Friday, October 23, 2009

What Gets Measured, Gets Managed

This post looks at the nature of information availability and how we select what action to act upon.  One of the questions I've had for years is why do all home buyers rely so much upon appraisals?  At first glance, this seems like a silly question.  But think about it - virtually every real estate site offers some sort of free appraisal.  Think of the now famous Zestimates at

All this really tells people is that a home, with certain characteristics, is worth some amount of money relative to other nearby homes.  A fancy name for this is a hedonic pricing model.  It's actually pretty easy to do - once you get the information.  You get an equation where you plug in lot size, and square footage and number of bedrooms and the model spits out the value based on recently sold comps.  Elegant, easy...


All this really tells you is what the price is relative to other nearby homes.  However, the number that really matters to both buyers and sellers, particularly in a rapidly changing market is - what will the house be in 2 year, in 5 years.  This is the question that must be answered first.  Otherwise, a buyer could get a great deal at current prices but still end up underwater in 6 months.

To us, it seems obvious that the solution is an individual home price forecast.  This should be a part of the buying process - before the realtor, before the loan officer, before the decision of how much to spend.  The first question should become - should we buy at all, and if so when?  Too often, over the last 7 years, there was an assumption that it's always the right time to buy.  It turns out that it's often a very bad time to buy.  We believe that house forecasts solve part of this problem.

Wednesday, October 14, 2009

2009 First Time Home Buyer Tax Credit - Bad For New Buyers?

The government is offering an $8000 tax credit aimed at stimulating the housing market.  At first glance, this seems like the sort of policy that would be good for everyone:

  1. for the economy as a whole due to the stimulus effect
  2. for new buyers (who get the credit)
  3. for existing home owners (if the policy props up values)
Obama's plan seems like a win-win, right?  Well, as in everything in economics, the answer isn't nearly so straightforward.

Let's look at the negative impacts of this plan.  It turns out that there are many.

Firstly, in areas where prices are dropping by more than $8000 per year - places like California, getting a $8000 tax credit on a wasting asset that loses $20,000, $40,000, even $100,000 in the first year of ownership is not such a good deal.  We did a case study to show the value of getting an individual house price forecast recently for a home in our area.  The payback period for getting the forecast turned out to be 30 minutes!  The same type of type of analysis could be used to compute the payback period of making the right decision on taking advantage of the 2009 first time buyer tax credit or letting the opportunity pass.  

Using the home from our case study as an example, the payback period for making the right decision on whether to use the tax credit or not comes out to under one week.  In many parts of California, where prices are dropping by over $10,000 per month, the value of the $8000 tax credit is consumed in less than a month.

Secondly, let's look at what the 2009 tax credit will do to 2010 prices.  For anybody who has been in a sales organization, you know that incentives and other tricks can be used to create false spikes in demand.  That is, it's easy to put incentives in place that pull sales forward from future periods into the current periods.  While this works great for the current period, it leaves the pipeline for sales in the next period dry.  This is exactly what the 2009 first time home buyer tax credit does.  

The credit cannot create any truely "new" buyers.  It doesn't create any new families with stable incomes and savings for a down payment.  What it does do is move some families that would buy in 2010 into 2009.  The end result is a spike in demand in 2009 and a further decline in demand in 2010.  This demand will further push down prices and put buyers who took advantage of the 2009 first time home buyer credit in a horrible position of having just purchased a home at an artificially inflated value.

As we can see, this stimulus measure may not do what it is designed to do.

We highly recommend getting an unbiased forecast of a home's future value before buying.  We founded this company on the idea that most of the "analysis" and "reports" out there are really marketing materials created by folks who get paid when you buy.