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Friday, October 12, 2007

What The Cleavers Teach Us About Real Estate & Rhetoric

The Quasi-Sociological Part
The way we describe issues in our national dialog changes over time. This process can sometimes be a struggle about whether, (or when), to allow uncomfortable realities into the public discussion.

Let's think about the picture of marriage on television. Remember that Ward and June Cleaver had twin beds, and then turn on your television today. It's either quaint or scary. Or consider politics, where Social Security went from the realm of the profane to that of a protected right.

Examples like this abound, and certainly real estate is no exception as the industry, and the media wrestle with how to exactly handle...the bad news.

The Quasi-Historical Part
The housing market stumbled in 2006 as sales of new, (PDF), and existing homes, (PDF), declined notably. Even worse, production fell and supplies continued to rise.

Futures traders would say here that the fundamentals were very bearish, while a grammar school class in the law of supply and demand would conclude that prices needed to fall. It's all the same.

But the rhetoric of housing could not quite say that. Like the depiction of marriage on TV, this issue needed more time to admit what it really was, even when we might have known better.

The Age of Seduction
So, what followed in real estate instead of price reductions through most of Q4 2006 and 2007 was what we might call a phase of seductive and suggestive strategies. They were mostly known as buyer incentives.

One could define this term as advising sellers to do something, do anything, but don't lower the price. It's an incentive, not a price cut.

Like political talking points, the dialog and media reports on how to sell homes became a laundry list of things such as adding high end appliances, landscaping, a $10,000 shopping spree at Pottery Barn, a 2006 Porsche, the ever questionable bonus to the selling agent, and hardly a mention of lowering prices.

Dutifully, sellers for the most part, especially individual homeowners, did not budge. As The Chicago Tribune recently summed up, they appeared to be "in love with the old days, when home prices seemingly rose by the hour". Naturally, the supply-demand imbalance persisted, only more so, since buyers were anything but seduced.

More Quasi-Academia
The Cleavers morphed into Sex and the City, so too housing's national dialog has recently changed. We may look back someday though and call this the period of "the reaction".

When historians describe something as a "reaction", it is understood that the phenomenon includes elements of vigor and strength, an overreaction if you will. The national dialog now speaks openly and aggressively about lowering prices.

The Devil is in the Details For Homeowners
Lets look at some major arbiters of national rhetoric. Business Week, in their October 15 cover story, along with this feature from The New York Times outline radical price cuts, 30% or more, from some of the big national builders.

The Washington Post went so far as to call it "car dealer tactics". Or maybe it's the return of legendary New York retailer Crazy Eddie, slogan; "His prices are insaaaaane".

The subtext here is not that great for individual homeowners. The magnitude of builders' price cuts over many months, and their greater financial muscle to do so have created an anomaly in normal statistical patterns. Yup, on a national basis those new homes just might be more financially attractive to buyers than existing ones.

Where there was once a 20% premium for new home prices, we now see a dead heat with existing homes. Most families who need to sell cannot compete in that kind of a bear market.

So, happy are those who gave or received early advice to price "below the market", whatever that was or is. Could be a wild ride, if traders on The CME are correct. Stay tuned.

UPDATE: Other Blog Posts on Real Estate and Rhetoric
Paper Economy Blasts The Boston Globe. And does it again here.
Inman Reviews NAR Rhetoric

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