October 18th, 2018
One of my economics professors at UCLA told us an old saying that I remember to this day. I’ve often thought about it and I think because I was a double major in both psychology and economics, the adage made more sense to me than for most people. Yes, it does have a lot to do with how to tell what kind of real estate market it is. The saying, really more of a riddle I suppose, goes like this. “What did the economist say when he was asked which direction the market was going? Well, he said it was either going to go up, or go down, or stay about the same.” Ok, go ahead and groan. But there’s a lot of wisdom in that “riddle”.
Here’s why that adage has more meaning to me than most. I first chose psychology as a major because I was (and am) fascinated by the human mind, how it works, how it doesn’t work and the behavior it causes. And where as psychology is the study of behavior, economics is the study of behavior in the market place so why not add the second major; I did.
The two are intricately tied together. See? And of course the befuddled economist had to answer the way he did because to predict, accurately, the behavior of individuals acting in the market, in this case the real estate market, is nearly impossible. Oh sure, we can say with confidence that “tomorrow” or “next week” or even “in the next 3 months” the market is going to behave in a certain manner, but who’s that confident to say what will happen in the next 18-24 months.
When you ask real estate agents how to tell what kind of real estate market it is, do you ask them on what FACTS they are basing their answers? Are they merely regurgitating the party line? Are they reporting on their own individual anecdotal experiences? (hardly statistically valid!)
What really are the factors that sway the market, that push or pull it one direction or another? Real estate is just a commodity. It’s no different than live cattle futures or gold, or corn or pork bellies (do I need to go on?). It’s a commodity, pure and simple
How to tell what kind of real estate market it is
I will grant that there is a big difference in real estate compared to let’s say gold. That ounce of gold sitting in the vault in London is 100% exactly the same thing as the ounce of gold sitting in the vault in New York. 100% duplicate. Moreover, there are tens of thousands of ounces of gold traded on the exchange every business day so we know with certainty, down to the penny, what an ounce of gold is worth on any given day.
But not so a home. Your home is unique, there is no exact duplicate and it certainly isn’t being traded thousands of times each day. So not only are there huge margins of error when it comes to saying “exactly” what a home is worth (are you getting now what the problem is with these computer automated home value systems and why you should use at least three for checks and balances) but those margins of error are compounded immensely when trying to predict what will happen in the real estate market 18-24 months from now. One thing not to do is focus too much on single data points...it’s the trend that’s important. Here are some quick real estate stats across the country
If you knew what the supply and demand trends are, wouldn’t you be able to make better decisions about how to price your home for sale?
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