I don’t often pick fights with others, particularly my local Realtor association, and don’t intend to. What I am doing is posting a “letter to the blogger” from one of my favorite commenters who raised some valid points. The story referenced is one in the most recent Real Estate Weekly; I would link directly to the story, but the site doesn’t offer that option. At your leisure, check it out.
In principle, I agree with most of the article and have said as much before. That said, one can certainly see his perspective.
From the article:
We have identified four stumbling blocks to getting the real estate market moving again.
Factors holding the market back:
1. Too many listings
2. Overpriced listings
3. Scared first-time buyers
4. Buyers waiting for the market to hit bottom
These are all very true.
I agree the following statement does little for Realtors’ credibility – there are no guarantees in anything. Ever.
Psst! Hey, want to hear a big secret? How would you like a tip for a sure-fire investment that will double its value every 10 years?
However, real estate is widely to be a sound long-term investment. What we are seeing also is that buyers (and sellers) are finally re-recognizing the intrinsic value of housing.
And the email from the reader –
I suspect you might not be terribly eager to pick a fight with your own Chal/Albemarle realtor colleagues, but I just read the new essay on CAAR.com by Judy Savage and it’s a doozy. She starts out by guaranteeing that house prices will double every 10 years — a “sure-fire” bet, she says. Well, that’s just nuts — there is no such thing in the investment world as a sure thing, there are just investments with different risk/return characteristics. And then she, and CAAR, lay out a plan for “balancing” the market. The upshot of the plan is to jawbone sellers into lowering their listing prices, and buyers into buying. Well, the two goals are at war with one another. If the announced policy of realtors is that listing prices are too high, that sends a message to buyers — wait! In the end, none of this is likely to make very much difference. The bursting bubble psychology has taken hold too firmly for browbeating to work.
I’d wrap the whole thing up with one final observation. This whole thing reeks of an attempt at market manipulation by realtors. The housing market is a *market*. The value of a house is not determined according to what realtors think it should be. The value of a house is what a buyer is willing to pay. And the CAAR plan is likely, if anything, to marginally depress buyer willingness.
Now is truly a great time to buy for many, many people, as interest rates are very low and prices are moderating. For others, renting may very well be the best option. It is each Realtor’s job to advise his client of the state of the market, the risks involved and help them determine whether the purchase or sale is right for them.
I see the letter as a call to action for Realtors to do what we should have been doing all along, but now with more urgency. As seller agents, it is our duty to advise sellers as to what the fair market value is. To do otherwise accomplishes three things –
1) Doesn’t sell the house
2) Makes the Realtor seem ineffective
3) Contributes to the glut of inventory
4) Doesn’t sell the house
Setting asking prices for too many used to be an exercise of asking the sellers what they wanted to ask, rather than doing legitimate statistical market analyses. No longer. One recent example of sellers’ psychology is this, and I’m changing the prices for the sake of anonymity:
Property has been on the market for 18 months. It started at $425,000 and is now priced at $375,000. The seller purchased it for $300,000 five years ago, and now owes $350,000 due to the home equity line. Market value is right around $335,000. The Realtor has advised her client of the state of the market, but he won’t lower the price or accept an offer that is in line with the current market. The seller says that he would rather let the property go to foreclosure than take out a loan to cover the difference between the selling price and what he owes.
When sellers are setting market value based on what they owe rather than what the market will bear – What is the Realtor to do?
* AC – Thank you for the email. I would have asked you for permission to post your letter, but I don’t have your email.
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Having helped write the article, I am amazed that anyone could get worked up over a little creative opener:
“Psst! Hey, want to hear a big secret? How would you like a tip for a sure-fire investment that will double its value every 10 years?”
If this cute little attention getter gets you worked up, you should be freaking out about all the opinion-stated-as-fact that comes out in the Wall Street Journal, NBC, and other so-called news agencies. The point of the article is that CAAR is trying to do something that will stimulate the market and get it moving again. The article is NOT about investing in real estate.
I invite any of you analytical types to read CAAR’s year end market report that will be released on my blog (www.davidrphillips.com) Sunday and to the wider media on Monday. There are plenty of facts and conclusions in that report for you to pick on. Please don’t waste your talents on a cute little bit of pros that was nothing more than an attention-getting opening paragraph.
Hello Jim and Mr. Phillips.
So, I wanted to comment on the opener to the CAAR essay, which is: “Psst! Hey, want to hear a big secret? How would you like a tip for a sure-fire investment that will double its value every 10 years?â€
Mr. Phillips says this is just “a cute little bit of prose,” and that it’s nothing to get bent about. I hear him — but let me say that in this environment, w/record foreclosures and a deflating national — and local — housing bubble, it’s time for realtors to get serious about the accuracy of their claims. That’s the best way to deal, over time, with the crisis of confidence that the CAAR essay correctly identifies in the housing market.
So, what’s the truth? There are two big points to make in response to CAAR’s essay.
No. 1 — there is no such thing as a “sure-fire” investment. Every investment — *every* — has risk. Treasury bonds have risk. The risk of losing capital on a home is far higher than on a Treasury bond. You can’t deny that — not least because loss of equity in homes is happening now on a massive scale — billions and billions of dollars in home equity has been wiped out in the past year. Some of these folks will hang on and hope that the market will head back up over time. But some of these folks will have to sell. Some because they lose a job and have to sell. Some because they can’t afford the mortgage and cannot re-finance out of their high-interest loan because of their declining equity. There is real pain out there right now, and realtors should think about their role in creating the conditions that led to that.
No. 2 — over time, housing has not “doubled its value every 10 years.” Not even close. Historical returns on housing since about 1890 have been less than 2% per annum, on a real (i.e., inflation-adjusted) basis. Here’s a URL for a wonderful graphic that shows the very slow historical growth in housing prices: http://www.princeton.edu/~pkrugman/shiller_long_run.jpg
At the historical rate of appreciation, real doubling in the value of a house takes decades. It’s true, of course, that we have seen *much* faster rates of appreciation in the past six or so years. But that doesn’t suggest that we should expect quicker appreciation in the future. Indeed, we should expect precisely the opposite — housing is likely to appreciate *more slowly* than the historical rate, b/c rates of growth in any investment vehicle tend almost always to revert to the mean over time. And that means, to my mind, that we are in for a bunch of lean years, where housing underperforms other assets.
Finally, the overarching issue here, in my view, is a definitional one: Is a house an “investment”? Or is a house a “consumption good”? Put in plain English, do we buy houses because we expect to profit from them? Or do we buy them for shelter and the pleasures of owning property? Traditionally, it’s been a bit of both, but with the emphasis on the home as shelter. With the housing bubble (and the associated financing bubble) that view changed. We stopped treating houses like . . .well . . . houses, and started treating them like Internet stocks. Buying them short term — and with 100% finance — and flipping them. “Trading” in them rather than living in them.
This makes no sense. Unlike, say, the stock of a technology company, there is no story you can tell about housing that explains why the asset should rise in price at a rate anything greater than the modest rise in population. The technology of houses hasn’t changed. There’s nothing intrinsically more valuable about a house as shelter than there was 100 years ago. Houses are bricks, wood, plaster — they are low-innovation, safe, and boring. They aren’t a growth stock, they are a utility.
We’d all be better off to go back to treating them as such. And in the process, the market will adjust only when we blow off the 20% or so of current housing prices that reflects nothing more than the (irrational) expectation of future double-digit housing price growth. On that, the sooner the better.
AC
The CAAR article is NOT about investing in real estate? I’m puzzled. What’s it about?
Here’s how I would rewrite that controversial first paragraph:
“Psst! Hey, want to hear a big secret? How would you like a tip for a sure-fire investment that will double in value every 10 years? Well, we’d all like that, but of course we’d all like to marry a supermodel and be elected President. There’s no such thing as a “sure-fire” investment — and that includes housing. As for doubling every 10 years, yes, but only during a bubble. After which the price erodes for 10 years. The historical rate of housing appreciation is about 2%. Not bad, but nothing to get too excited about. You want to buy a house? But it to live in. Not as an investment. You’ll be happier.”