The Economy of One

I had fully intended to write the second piece about the Case Schiller price index changes last week, but there has been so much information and opinion to absorb that I wanted to take the time to read other people's opinions, particularly on the excellent Housing News Live site.

There has been a fair degree of triumphalism, particularly from the realtor community, that all the problems are behind us and we can now see evidence that things are going to return to normal. Take a look at this historical chart of house prices and it gives some perspective to the outlandish effect that the securitization growth of the early part of this decade had upon prices,even more so when you note that there was really no income growth during this period. Note this chart is adjusted for inflation, which makes it even more stunning.

There is undoubtedly sales growth, as people who have been holding off buying have been jumping in to the market and taking advantage of the low interest rates for insured mortgages and the tax incentives (which are due to end in November). As the proportion of total sales made up by short sales and foreclosures drops this automatically means that average prices go up. But this is not house prices rising! Go back to grade school math and it is easy to realize this.

What we are seeing is a pattern that is likely to play out for years to come. A reasonable number of sales in the part of the market that the Federal government can stimulate through incentives, loan modifications and the new major player in the market Ginnie Mae. This will lead to some degree of price stabilization nationally, but in the areas with the biggest problems, both in residential and soon commercial real estate (due to effect upon the local banks) it can still get worse, much worse.

But where is the growth going to come from?

One argument is inflation, left unchecked by a Federal Reserve looking to inflate its way out of deficit. This could lead to rising asset prices and interest rates kept low to stimulate growth. The people who believe this are trying to get you to load up on gold, buy a shot gun and move to a cabin in Montana! The way to convince yourself of this is to believe that the money supply is 100% under the control of the government and that they are printing money to bail out the economy. Lots of people are getting rich off of this theory. The only problem is that it completely ignores the way that the private sector effects and creates money supply through loans and securitization. When Morgan Stanley leverages its positions in the market by 25 to 1 using derivatives, aren't they also creating a monetary effect? With the cataclysmic shrinking of the market for securitized debt products (not because the banks don't want to make them, but because the buyers don't want to buy them) the growth in effective money supply (even if you believe Milton Friedman) just isn't there. I honestly believe Ben Bernanke is up at night worrying more about deflation than inflation.

The market is not going to rush back. It can't even if we all want it to. The wall of money just isn't there any more. Look at this chart again and you see the future of housing prices, they are basically just going to go back to trend unless someone (private or public) does something to distort their value again. For all the Fox News prophecies of doom every night, the Federal government alone cant do this and the banks have to pay attention to their balance sheets if they can't ship the loan off to someone else.

What does this mean for your home or project? Well it means different things if you own a house in a suburb where everything looks the same, or if you live in a unique property in a great urban or unique community. If you live in the mainstream, your market is dominated by those we have come to call Traditionals. Price is their deity and it will be a long time before they are ready, willing or able to chase prices up. The bruises are still there and will be for years to come. So, while liquidity will return in terms of the number of transactions, prices will be stuck in a pretty narrow range for some time. If you want to sell, you have to be the best deal or it will sit on the market.

If you live or have developed a property in a community that attracts NEOs, who value uniqueness and individuality then there is hope. Research shows us that these people are less orientated around price than other factors, such as design, individualization and sustainability. Price matters but it isn't everything. For a NEO what they own is a representation of who they are; never more so than the home they live in.

Our latest data indicates that 82% of people who plan to buy a home over the next 12 months can be classified as NEO or their lower earning Evolver brethren. If you are in the real estate business, if this data doesn't make you pay attention you are as smart as the foundations of your houses.

Of course, none of this matters though if you continue to promote your product in the manner that only appeals to the Traditionals - by focusing upon features, slick marketing messages and claims of luxury and lifestyle - this just makes it like everything else and so ultimately, all about price. It is only when you understand that there are 59 million markets of one out there AND you learn to talk their language that you can start to move beyond the ugly economics of many and into the far more optimistic economy of one.

NEOblogger