Matrix Blog

Junk Statistical Analysis, Luck, Superstition and Coincidence

Status Quo Bias: ‘Linear” Thinking in the Real Estate Industry

June 8, 2014 | 8:09 pm |

linearcharts
[source]

When we look at forecasting, planning, trending or anything that includes a look out over the future, I find the real estate industry (i.e. appraisers, real estate agents & brokers) generally thinks along linear lines.

For example:

  • When housing prices rise…they will rise forever.
  • When housing prices fall…they will fall forever.
  • When sales activity rises…they will rise for ever.
  • When inventory falls…it will fall forever.
  • When rental prices rise…they will rise forever.

…and so on.

Where does this status quo bias come from?

I don’t think this bias only specific to the real estate industry – but I describe it through the industry only because it simply happens to be my area of focus. I do find that real estate professionals can be quite disconnected from the mindset of their clients when the market is at extreme points in the trend i.e. peak and trough.

For example, in the dark days following the Lehman Brothers bankruptcy, I was giving a speech to a large group of New York real estate agents in October of 2008. Roughly a dozen agents approached me before and after my presentation saying they were getting offers on their listings at roughly 30% below ask, characterizing the offers as “lowball.” It was quite amazing to hear all the agents use a similar characterization of the post-Lehman market. Of course when nearly all buyers are behaving in the same manner, that becomes the new market condition.

Towards the end of 2008, I found that New York real estate agents rapidly changed their view on the market as sales contract activity fell by 75% YoY. The real estate agent disconnect with the consumer was evident by the early spring of 2009 when it was apparent that buyers were not as negative in their outlook of the coming real estate year as the typical agent was. Needless to say that the market did see a significant rebound over the following year and the consumers were ultimately right.

My takeaway from all of this is never to get too comfortable with a trend. Although we like to say “the trend is your friend,” it is only your friend “until it ends.”

I would think this “status quo bias” behavior manifests itself more strongly in professions that are sales commission heavy, i.e. where commission incentives and generally over-the-top positive thinking are the norm and the agent tries to feel like they have some control over the impact of the market on their livelihood.

Of course the real estate market could care less what anyone thinks.


I was away last week, invited by the US Army to participate in a seminar at the US Army War College in Carlisle Pennsylvania after they heard me give a speech about the evolution of our company. Last week was a complete strategic immersion at the college and frankly I didn’t think a whole lot about the housing market or social media. I met an impressive group of accomplished military veterans who are furthering their careers. I also got to meet civilians like me from around the country that were also invited to participate. I gained invaluable strategic insights and friendships from this event that have made a real impact on me and how I interpret information that is presented to me.

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Pulling the Case-Shiller Index Back by 6 Months to Reflect Actual Buyer/Seller Behavior

May 27, 2014 | 10:45 pm | Charts |

matrixCSIshift-5-27-14
[click to expand]

The Case Shiller Index was released today and it continued to confuse consumers, pundits, economists etc…and for good reason. It’s 6 months late.

I wondered what would happen if their index result was pulled back by 6 months to see how it lined up with a couple of significant housing milestones (purple vertical lines). The most recent housing milestone was last year’s Bernanke speech that resulted in the spike in mortgage rates in May-June of 2013.

In the modified trend line (dotted blue) housing prices surge up until mortgage rates spike. This is clearly more logical than the actual index showing housing prices surging for six months after the mortgage rate spike.

In the earlier milestone in April 2010, the adjusted index (dotted blue line) immediately begins to slide after the April 2010 signed contract deadline passed to qualify for the federal homeowner tax credit as part of the stimulus plan. Yes, that’s exactly what happened on the front lines.

I’m going to call this new methodology “time-shifting a housing index.” From an historical perspective, this is a much more useful and reliable trend line. For the near term, it places the CS HP 6 months behind the market without any relevance to current conditions. Then again, the S&P/Case Shiller Home Price Index was never meant to be a monthly housing indicator for consumers as it is currently used by the media. It was originally created to enable Wall Street to hedge housing but never caught on because of the long time lag and therefore the eventual ability of investors to accurately predict the results.


The top chart is fairly self-explanatory but here’s the math again:

  • May 2014 Report Publication Date
  • March 2014 Data (Jan, Feb, March Closings – February is midpoint)
  • January 2014 Contracts (Nov, Dec, Jan Contracts – December is midpoint)

Contracts Assumes 90 days between closing date and “meeting of minds” between buyer and seller i.e. 75 days from contract to close +15 days to signed contract from “meeting of minds.”

“Meeting of Minds” Moment when buyer and seller agree on basic price and terms, usually a few weeks before contract is actually signed i.e. May 2014 Case Shiller Report = December 2013. The optimal moment to measure housing.

Here’s a regular chart that has a longer timeline, with and without seasonal adjustments (you can see that seasonal adjustments are essentially meaningless.)

matrixCSI-5-27-14

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Stories on Chinese Overtaking Russian Home Buyers in Manhattan is Purely Anecdotal

May 4, 2014 | 4:21 pm |

russiavschina

I’m not saying the US isn’t seeing an uptick in buyers from China, especially housing markets such as Manhattan. After all, there is a global trend where money is chasing stability and safety. US real estate has been a key beneficiary of this trend.

However it is important to realize that there is no US data from independent sources that links overseas nationalities with residential real estate purchases. Why?…because of long time concerns in the US about fair housing laws and by extension, the gray area of tracking nationalities to housing purchases although it is the norm outside the US.

When any housing trend is discussed, it is important to understand where the source of the trend came from. I’d really like housing market followers to appreciate that the trend analysis on the foreign buyer subject bantered in the media as of late is literally based on nothing. There has been an outpouring of coverage of the topic over the past few months, but the sourcing is only from real estate brokerage anecdotes because that is all there is for reporters to work with. I was interviewed for some of the following articles but disagreed with the general story premise, and I assume that is why my view wasn’t inserted.

Whichever stance you take on this particular trend – that Russians used to dominate the Manhattan housing market and how the Chinese have taken their place at the top – there really is no wrong answer, because there are no facts. All sourcing on the topic to make that point are from real estate agents referring to their opinion, often based on their past few transactions.

Russia
I first noticed this new new storyline when Russia invaded Crimea. Would the Russian position as the number 1 foreign buyer of real estate in Manhattan now go away? The brokerage community, or at least a couple of real estate agents claimed this to be the case.

I have no evidence to the contrary even though there are huge capital outflows from Russia that began with the Russian invasion of Crimea. In my view, the real estate agents were confused by the high profile sales by Russian buyers (think of Russian Oligarch buying 15 Central Park west for $88M) and perhaps has some direct feedback in some of their own transactions. However I don’t think Russians were ever the top homebuyers in Manhattan, just the highest profile.

If we have learned anything from the current Manhattan new development boom, it is the fact that high profile, high end transactions are not a proxy for the balance of the market much like a handful of high profile Russian purchases are not a proxy for some sort of Russian real estate dominance.

Manhattan Real Estate Feels a Russian Chill [NYTimes]

China
Now that the Russians are “out” (see previous) of the top spot, that must mean that the Chinese are “in.” Check out the headlines to this storyline although much of these articles build on the Reuters piece (linked below) which is based on real estate agent anecdotes. A slew of brokerage PR driven stories on the Chinese are now dominating the real estate headlines in New York City.

Perhaps this uptick as something to do with recent closings at well published Chinese buyer favorites like One57 and perhaps the fact that China is poised to become the world’s number 1 economy.

NY real estate firms woo Chinese buyers [China Daily] The Chinese take Manhattan: replace Russians as top apartment buyers [Reuters]

U.S.CHINA’S RICH BECOME BIGGEST FOREIGN APARTMENT-BUYERS IN MANHATTAN [Al Jazeera]

Who are the dominating the foreign buyers of Manhattan real estate?
Anecdotally I think it remains Canadians but is dominated by Europe (UK, France, Germany, Italy, Spain, Ireland, etc combined) because they are still the largest tourism group. Brazil doesn’t get enough respect since they are the 3rd highest source of tourism to NYC. This list is 2 years old but I doubt China has passed Europe or even come close but this is, shall I say, “anecdotal.”

From NYC & CO., here are New York City’s top international sources (2012 figures):

  1. Canada 1,063,000
  2. United Kingdom 1,033,000
  3. Brazil 806,000
  4. France 667,000
  5. Germany 605,000
  6. Australia 595,000
  7. PR China (excl. Hong Kong) 541,000
  8. All Middle East (incl. Israel) 478,000
  9. Italy 449,000
  10. Mexico 387,000
  11. Eastern Europe 384,0000
  12. Spain 380,000
  13. Japan 328,000
  14. South Korea 281,000
  15. Argentina 272,000
  16. Ireland 224,000
  17. India 215,000
  18. Israel 203,000
  19. Netherlands 203,000
  20. Sweden 190,000

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Canadian Housing Prices Now Pushed Up Same Way as US

May 4, 2014 | 1:28 pm |

gandmUSvCanadaprices

I was reading Tara Perkin’s piece in The Globe and Mail about the record price spread between the US and Canadian housing markets and saw one of the most startling housing charts of late (above). To be clear, this chart doesn’t adjust for the exchange rate but the article says the Canadian/US existing home price spread would be large – closer to 50% than 66% – still huge.

The article cites Bank of Montreal’s chief economist Doug Porter as saying:

“The main takeaway is that, contrary to all expectations, the Canadian housing market has just kept on rolling in 2014 even as the U.S. housing market has paused for breath (after a steep climb out of the dungeon),” he writes in a research note. “Put it this way, how many pundits a year ago were calling for Canadian home prices to rise faster than their U.S. counterparts in any single measure?”

Yes, true, but this is probably another good reason not to rely on anything published by a lender’s “chief economist” title due to their inherent bias toward the interests of their employer. What I find fascinating about the Canadian housing market is the proliferation of the false rationale that prices are being used as a measure of housing health. For the US counterpart, think Miami and Las Vegas circa 2005 when prices were skyrocketing and sales were falling.

The Canadian government tightened credit conditions a year ago and sales fell sharply:

This time last year it was far from clear when and if the Canadian housing market would emerge from the sales slump that ensued after former Finance Minister Jim Flaherty tightened the country’s mortgage insurance rules.

Focus on March 2014 v. March 2012 in the following chart:
canadahomesales3-2014

With Canadian home buyer’s access to credit now reigned in, sales fell sharply yet housing prices continued to rise. But Canadian housing prices are rising now much like they are in the US, based on restricted access to credit that keeps inventory off the market. And we’re not talking about household debt.

New housing inventory entering the market in Canada is now falling which is continuing to goose (sorry, Canadian geese pun) prices higher.

canadahomelistings3-2014

The Greater Fool Theory Applies to the Canadian Housing Market

A theory that states it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.

Of course from our past experience in the US, it’s not surprising to see every outpouring of Canadian housing market bubble concern met with an equal outpouring of Canadian housing bubble denial.

Please stop using housing prices as a measure of housing health. It was obviously flawed logic when applied in the US during 2003-2006 and now it has become apparent it was flawed during the 2012 to 2013 US run up.

Housing price growth doesn’t reflect good housing market health in Canada either.

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It’s St. Joseph’s Day – What Does It Tell Us About Housing Trends?

March 19, 2014 | 11:16 am | wsjlogo |

wsj3-14stjoseph
[Source: WSJ]

Last week I can across Sanette Tanaka’s WSJ column “Spreadsheet” titled “Bless Our Happy Home Sale” that talked about the tradition regarding St. Joseph. I waited to blog about it until today since March 19th is actually St. Joseph’s Day (BTW: who is getting any work done this week with 3/17 St Patrick’s, 3/18 March Madness brackets and now this?).

I love the phrase within the WSJ graphic: “Faith in Action.”

I previously wrote about this here in September 2005 and in October 2007.

Traditionally, Joseph, the husband of Mary, is hailed as the patron saint of home and family. Some believe that burying a statue of St. Joseph in the yard helps sell a house.

Here’s how it the process works when selling your home:

  1. Bury the St. Joseph statue upside-down in your yard, facing toward the house listed for sale.

  2. Sell the house.

  3. The Seller digs up the statue and puts it in the new home in a special place.

The last 4 years of statue sales show a pattern consistent with NAR’s existing home sale pattern with the housing market rebound beginning in 2011.

Who says housing trend analysis is devoid of emotion. Got it?

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