Wednesday, April 23, 2014

Eighty-five percent of agents must be right

From page HS3 | July 19, 2013 | Leave Comment

While watching the evening news last week, there was a story regarding how the real estate market has improved over last year. As evidence, the reporter had included the results from a survey of real estate agents with 85 percent saying it was a good time to buy. With respect to my fellow agents, when did we not think it was a good time to buy or sell for that matter? Asking an agent about whether the time is right to buy is like asking your dentist if your teeth need cleaning, your chiropractor if you need an adjustment or your life insurance agent if you need more insurance. But of course, now is always a great time to buy.

Just because a majority of any group holds a common opinion on a topic doesn’t make for empirical evidence that it’s true. History has many examples where a great majority of folks believed the truth to be one thing, only to be proven wrong over time. However, majority opinions, be they right or wrong, determine our behavior which has a resulting effect on others and their behavior. At some point, when enough people believe something to be true, it becomes common factual knowledge until someone discovers evidence to the contrary.

How buyers and sellers feel about the real estate market is likely more important in influencing the market’s direction than any other measurement. It’s consumer confidence that determines whether or not folks are buying and selling homes. If the general opinion is that the market is good, people will buy real estate and if the popular consensus is to stay away from real estate, that’s what most folks will do.

We seem to have a survey, measurement and government department for everything. Consumer confidence is measured and a monthly report issued by the Conference Board. The index is calculated each month on the basis of a household survey of consumers’ opinions on current conditions and future expectations of the economy. A monthly report is then issued detailing consumer attitudes and buying intentions. The index now stands at 81.4 up from 74.3 in May.

Says Lynn Franco, director of Economic Indicators at The Conference Board: “Consumer confidence increased for the third consecutive month and is now at its highest level since January 2008. Consumers are considerably more positive. Expectations have also improved considerably over the past several months, suggesting that the pace of growth is unlikely to slow in the short-term, and may even moderately pick up.”

Housing economists don’t rely on confidence levels but on measurable statistics to project the health and direction of the housing market such as: employment, household formation, interest rates and housing affordability.

In determining the affordability factor, economists look at several factors including the median household income, median selling prices, financing cost and the monthly cost of homeownership. The theory here is the more affordable the homes are the greater number of potential buyers and resulting sales. But the validity of using the affordability factor to project the direction of the housing market is questionable. Consider … houses are more affordable today than in 2006. If this affordability factor is so important when determining the future sales, shouldn’t more people be buying today than back then? Well they’re not. Actually, as affordability decreases, sales and property values increase. Why? Because buyers are more determined and enthusiastic about buying when home prices are rapidly going up and less affordable. When prices are declining, homes are more affordable but there are fewer buyers.

Economists also point to low interest rates as the key to our housing turnaround and propelling it forward. Low mortgage rates have helped but here is an interesting phenomenon. If you put a graft showing the mortgage interest rates over the last 40 years and another graft in front of it showing the number of yearly sales, more sales happen during periods of higher interest rates than periods of low interest rates. As an example, twice as many homes were sold between 1976 and 1980 when the interest rates average between 9 and 10 percent than homes sold between 2008 and 2012 when mortgage rates averaged below 5 percent. Homes sales were better in 1984 when the interest rates were 13 and 14 percent than in any year that interest rates have been below 5 percent.

Since last year the Federal Reserve has spent $85 billion a month on Treasury and mortgage bonds, betting that all this subsidy will turn the housing market around and with it employment. The reality is that since 2010 when interest rates dropped below 5 percent we have had higher unemployment and fewer employed workers than when interest rates were above 8 percent.

The irony with the Fed keeping rates artificially low for so long is that we have come to believe that they will always be this low. Surveys now show that if mortgage rates jumped above 6 percent, it would significantly turn off buyers from buying a home. During the last 40 years, 50 million homes have been purchased and refinanced with interest rates above 8 percent. And now 75 percent of us think rates above 6 percent are so high as to discourage us from buying a home. Go figure.

Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his Website


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