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.


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