Wisest of the crowds

Looking for a great buy-rent analysis tool? Go no further the the New York Times. My friend Kevin Boer blogged about it here, and I have to further endorse this product. Very cool Ajax interface and has all the things you need to understand the issues. Warning! Do not accept their base assumptions, some of which are in “Advanced Settings”, “General”. The main value to a tool like this is playing with different assumptions so that you can understand the real drivers. I have inputted some assumptions below based on a friends analysis of spending $6,850 to rent a house that might ordinarily cost him $2 million in San Francisco (yes, these are real numbers…it is that expensive here!).

Three Key Assumptions:

- Housing Value increase 4% per annum

- Rent increases 2% per annum (San Francisco is largely rent controlled)

- Investment returns of 6.5%

You can see there is no scenario that allows one to buy versus rent. So what does it take to get the buy-rent math to justify buying? Well if you increase housing prices to 5% increases per year then you get a break-even point of 7 years and if you increase it to 6% then you get a break-even point of 3 years. Although I held investment returns constant at 6.5%, prices increases for housing coincide with general returns in assets so realistically I should probably be increasing investment returns with any increase in house price appreciation . Why is this relationship so important? Because when you have money tied up in your house, that money is no longer available to invest. If you are a crappy investor no problem. If you know your way around, this makes the math even more difficult. So if I increase investment returns to match my original assumptions of 4% appreciation and 6.5% investment returns (2.5% spread), then the following buy-rent trade-off emerges:

So buying is better after 5 years but the gets worse at year 15. Why? Compounding. It seems the real issue is what is the relationship between housing returns and investment returns…something I will blog about in the future.

What was my recommendation to my friend? Rent and look for a distressed seller.

Local Resources:

San Francisco Assessor-Recorder

City of San Francisco Rent Board

In today’s Sunday Real Estate pull-out in the San Francisco Chronicle, Carol Lloyd discusses the various things that agents are, or can do, to market themselves in an article entitled “Surreal estate: Real estate seminars aim to give agents the edge in a competitive field”.
An interesting article that certainly offers a number of valuable points but perhaps the core perspective is that Agents must create personal brands - brands based upon specialized niche expertise. Don Hobbs opines “…Once Century 21 had 80,000 agents, how was an agent supposed to distinguish themselves from the crowd?” Hobbs’s company offer’s a host of marketing and coaching programs.

The most obvious thing missing in this whole article is discussion of the internet. Interesting! Let’s see, 80% of people start their housing search on the internet yet 2/3’s of internet leads have a conversion rate of ZERO percent (NAR data 2005). Consumers expect the immediacy and transparency of the internet to be delivered to real estate services. Yet as an agent, you are just a name and a face. The internet changes everything and makes the playing field much more fair. Gone are the days where networks of people are limited. The network of all humanity is up for grabs but dare you engage with it? The internet is an opportunity to expand your reach by showing people what you know - that YOU ARE THE EXPERT.

It helps you engage with your current and future clients in a meaningful way that elicits trust. It enables you to incubate ALL your clients at the same time and creates a history of your expertise for future clients to reference. In other words, it makes it cheaper, easier, and more effective to keep your pipeline fertile and growing. Welcome to the SHOW ME economy.

But if requires you to do new things. The simplest is to start writing things that demonstrate your knowledge base (blogging). Free systems include Wordpress and My-Currency that offer a blog free just by registering (30 seconds). My-Currency gives you the opportunity really differentiate yourself by taking things much further. We give you the opportunity to answer questions through our “answer” section, to participate in “wiki’s”, and to make valuation predictions on housing indexes (median values of a square foot by zip code) and homes. This all helps to answer consumers SHOW ME sensibilities.

My-Currency also enables you to create a very robust profile with all your contact information. And it is free!

Engagement with clients using social tools is a foregone conclusion in other industries. The real estate industry has begun to embrace it but there is a lot of adoption ahead. As the “rookie agent” at Coldwell Banker noted in Lloyd’s article, “You never know if that deal could be your last”, adding “… do people really choose their agents based on a postcard they get in the mail?”

Last night I had the great privilege to meet Glenn Kelman and the Redfin gang at the Socketsite drinks in San Francisco. There was a big mix of people including housing consumers, real estate professionals, notable bloggers, and entrepreneurs. What was most interesting was to hear the optimism from various people about the state of housing this year. Everyone acknowledged that the last quarter or two were hard but that 2007 is looking hot.

Interestingly, a couple of headlines this morning have highlighted the generalized and backward nature of news reporting versus the localized and forward looking of people on the ground. For example:

- Toll’s Orders Plunge, Forecasts Larger Land Writedown - largest U.S. luxury home builder, reported a 33 percent plunge in first- quarter orders

- HSBC shares fall after it ups bad loans provisions - “Foreclosures have shown a higher severity” than expected, Chief Executive Michael Geoghegan said on a conference call. “The major impact was taking into account adjustable mortgage resets.”

Please note that housing stocks are down approximately 3.00% this morning on the combined news.

So here we are again juxtaposing the headlines versus the word on the street. What HAS happened versus what IS happening and WILL happen. The global versus the local. Notable blogger and realtor, Kevin Boer in Palo Alto notes that properties are back in multiple offer situations. John Harper of Danville and Andrew Maury of San Francisco are also reporting mutliple offers and a very bright outlook for housing in their areas.
Stay close to your market and look at what is happening on the ground and what is likely to happen and don’t worry about the headlines. My-Currency is committed to help you gather hyper-local information that is forward looking.

Yesterday I did a roundup of the doom & gloom from around the world yet the Philadelphia Housing Index has marched back from its lows in late summer. Take a look at this chart from Yahoo:

I think this says it all. The index has retraced nearly ALL its declines. So what is the market signaling? Is there a relationship between the fortunes of housing builders and housing values?

In time we hope to highlight these relationships between the financial markets and housing but we would love to hear your thoughts.

My First review of headlines around the world this morning brings the following:

• - Canada via the Globe and Mail: “Housing starts off at last” The first line reads “Housing starts are expected to moderate this year and next because a lot of pent-up demand has already been met and carrying costs are rising”
• - USA via Reuters “U.S. housing vacancy suggest further pain - analysts “ First line read: “A glut of vacant homes suggests that the U.S. housing market has not yet stabilized and may be poised for another downturn, Merrill Lynch said in a research note”
• - Europe via Forbes “European housing market set to cool in 2007 after a strong 2006 -RICS”. Interestingly this headline spins positive but six paragraphs in gets justified with the following: “the Bank of America is anticipating price corrections in the UK, Spain and to a lesser extent France. …research by BoA shows these European markets are overstretched and prices are approaching 1991 levels, just prior to the last house price correction, in terms of housing affordability.”
• - Australia via The Australian “Rate rises blames for housing squeeze”. David Uren opens: “The Reserve Bank is being blamed for a dive in housing construction”. The first line read “A glut of vacant homes suggests that the U.S. housing market has not yet stabilized and may be poised for another downturn, Merrill Lynch said in a research note”

These are the just the English language headlines!

So what is going on here? Is housing imploding or is everyone in the media bitter because they are trying to buy a house? Perhaps it is Wall Street, The City (London), and other influential people in the markets and the economy just talking to talk and/or advancing some agenda.

The Truth is housing is a market in a very loose sense. We are all affected by interest rates and the economy but in reality, we don’t buy markets. We buy houses. What is true globally may not be true in your city, your zip code, your neighborhood, or your street. Furthermore, if a lot of people want to buy a house, does it matter what’s happening elsewhere?

In considering your situation, remember to take a hard look at the micro variables and question whether the macro variables are relevant and if so, to what extent they may impact your decision.

My-Currency has embarked upon revealing values and information at micro levels to help you make a better decision, get a better deal and ultimately be confident that your decision was a good one.