Thursday, January 2, 2014

Why the Fed’s Easing of Stimulus is Good for Real Estate

There are two ways to look at real estate.  One can either see it as a “consumer good”, bought out of a desire to live in a particular style, or in a particular place.  Or, one can instead view it as a “producer good”, and think of it as an investment; in that case, sales would be based on what buyers thought would appreciate the most.  Either way makes sense, but would look at properties through different lenses.  The latter approach would argue that people make rational decisions, through calculating numbers and weighing alternative investments.  The former would say that buyers go largely with their guts, purchasing what appeals to them, in much the same way that they might choose clothes or entrees. 

In fact, I would posit, the truth lies in a combination of the two theories.  I think that people try to make real estate a rational investment, but those who view it purely that way often don’t live where they want to live, or buy when they want to move.  In the end, those who are happiest are frequently those who fall in love with a particular piece of property, and rationalize its logic as a good choice for where to put their money.  People who turn out to make the best choices, from a financial perspective, are to some extent those who are lucky in their timing.  Very few of us choose exactly the right time to buy, if that is our aim.  More likely, we get a job, start a family, or retire at a time that lends itself to a home purchase when prices are low, and end up selling when prices are high, for the same reasons.  In addition, there is one other factor:  it’s best not to be too greedy, because aiming to get the very most out of your real estate investment can lead to waiting too long to buy or sell; in a way, that argues that overthinking a purchase or sale can be a mistake.  Many good decisions turn out to be good in hindsight, even for those of us in the business.

So why does it matter what national fiscal policy is?  Since I believe in the power of the free market, I believe that having the government tell us to buy real estate doesn’t work, most of the time.  In fact, it triggers something in our brains that makes us suspect that, as with some other good reduced too far on sale, there must be some reason NOT to buy then.  What does work, conversely, is for prices to begin to rise, or for rates to begin to climb.  Once buyers see that their purchase will cost more, they acquire a sense of urgency that does far more for the real estate market than really low rates and prices could do.  And, of course, as soon as some people start rushing to buy, prices get bid up, and the sellers’ market conditions begin to feed on themselves.  Soon rates and home values begin to price some buyers out of the market, and lead others to overpay or stretch too far for something too expensive for their incomes.  We all know what happens then….
If people always did the rational thing, they would know that interest rates are almost always lowest near Election Day, and, yet, that’s not a busy time of year for real estate.  Springtime, when rates traditionally rise, is the season that tells the story as to how the market will fare for the rest of the calendar year.  Every year, then, we see the theory that the behavior of others affects our behavior more than logic does.  Other factors certainly matter, but some of them are also emotional.  The single biggest effect on sales, in my opinion, is the consumer confidence index.  One could buy when one believes it is peaking; however, I believe that most people act without knowing the exact number of that index, but because the climate that goes into setting the index affects their behavior.  That certainly happened around the country beginning at the end of August, when sales everywhere seemed to slow down at once, even though the economic indicators didn’t predict a dip. 

Professor Robert Shiller of Yale, winner of this year’s Nobel Prize in Economics, has written extensively on emotions and economic behavior, and we in the industry live it every day.  If the Fed eases up on stimulus, that should make people start to feel as though the economy is heating up, which should send them out to buy real estate.  Maybe not today, but certainly this spring.  So that would argue for a good market in 2014, caused by a combination of irrationality—seeing others buy—and rationality—seeing numbers that point to recovery and growth.  Together, that points to a good year this year, and probably, barring extreme weather, an early start to the spring selling season.  So here’s to a robust 2014, and may the buying begin!