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Location: Mars Hill, NC, United States

A small, highly personalized real estate firm specializing in mountain homes and land in greater Asheville.

Sunday, May 25, 2008

Four Essentials From the Eighth Grade for Buyers & Sellers

Think about life. Isn't it true, that almost everything we ever needed to negotiate the world, we learned the basics by the eighth grade? Here are four tools from those halcyon days to help us assess our decisions as either a home buyer or seller.

1) The Law of Supply and Demand
We spent a lot of time with the law of supply and demand in grammar school, and we should hang onto it in adulthood. Even futures traders, a fairly esoteric group by most standards, begin with supply and demand before taking a market position. Nothing magical or advanced about that, it's the basics, and it happens long before they look at such things as a stop limit order or inter delivery spread. Why should housing be any different?

So don't put the cart before the horse. Before we speculate about such things as Fed policy or last month's sales data, we want to know the more basic picture:
How many homes are for sale, how many are being sold, what are the prices, and how much have those those items changed from some meaningful benchmark, like the same quarter of the previous year or years?

At our firm, we also consider it important to know how a local market compares regionally and nationally, if it is ahead or behind the curve, and why that might be so.

Now we have in our hands, the same tools that even the most sophisticated commodities broker would begin with. We can evaluate for ourselves what it means when we hear things like, "The market is good, our firm sold X houses last month", and so much more. Ask for it. Accept no substitute for what is likely the largest transaction of one's life.

2) Arithmetic
Remember My Dear Aunt Sally? For those who learned without mnemonic devices, that's "MDAS", or multiplication, division, addition, and subtraction . It's arithmetic. Here is one simple example from housing.

Prices are falling lately, finally, and it is common to see faxes or emails such as, "Price Reduced by $XXXXX". No one can fault agents for that, indeed they are doing their job. But our thought would be to suggest, "Who cares about the dollar amount, what was the percentage change, and is that enticing given current supply-demand scenarios?".

An email or a flyer announcing a $50,000 decrease might sound pretty exciting, but we want to know more. On an $800,000 home, this boils down to a reduction of only 6.25%. For a $600,000 home, it's 8.33%, and so forth.

For sellers who really need to sell, consider the percentages of supply and demand. Anything else might result in what is called chasing the market. A little arithmetic can serve all of us, even to decide if it makes any sense to buy or sell at all.

3) The News Can Be Slanted
In grammar school, we used the word "slanted" to mean bias in the newspaper or TV. This was part of those those famous who, what, when, where, why and how lessons. Nowadays we call it spin. It can be intentional or inadvertent, it hardly matters.

In real estate for some reason, sales data is usually reported in the headlines by comparison to the previous month. Here is one recent story under the banner, Home Sales Rose in February. The immediate reaction from the informed buyer or seller should be, "Really? Compared to what?".

It takes about 20 seconds looking at this chart, or this article from The Big Picture to see that real estate is notoriously seasonal. Thus a comparison of February to January, or maybe a report that 2ndQ sales rose compared to 1stQ sales are just meaningless pieces of information. The Wall Street Journal took a recent look at this phenomenon. The value of proper comparisons is summarized in this single sentence:
While sales were up slightly from January, they were still 24% below a year earlier.
4) A Stream Can Rise No Higher Than Its Source
Our eighth grade teacher always said this to warn us not to state or to accept things as fact without knowing a source for that information. This can be difficult to catch, especially when we encounter things we are inclined to accept as truisms.

A recent theme in housing goes something like this; 1) Lots of inventory is a wide selection for you, 2) Prices are falling, so that's good for you, 3) And the value of a home will always rise, you can bet on it.

Let's pause for a moment to recognize that statements 2 and 3 cannot exist at the same time, not in this universe at any rate. Let's also recognize that IF statement # 3 were true, then a graph of housing prices would be a constant upward line. That's not what markets do.

Consider this chart from Yale economist Robert Shiller, then consider that the average American owns a home for around 7 years. There can be no argument that values do not simply rise. It is the timing of a home purchase that has every bearing on whether the value increases or not at the time of sale. This is elementary, and making money on a home purchase is more complicated than simple slogans. It's far too easy to be seduced, so be aware. The NY Times offers added textual detail on values over time.

The real estate transaction is the biggest thing most of us will do in our lives, and hopefully a few lessons from the eighth grade can help us along the way.

Thanks for stopping by,
Black Bear Realty Website
828 689 2055
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Filed Under: Tips for Buyers, Tips for Sellers

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