a rumination on value, leading to taking stock(s) of analogies to apartments
one more try at getting Dave Leonhardt’s complaint about home sales data out of my craw, hoping something good may come of it
(The David Leonhardt Economix column in the NY Times business section two weeks ago by now, What Statistics On Home Sales Aren’t Saying, offered this criticism of past sales data: “thesestatistics have a number of flaws, perhaps the biggest being that they are based only on homes that have actually sold.“)
Yeah, I get it that past sales data have flaws, and do not provide a complete picture of the marketplace, and do not address inventory. But let’s at least start from that bit of hard data (questioning the sources and probing for reporting biases). Then layer in the “but”s.
so many “but”s, so little time (such as hypothetically)
But inventory is up 50% over last year.
But the local economy Is heading in to the tank so demand should weaken.
But x% of owners will have to refinance their mortgages this year and y% will have trouble doing so based on their reduced equity and/or changed personal financial profile.
But the apartments that managed to sell this quarter took 30% longer to sell than apartments that sold in the prior quarter.
Butwe have to look at the mix of apartments that sold this quarter compared to last, to see how that skews the data.
Whatever the “but”s may be, they are part of the discussion. Along with hard data about what actually did sell, I hope.
is FMV OK?
I picked on Leonhardt last week for using auction data, suggesting that the characteristics of the auction might have skewed the resulting prices below what the homes in Naples, Florida were actually “worth”. (Could the 500 or so bidders be expected to have the same kind of information that a well-informed single buyer might have? Did they even get inside the homes?? Dunno. But if not, those auction prices are not such good “comps”.)
It is hard to know the degree to which a particular seller has to sell (it should be impossible — if the seller’s agent is doing the job right) and probably impossible to take that into account in reviewing sales data. Except that certain forms of sales should provide a clue that there was a lack of arms-length (as with intra-family sales) or undue compulsion (such as a foreclosure or another form of auction).
weakness of stock market analogies
Much of the language in the press and in common real estate discussions is based on stick market terms and concepts. “My home is my biggest investment.” Efforts by the Real Estate Industrial Complex to prime the market (rah-rah everyone should buy! this market has never gone down!) are among the causes.
But in the market that is more skewed towards buyers than sellers that we have, the cheerleading rings a little hollow, the analogies don’t serve as well as they did.
Repeat after me: every apartment is unique – or at least not identical to any other apartment (even cookie-cutters differ in location, condition, height, light, view). Many lofts are substantially different from their peer “comps”; some are even (literally) unique. But every 100 share lot of Microsoft common stock is exactly the same as every other 100 share lot, whether traded today or last year, whether traded on an exchange n New York or Chicago, whether received as a gift or stolen.
And enough of these lots change hands every day that the “market” is immediately discernible to anyone paying attention.
Homes, apartments, lofts are not like that at all (d’oh!). I often tell buyers that the only way for them to know the Fair Market Value of a loft is to let someone else buy it. Lacking that data, they have to make their best guess about value, factoring in their needs and resources. While it may be highly relevant to know that the last apartment that sold of this size in this building sold for $xxx last week, that does not establish that this apartment this week is worth some factor of $xxx.
So “the market” is made up of about ten thousand real sellers reaching agreement with about ten thousand real buyers in Manhattan in a given year about the value of about ten thousand specific more or less unique apartments.
Because the stock market is so much deeper, is much more transparent, and deals in unvarying fungible instruments, data is much easier to drill down through than data about home or apartment sales. The more granular (“local”) real estate data gets, the shallower it becomes, the more one is at risk of data bias skewing results in invisible ways.
So I want real estate data, the more the merrier. About what has sold, about what is for sale, about who is out there not yet having bought. And transparency about what actually happens in the market. I will not complain that specific data are limited, because I know that is the nature of data.
I will use data to determine directionality, particularly for hints about the effervescent buyer and seller psychology. But I will not attempt to construct a formula for determining “the value” of any apartment without applying judgment – and without explaining risk to my buyer-client or seller-client.
two useful analogies from the stock market
So much of press and blog commentary about the real estate market seems to be premised on overly general warnings or exhortations. “Now is a good time to buy because…” (meaning because prices will hold steady or values will increase) or “now Is not a good time to buy because …” (meaning prices may decline so don’t go there).
how bad is volatility?
But experienced stock market investors don’t act that way; unless they are day-traders or technical traders. “Value” investors buy a stock because fundamentally they expect it to appreciate over a reasonably long length of time and they understand that things could turn out differently.
In other words, volatility is an accepted experience with stocks but seems to be a feared experience with homes. I suspect – but do not know – that individual equities tend to be much more volatile than the housing market, but people accept that that is how the stock market works
a two-sided market
I am not sure why the press and commentators tend to look at the real estate market as a whole in determining if “now” is a good or bad time to buy or sell, or next year will be a good or bad time to buy or sell.
I don’t just mean that real estate is local, and there are many niches and sub-markets in any local market. I mean that for some buyers today is a very good time to buy, while the exact same market conditions may make today a very good time for some sellers to sell.
People accept this about the stock market without question – which is one base for the liquidity of stocks. At any given time, there are always people willing to buy and people willing to sell the same stock at exactly the same price.
As I have said before, I think the Real Estate Industrial Complex makes a mistake when Dr. Pangloss writes its market “analysis” quarter after quarter, cycle after cycle. This Pollyanna approach (to mix literary metaphors) is not as credible as more “honest” brokering of information can be, and fails to help individual people make individual decisions about whether to buy or sell (or buy and sell) an apartment.
The National Association of Realtors® was pilloried in some precincts by its recent campaign to the effect of now-is-the-best-of-all-possible-times-to-buy-in-the-best-of-all-possible-worlds (including in this precinct). Securities brokerage firms are way ahead of the REIC in understanding that they make money when people are comfortable buying and other people are comfortable selling.
We in the REIC will make money helping people get as comfortable as they can be (which may not be very comfortable) with their individual decisions to buy or sell, then helping them to do it as quickly as they want on the best possible terms for them.
The rest of this stuff makes us look like idiots.
(Which sounds like a Concluding Line if ever I heard one, and brings me a long way from David Leonhardt’s Economix and the Naples, Florida auction. So I will declare victory and leave the field….)
© Sandy Mattingly 2006
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