with a service or large tourism industry) with a disproportionate number of tip earners (whose actual income vs. reported income can be significantly higher than the declared income) how is that index impacted?
Another statistic impacting the AI is the number of seniors and retirees moving here and elsewhere. They comprise over 24% of immigration to our area and while the median income for retirees is lower ($35,000+ in 2006), they typically bring with them equities and savings from other markets, totally unmeasured in any way. The stated income impacts the median for the area and is reflected in the affordability index. Yet the equities and savings represent buying power that can’t be factored into the analysis. Add to that a transient population, many also with equities and savings and you have a couple of great snowball makers.
While the numbers may argue that housing in Las Vegas is well below the base affordability index of 100, the sales still happen, something that has occurred in other sub-100 AI areas (Los Angeles, San Francisco, New York, etc.) for years. The numbers say they can’t buy; yet they still find ways to do just that.
As real estate professionals, our comments, viewpoints and analysis impact the actions of other participants in the marketplace. During those brief moments that we “get it right” are opportunities for clients to benefit from our efforts. Being advisors, to best serve our clients, we need to understand the implications of the numbers, when and what makes them change and what the resulting impacts on home prices can be.
The actions in the market of 2003-2005 are an example of “housing gone wild” as 40-year low interest rates drove prices skyward, well beyond what appraisers could quickly measure. Within 18 months, the rates that pressed prices to new records, advanced upward and affordability plummeted. Was it predictable? Absolutely.
We need to “get back to the basics. ” Market analysis,” the process of identifying and understanding the market for a particular economic good or service,” is fundamental to real estate. It involves investigating the community’s economic base including employment activities, supply and demand conditions, population, mortgage rates, growth trends, etc.
If we were to do this, how likely is it that we may discover any number of interesting facts, trends and indicators that are contrary to much of what we have been reading and hearing about our markets, the economy and the housing market in general, from the media on a daily basis.
As of July 2006, there were a record number of listings in the Las Vegas market. Year to date, sales to listing ratios hover around 38% compared to a more normal 59%. Sounds like far more sellers than buyers. If you did a little homework you might find out that while re-sales are down, new home sales (at least in my market) are doing quite well and may even set a record or come close to it. Add to that the expansion of the commercial sector and we’re talking serious construction dollar numbers, but all we ever hear about from the experts is housing.
Now some may lament that builder sales are only due to concessions, however you must consider several factors; 1) how can the builder afford to lower prices and 2) did they have profit far in excess of norm already factored in? Builders aren’t that generous. They need to sell because profit margins are impacted by inventory, hence they move inventory. Unlike existing homeowners, builders understood the market and adapted to it. Re-sellers on the other hand, see “windfall profits” passing by them and desperately try to hold on long enough to capture an opportunity that has long since passed them by.
Like the builders, many sellers have excess profit in their homes. It’s called equity. They have measured it, counted it and in their mind, perhaps already spent it on that future dream house. And even though they know that it’s only “paper” and not real, they want to hold on to that dream and so they wait and we wait with them.
This year Las Vegas will likely see 75,000+/- total sales. About half or so will be new and the rest re-sales or conversions. While the sales may be lower than the past two record years (2004 & 2005), the number (as a percentage of population, employment and households) is very consistent with prior years when we had similar interest rates and what was then considered a healthy economy. What’s not normal is the amount of new homes selling in comparison to re-sales. Something sellers can remedy with a stiff dose of reality. Don’t worry, it’s coming, but it will be painful for some.
Lately, market analysis seems to be a forgotten skill, having given way to “parroting” of the “headlines and sound-bites” rather than being independently conducted by those of us that really need to know the rest of the story. Anyone who participates in the real estate market, as a sales person, appraiser, investor, builder or analyst, should take the time to “get back to basics” and understand the marketplace. Review historical data, develop the indicators and do the math.
Bad news sells. That’s how the media stays in business. We all watch, listen and read to find out what will happen to us next. We want to know what to avoid rather than what to embrace. Have we become so removed from the basics of analysis that we no longer remember why we did it in the first place? 
Mark Twain once said, “Gather all the facts first, then distort them as you like.“ Unfortunately, that’s what tends to occur. The analysts make the forecasts, the media publishes them and right, wrong or indifferent, no one seems to hold anyone accountable for the numbers we rely upon to make our financial decisions.
“The economy depends on economists about as much
as the weather does on weather forecasters.”
Jean-Paul Kauffmann
Footnote: For an example of things to do, read “The Appraisal of Real Estate or Essentials of Real Estate Economics".
AUTHOR: Patrick Egger, Stewart Title of Nevada, is the creator of a popular Real Estate seminar for sales agents "DeMystifying the Appraisal - Appraisal Techniques for Real Estate Agents". He also has his own blog Intouch. Contact: lvreqa@cox.net
Recent Comments