Interpreting Statistics

Yesterday's news for real estate in Connecticut was that unit sales for residential properties rose by 23.9%.  That's the biggest single increase in a few years.  However, the median price of a home dropped by 7.2%, which was also the biggest change in several months.  What can we learn from that, and what are they measuring?

First of all, they aren't usually,in reports like this, looking at the same property being sold and resold.  Some, like the Case-Shiller index, take the value of all of the real estate together in one city, and compare it to the total value in another period.  Others aggregate lots of individual sale prices, but it still isn't apples to apples; that is, it's not the same house being sold at the first period mentioned, and again at the second.

Therefore, most such data can be skewed by the type of properties sold in the greatest amount.  In this case, it's most likely because first-time homebuyers, lured by low interest rates and family formation, are out in greater numbers than high-end buyers.  We know that this is true in general, because the loss of GE alone is causing very high inventory over a million dollars in Fairfield County.  We also would suspect this explanation, due to the constant news about the weakness of Connecticut's economy, and the flight of older, wealthy taxpayers to states with estate tax rates that mirror the Federal ones (which is almost everywhere else).  We also would think this distribution is likely because the first-time homebuyers are driving the market in other states as well.

So what does this mean for the value of an individual home?  Well, it's good news in the sense that demand for homes in general will drive up prices over the long run.  In the short run, it's anecdotally true that most homes purchased within the past ten years are selling for the same or less than they were bought for then.  However, many factors could influence this.  How much work has been done to the home?  Exactly what micromarket is it in, and what's the supply there?  How has the neighborhood changed over the past decade?  Where's the buyer coming from, and how quickly does she/he need to move?  How quickly does the seller need to  move, and how much equity does he/she have? What are the other terms of the sale?

So, as with most things, the final answer is "it depends".  However, the robust demand is cause for celebration!

Conflicting Information on Prices--What to Do?

Yesterday's New York Times Business Section had some very interesting articles on the current state of the real estate market.  One of them took a few homes in different parts of the country, and compared the prices each had sold for at various points over the past twenty-five years or so.  They ranged from homes that had gone up or down very little, to ones which were now above the highest earlier sale, to ones where the value had not regained its earlier level.  This was excellent data, and is measured differently from the more often cited Case-Shiller Index.  The latter index is derived from taking the entire aggregate value of real estate prices in a city or SMSA, and comparing the whole package to the entire aggregate value of sales at another point in time.  That means that you are essentially comparing apples and oranges, although the sheer volume of data would indicate that it might be a pretty good predictor of overall values.

When you look at the history of one home, however, you can clear see the effect of any given downturn or uptick on whatever owner happens to be in place at a particular time, and it's so clear that the market is driving the price up or down, because, of course, it's the exact same house.  The NYT article included pictures, which always tend to make a story more compelling.  What was missing, though, for obvious reasons, was advice about how to apply such information to a personal decision.  How could it say what to do in Connecticut, when sellers all over the country were in such disparate situations?

Perhaps the best answer to the unspoken question of what to do in today's market is to focus on the overall variety of price levels, and conclude that there is no one right answer.  Which is, in itself, good advice:  Don't try to outguess every expert and every real estate seller or buyer.  If all the experts agree, and the whole country is in the same position, you are most likely too late to cash in on the upturn.  If it seems as though results are spotty, you conversely have a better chance, if you're a buyer, of landing a home that will increase in value over the next few years.

By pointing out that similar properties can have very diverse sales outcomes, the article reminds us strongly that a home is, after all, a home.  Buy what you love.  Live there because it enhances your life.  Sell when it's time for a change.  Hope that your timing is good, but don't plan everything on a certainty you can't achieve.  Sometimes people get lucky, and sometimes they don't.  It doesn't mean that you shouldn't be happy where you live.  We don't know what the future will bring, but the present beckons--buying now is a great option if you qualify for a mortgage at current rates, and can buy at current prices.  That's all you can know, and all you really need to know to take that first step!

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!

Finally Some Helpful Press

There was a wonderful article in the Wall Street Journal this week, that actually listed ten reasons TO buy a home. As you can tell by the title, we have come to expect that every article will result in calls from clients who have decided not to go forward with a purchase. Therefore, we were thrilled to get some help from the WSJ.

You would not be surprised by most of the reasons, because you've heard them all before. There were a couple of arguments that were particularly good, however, in the way that they were phrased. One was the perennial issue of whether a buyer should buy before the market hits bottom. All real estate professionals know the answer to that--you cannot predict the bottom, so you should just get somewhere near it and not worry. The article, however, quoted a talking head as saying two years ago that prices had to fall another 17% to reach where they should be, and that the Case-Shiller Index in those two years showed prices down 18%. That's pretty close to the bottom.

The other points I really liked were really variations of the same theme---you get a better home when you buy. That's because better properties get sold and worse properties get rented, but it's also true because you can't (or won't) personalize a rental the way you can or would your own place. It's a version of what I've been saying--that you have to like where you live--but it gives some concrete reasons as to why buying does a better job of providing that.

Low mortgage rates, big inventory, fewer taxes, long-term growth--all of these ideas were listed as well. Let's hope that some of you take the plunge after reading the paper!

New Haven is hot!

I'm looking at the figures for June and July in our New Haven office, and they're great! We sold as many units in those two months as we did year-to-date through May, and the two months together were 50% over June and July of last year in both units and volume! This week was the best week they've had in at least two years. What's particularly surprising is that it's happening in what is usually a very slow month, and finally hot and humid to boot. Maybe all the hype about hitting bottom is old news, and we're on the way up!

The Case-Shiller index for last month also showed a halt in the decline of prices, and it corroborates my earlier paragraph. We are also finding our Wallingford Regional office to be running ahead of last year in sales, so it's not just New Haven (although Yale continues to be a driving force in the local real estate market).

I was at the Lexus dealer yesterday, and Dave McDermott and I had a friendly argument as to whose business was worse this year. He has trouble with my argument that at least he has his excellent service department to bring in revenues. Dave says that customers want to buy, and that credit is the issue. I'd say we're both in much the same situation, although, if he reads this blog, he's going to think we're in clover now. I wish...

National Statistics

In trying to make sense of national statistics on real estate sales, I have been reading a number of different sources. One I received today was from a friend with a real estate company in Madison, Wisconsin. He sent a link to the Fannie Mae/Freddie Mac numbers, which include all resales with conforming loans, and are divided by state and by quarter. These are different from the Case-Shiller numbers, which only cover 20 metropolitan areas. The numbers for CT in the Fannie Mae index indicate that prices fell most sharply last year, and that overall prices have fallen about 15% in total. The numbers for the latest quarter indicate that prices have levelled off for now.

These figures agree pretty well with what the New York Times reported this morning. The article in the Times said that prices in the past month actually crept up from the month before. That could be because of the mix of properties sold, but it does indicate that some people who were on the fence have jumped back into the market.

The third source, the Commercial Record, shows town by town variations in what has sold this year versus last. Again, it shows increased activity lately, although the first quarter was pretty dismal.

Whichever measurement we use, it seems to corroborate that we have at least and at last hit bottom, and are looking forward to heading up!