Quick Links
Follow us on:
 |
 |
 |
 |
 |
 |
Commentaries
 |
John Tuccillo is one of the foremost real estate economists in the United States. His presentations on the economic outlook, real estate markets and change in the real estate business are invariably witty, informative and accessible to both lay and professional audiences. His experience and counsel are sought out by major real estate firms and technology firms interested in entering the real estate space. Visit http://www.johntuccillo.com. |
| Understanding the Real Estate Market? Priceless |
| Written by John Truccillo |
|
For an individual homeowner, prices mean a lot, because they will decide the sum of his wealth when he sells his home. But for the market as a whole, prices are a distracting and misleading indicator. There are two basic reasons for this. First, the state of the market depends on units—sales and listings—since they describe the current relationship of supply and demand in any local market and for the nation as a whole. Price is a result of this relationship, not the cause. Measures like the NAR’s Existing Home Sales, its Pending Sales Index, and the Department of Commerce’s New Home Sales series explain far more about real estate than any price does. Second, we have no good way to measure housing prices at the national level. NAR’s Median Sales Price number just tells you the mix of homes being sold in the market, not the value of real estate. If the index is consistently going in a particular direction, one can generally infer that prices of individual homes are rising or falling, but not by how much. The government’s index, once produced by the Office of Federal Housing Enterprise Oversight (which had a function when we still had Fannie Mae and Freddie Mac) measures price appreciation but only for certain property types and price classes. It only gives a partial picture. The current hot index, created by Karl Case and Robert Schiller and now owned by Standard and Poor, covers all property types and the entire price spectrum but only for twenty out of the 384 SMSAs In the United States. And while these are the largest metros, it’s still a partial picture. In short, no one knows what’s going on with house values.So, given that we can’t tell the value of houses, why are we—I should say the media—so obsessed with them? I think there’s an answer for that. Most journalists (using the term broadly) who write about the real estate market come from the business desk. Prior to covering real estate, they covered the financial markets, where price is the most important metric. And if they didn’t come from the business desk, they were sports reporters where the score was all that mattered. They come to cover real estate and they carry with them their sensitivity to price as the major measure of the market. If you are involved in real estate, you need to understand how the pressure to use prices to measure the market misleads the consumer. Right now, a significant number of sales are distressed properties that have been heavily discounted in price. These compete with all other properties and keep price measurements low. Yet, every distressed property removed from the inventory is a step toward recovery. If you focus on price—as the media does—you miss the real point: rising sales are moving the market toward stability. This is the real message of the market, one that consumers need to know and understand. |
