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Realtorsâ„¢ Using "Econ" to Push Overpriced Homes
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2006 Jun 2, 3:27am 8,405 views 91 comments
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Headset,
Whoa! Yeah I hear ya, Denver's economy just seems to be detached from the rest of the country and I'm not sure why. I'm sure you meant it in jest but I just don't see a lot of "cash flush" investors waiting in line to impale themselves swooping in to pick up bargains. Especially apartments. Somehow between the condo conversions and the conversion back to apartments and the lawsuits that are sure to ensue most of the well healed will likely steer clear of what is certain to be a mess. IMHO.
HeadSet
2006 Jun 2, 6:55am
DinOR,
I was thinking SFH, I never thought about apartments. Now that you mentioned them, I agree with you 100% on apartments.
But if there is a a glut of homes on the market (and if the prices fall), and a large mass of people looking to rent, it seems that a business opportunity comes into play for those with cash. (Horrible thought, what if they are a Chinese PLA investment group).
@Red Whine,
Yet another brilliant rant --thanks! My favorite part:
It’s called NEGATIVE cashflow because the only people who might suffer from it are NEGATIVE people who are AFRAID to liberate equity.
This is totally O.T., but I remember a discussion a while back about penny arbitrage (selling pennies for scrap metal when the cost of the metal used to make them --mostly zinc-- exceeds the value of the coin itself.
Check this out:
http://money.cnn.com/2006/06/01/news/newsmakers/penny/index.htm
Anyone know if public scrap metal/recycling yards are willing to buy pennies?
Red Whine,
All those years of crunching numbers to calculate a bond's taxable equivelant yield have been wasted! I now see that. I see that I have been worshipping "false gods" and am ready to submit myself to total understanding, total devotion to the new paradigm! What a fool I've been.
HARM,
I didn't realize there was a "penny lover's club". Also interesting to note that Zinc producing companies are charter members. I'd heard when I was a kid that a lot of the old gangsters had some of their money in gold bars which they kept in the "upper tank" of the commode in case there was a fire? Then there's the "fence post bank".
HeadSet
2006 Jun 2, 7:38am
Let me see:
Selling FSBO - FOOL!
Renting Home - FOOL!
Paying off Mortgage - FOOL'S FOOL
Seems like Congress will have to enact a FOOL TAX. Only the FOOLS will have money.
I’d heard when I was a kid that a lot of the old gangsters had some of their money in gold bars which they kept in the “upper tank†of the commode in case there was a fire? Then there’s the “fence post bankâ€.
Wow, better let Surfer-X know about this. He should check for that before he performs his next "upper-tanker"!
If the zinc in pennies costs 40% more than the penny itself is worth, then why shouldn't I convert all my available cash to pennies and sell them to a local scrap metal dealer? Rinse, cycle, repeat.
I should become a zinc millionaire in no time, right??
Headset!
Haven't you learned what Red Whine has so graciously shared with us (and you and I no more to he than Adam?)
Oh, my favorite psalm:
"Even underaged minors and vagrants"
Look for these to become part of our daily language shortly.
"Oh, I don't look at me home as in investment" or,
"We've never looked on our home as our retirement" or,
"I view my home as an investment in my lifestyle" With added emphasis on "lifestyle" as in, you wouldn't get it (low life). Translation?
We are so screwed.
HARM,
After you've hung around X for awhile you'll never look at an upper tank the same way again!
Harm,
What's facsinating to me is that there are numerous instances of California and New York local publications scoffing at some of the what they view as "conflicting" information. I've even seen a few claim that reports of jobs leaving California, wages unable to support housing prices, and the expected decline in sales as nothing but the conservative media trying to basically attempt to topple poltical ( liberal) influence. I'm dead serious and thought it was strange because it is usually the conservative media blaming liberal medias for being inacurate. It's almost like the opponents of anything negative in CA economic futures are viewed as those who can't possibly be right since California is unfallable.
Peter P
2006 Jun 2, 8:05am
Look at the Google Ads!
"Your own easy-to-manage real estate web site."
Perhaps we should become RE agents. 1 for every 52 Californians is not too bad. I can easily see a world in which there are 1 agent per person!
Perhaps I should skip CFA tomorrow and start taking RE classes.
Interesting NYTimes article on the Economic Zeitgeist...
"A conviction of fairness..."
Lottery Ticket Baby Boomer: What's not fair about betting $500K of the bank's money and winning $300K? Oh you were too afraid to play? Sorry to hear that, but keep working at that job though - you'll make it up in 10-20 years at which point we'll tax the hell out of it to pay for my retirement...
Bah.
Randy H
2006 Jun 2, 8:37am
I just stopped working on my revised Black-Litterman model and instead began working on my Realtor(r) website.
To think, I wasted all this time learning computer science, business, finance, economics, math and statistics. All along I could have just been selling houses and making an easy living. And with a leased Lexus, to boot!
Peter P
2006 Jun 2, 8:47am
I just stopped working on my revised Black-Litterman model and instead began working on my Realtor(r) website.
How about a Randy-Peter model that shows that housing value cannot go down? We can start selling NAAVLPs to underaged minors. Can't afford that new playstation? We give you a loan!
Peter P
2006 Jun 2, 8:49am
I just got a letter saying that I have been pre-approved for a HELOC. Looks like actually owning a home is no longer required for that.
Randy H
2006 Jun 2, 8:58am
Yea, I get those still too even though we sold over a year ago. The funny thing is that my credit rating is apparently improving given that the last one I got was for 120% of the value of my last home. LOL.
Don't laugh about selling NAAVLPs to minors. I was thinking we could create a financial instrument, which we'll call a collective savings account to avoid NASD and all that unpleasantness, by which people can invest in the groups total return. The fund will be used to pay for 1%-3% down payments so people can get NAAVLPs on nice condos and starter homes. Then a their returns when they sell will go back to re-compensate the fund for future down payments. In just a few years everyone participating will own over 100% of their home's value. This will work perfectly because it always goes up.
You just have to recruit new members all the time, as your payout is based upon the number of people you recruit, and they recruit, and so on. Pure genius.
Randy H
2006 Jun 2, 9:16am
Jon,
But to say that realtors are evil for putting a self-serving spin on the facts is like handing out speeding tickets at the Indy 500 or asking someone not to smoke in a burning building.
I am all about caveat emptor, and agree with your observations but for one important distinction in this particular case:
Realtors are making forward looking statements about something they are "selling" as an investment.
We have rules about such things, which everyone else selling investments has to abide by or risk fines and jail time. Realtors are selling "investments" much larger than most people will encounter anywhere else in their entire lives. Why do they get to make shit up when your stockbroker cannot?
I'm a free-market biased person. But consistency wins out over free market ideals. Either turn all investments loose on everyone with no regulation or bring Realtors under the same controls we have in place for everything else.*
If they want to sell a home to live in, raise your kids, and plant your garden. Fine. They can say anything they want. But the minute they start giving out financial advice they cross the line into territory that should be regulated.
--
*In reality I do not think investments and finances should be unregulated. The simple fact is that, like nuclear reactors and aircraft engines, financial instruments are complicated beasts which are truly understood only by people who study long and hard at learning lots of theories and skills. For this reason, asking someone to caveat emptor about investments is unrealistic.
Peter P
2006 Jun 2, 11:03am
Why don’t we just put up a very fancy looking Center on Economics and Housing Trends and Policies website (unless that name is taken) and write our own articles?
How about...
National Association for the Advancement of Very Leveraged People (NAAVLP)
Randy H
2006 Jun 2, 1:02pm
SFWoman,
That article demonstrates my contention regarding just about everything reported by any MSM. Not that they have a bias--I don't believe in conspiracy theories--just that they are lazy.
Caption to the little graphic:
Investors loaded up on hard assets such as real estate after stocks fell in 2000. Now a softening of home prices in Los Angeles, where this house is listed, and other markets may push some back to stocks. (AP / Mark J. Terrill )
There exists no evidence for this inverse correlation in any credible academic literature or unbiased industry studies. At best, real-estate is UNCORRELATED with the stock & bond markets. See, this kind of slip makes the job of the spinners like Mr. 'I have a MA in Marketing and now I'm going to play Economist for the Working Man'.
Randy H
2006 Jun 2, 1:07pm
Fewlish,
I looked into this a bit after our last interchange on my blog. It is not illegal to destroy US currency, only to deface it for purposes of fraud. Since there is no intent on fraud with melting pennies for their intrinsic content, there is no existing legal problem.
I still contend that transformation costs (energy) and holding costs (lots and lots of warehouse space and lifting equipment) make this arbitrage unprofitable unless conducted on a massive scale. And those are some pretty huge fixed costs to invest in given external risks:
1) Copper and/or Zinc values fall.
2) The US gov't decides to reformulate the penny or discontinue it altogether. If they do this, pennies will immediately gain value, not lose it (as a function of supply and demand paired with market pricing of pennies based on intrinsic value not face value).
Peter P
2006 Jun 2, 1:13pm
DinOR, what do you think about this house?
http://www.craigslist.org/sby/rfs/167453918.html
It is my dream house now... for 750K. :)
National Association for the Advancement of Very Leveraged People (NAAVLP)
That's so good, I'm adding it as an alternate definition to the Bubble Glossary thread.
Randy H
2006 Jun 2, 1:33pm
Does anyone happen to know how to improve the performance of Solver in Excel when it is attempting to maximize a value for a HUGE number of variables (like thousands or tens of thousands), and the problem is non-linear?
Randy H
2006 Jun 2, 1:35pm
SFWoman asks;… If some Realtor(TM)(-how did Robert Cote get the proper registration mark to appear?)
The smart@ss answer is I use a real computer on the ‘net so I type option+r and get ®.
The remedial operating systems can use the keypad and ALT key for the ASCII high order characters: http://www.starr.net/is/type/altnum.htm
ALT+0174 seems to be the (obvious and intuitive, not) combination.
Or just use Character Map, it's under Accessories in the System subfolder. You can copy/paste from there.
Peter P
2006 Jun 2, 1:37pm
Does anyone happen to know how to improve the performance of Solver in Excel when it is attempting to maximize a value for a HUGE number of variables (like thousands or tens of thousands), and the problem is non-linear?
Buy a faster computer.
Are you guys being sarcastic? That is an awfully nice house. I don't know anything about the area, but the house itself is great. It has a little more space than we really need, and it's certainly not in our price range, but it's a nice house.
Randy H
2006 Jun 2, 1:41pm
Buy a faster computer.
I don't know, this one is pretty kicking. I think the problem is Solver. It's not optimized for real work. And I really don't want to transform all this to a linear approximization and matrix algebra, damnit.
Peter P
2006 Jun 2, 3:00pm
Not to make you all jealous, but my in-laws house is very similar to the one Peter posted the link to. Their’s is considered French Country though, and not Victorian, though the the styling is very similar. Theirs is a tad smaller too, but it’s a really great place and almost paid off. Ok, I just made myself jealous……
I certainly do not need almost 4000sf of interior space. A 2000sf 3/3.5 would be sufficient.
BTW, the house has a blog:
I am not sure if the NAR ad on TV has been running for a while or not but I saw it tonite and was taken back when it said that REALTWHORES have to follow some ethics code or some BS like that. It shows some home buyers trusting the ethics of the REALTWHORES for their home purchase decisions. I guess NAR is feeling that the bad press about their hefty commission for not doing anything worthwhile are getting to the people and they have to do something about it.
I believe the correct phraseology for leaving a present in an adversaries commode, that they will remember for weeks is, Upper-decker.
Peter P,
Lovely home, great setting!
However; saying "east of La Grande" is like, well........ saying "East Jesus". Unless you want to teach EOU the only other employment is with the US Geological Survey. I have a client out there that moonlights taking pictures (and I am not kidding here) of rodeo clowns. The fact that the seller requires a blogspot should tell us something. Bring money, b/c you will not find it here. I've often tinkered with the notion of having a place in EO as a "perk" to clients that would somehow skirt the NASD issue of "excessive gifts" issue. Me? My blogspot entry? Try selling it as a time share and "buy" yourself a job as the manager. And in the end that's what people that invest in "income property" do. They "buy" a job! Hell I've even considered it. When I get too old and too cantankerous I could just buy an apartment building just like on "The Ropers" (an abysmal spin-off) from Three's Company. Anyone here that thinks I am too far gone to interface with equity markets (and clients) please let me know when it would be more appropriate for me to buy a job.
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Charts and graphs and numbers, oh my!
Increasingly, so-called "upscale" realtorsâ„¢ are using pre-packaged "market and economics" newsletters to push hesitant clients into buying. After all, with the mainstream media throwing so many numbers at the homebuying/homeselling public, who does one turn to for help interpreting what it all means? Of course, your local realtorâ„¢.
I won't name the particular realtorâ„¢ from whom I lifted this particular newsletter. Let's just say he represents "top-end" properties in the SF Bay Area. Assumedly, his clients would include a significant percentage of sophisticated buyers. A lot of these folks read the Wall Street Journal and perhaps need a little "guidance" from their friendly realtorâ„¢ on just what it all means for the real estate market.
Before I share some quotes from the newsletter and my criticisms of the bad economics and logic it invokes, I also refer to a problem we discussed sometime ago in Realtors(tm), Credibility and Influence. There is absolutely no accountability in the real estate industry for what agents say, promise, or write. Nowhere on this entire newsletter do I see Past results are no guarantee of future performance. Or, Buying a home contains inherent risks. I remind that realtorsâ„¢ are charged with helping people in what is for most the single largest financial transaction they will ever engage in. Mutual funds are not permitted to put out "newsletters" like this. Stock brokers are not either, at least not without so many scary disclaimers that all but the most savvy or foolish investor will think twice. But we allow realtorsâ„¢ and mortgage brokers complete freedom to claim whatever they want, whether true or not, without any recourse.
Many of these newsletters, including this one I'm looking at, are produced by Howard Blum & The Financial News & Information Service out of Novato, CA. The product is sold as Daily Economic Insights as a subscription service, which is often then "reframed" and retitled by various agents to include some of the agent's own marketing material and finally distributed to their clients.
The tagline from www.econonews.net (the company's web site) reads: If you need the best financial market, interest rate & real estate market insights available, written in plain English (as in no 'econo-babble')....
Let's see, shall we.
Evidence for this appears to be a nifty little graph in the upper corner titled 5-Years SF Pct. of List Price Sold For which shows March, 06 average home in SF sold for 104.72% of listing price. Source of this data? Well, they credit themselves, Financial News & Information Service. On further inspection, we see that the "average" in the graph is actually a moving average. Nowhere is the period of the moving average disclosed, so we have no idea if this is a 30 day moving average, a 90 day or just whatever moving average yields the highest numbers. Also, notice the range of data is 3/01 through 5/06, apparently carefully chosen to make sure all the moving average trend-lines are well above 100% of listing price.
Conveniently comparing adjusted numbers to unadjusted numbers. Also notice an attempt to put a positive spin on rising mortgage rates. There is also a nifty little graph showing mortgage rates from 5/27/05 to 5/04/06, ranging from about 5.25% to 6.25%. Again, we don't know what this is even measuring, but assuming it is standard 30-year fixed rates on conforming loans, the author is attempting to show that rates aren't likely to rise much more. We could dive into a huge digression on what really drives interest rate policy in the US, but suffices to say that worries about the housing market are only one factor, and a relatively small one at that.
Notice the reactionary disdain for Wall Street and the mainstream media. Of course, if these people aren't saying what you want, they must be bad people.
Wall Street wants the housing market to flounder? Even though every economist knows this will severely impact consumer spending, burden consumer debt even more, and further distress the already negative savings rate? So, Wall Street wants a huge portion of their best, blue-chip stocks to go into the toilet because people quit spending money? Wall Street does love recessions...or maybe econonews would do well to spend a little more time actually listening to some of that "econo-babble".
One more point: real-estate in the US, as an asset class, is NOT CORRELATED to either stocks or bonds. For what these guys are claiming -- a down housing market will drive investment in stocks and bonds -- to be true, it would be a NEGATIVE CORRELATION. Please, someone demonstrate for me any credible academic or industry research that reveals this strong negative correlation. Otherwise, you're just making stuff up.
First, notice the presentation style. It looks a lot better to say that personal income rose 5/10% because there are lot of big numbers there. It doesn't look so pretty to say 0.005 or 0.5%. If you are paid $100,000, then your income rose to a whopping 100,500 per year, or $41.67 per month gross, or about $27.50 net per month. Time to go buy that $2.1M Marina Condo! (See, I can screw around with numbers to make them fit my message too).
Secondly, all sentiment is towards rising inflation, not contained inflation. Reading the "econo-babble" in the Wall Street Journal or Financial Times for any given day and this is blatantly apparent.
One realtorâ„¢ per every 52 people?!?!!!!! Yea, maybe there is a wee bit of competition. And, maybe there's a firestorm coming. What's the percentage of CA residents who buy/sell a home in any given year? I have a sneaking suspicion that there are more realtorsâ„¢ than transactions to be had.
Of course this is all very bad news for realtorsâ„¢, fancy newsletters full of misinformation and spin or not.
--Randy H
#housing