The Problems are the Path: Statistics and Probability

One of the most enjoyable classes I had in college were in the Statistics and probability classes.  I must admit my greatest source of successes from these classes in my formative days was Black Jack.  A colleague of mine named Tony, who looked like Tony Soprano and was from New Jersey, and I were so successful at in that in the mid 70's we were told not to come back to Las Vegas.  So it became a rather humorous endeavor when I listened to Economists talk about the various forecasts they had on the economy and where the future was going.

Another  benefit  was in viewing the FED and their attempts to use interest rates to solve and economic situations.  The Federal Reserve of St, Louis published an economic report which detailed the past actions of the FED with interest rates.  I can say, that my interpretation was the FED was alway Behind the Ball.  They either failed to cease their interest rates cuts until inflation started and ceased to act fast enough to stop inflation without aggressive interest rate rises that eventually affect the economy and employment.  They always had the rhetoric that it was being done to stop inflation and its affect on the economy.  Of course, I saw the economy as my neighbors, my parents, my relatives and those I knew who needed to work to earn a living and support a family.  I could never see how some overly educated members of a Federal Reserve, appointed by politicians, who were wealthy and in no need of earning money to support their families.   If they were laid off or unemployed.  They either went back to Wall Street, or an endowment their family established or the academia to write books.  

When the failure of their actions resulted they went back on an Economic term that bailed them out.  We simply know it as "the past is no guarantee of the future".

Through all my years on this planet I too looked at the various formula's and computer devices to forecast the economic future and profit from the forecasts.  "Too Soon Alt and Too Late Smart" is a Milwaukee German emigrant saying.  

The brain we have been given with is far more able to quickly adapt than any computer, silicon chip or formula.  

As we started 2020 the forecasts were for a advance in home prices, then as interest rates rose no growth.  By the time we were into the 4th quarter a negative performance after athe first 6 months had a double digit return.  We ended up with double digit decline.  Some areas in the peninsula had 11% decline in the last two months; while others had no decline for the entire year.  As I look at the Fidelity reports on various towns and cities in the Peninsula I see 25% declines, year on year.

So where does that put us for 2023?  One thing to remember is that stocks, bonds and real estate are not in the same bucket.  Again, going back to college and "Money and Investing", Real Estate is called that because it is your "real estate".  It is the estate you leave in your will.  Stocks and bonds are store of value assets.  Real estate is purchased not for a store of value.  It is shelter, a home, a source of income; something we can see and feel.  We don't need to sell it because interest rates went up because our mortgage is fixed, if we have one.  The rise in interest rates is matched with a rise in income from the  income producing real estate owned.  We use it to grow flowers, vegetables, food products. maybe even entertain ourselves, family and friends.  Shares of companies and bonds pay dividends, interest and are there when we need money for emergencies or planned expenses as retirement, household emergencies and our children's education.  Inflation is great for real estate as it creates increased value from inflation and the income rises due to inflation.  So why is it so BAD?

So where are home values going?  First, I do not see the supply and demand changing since last letter.  I watch the MLS statistics on "new listings". "contingent", "pending" and "sold" on a daily basis.  We started out a week ago at 37 new listings went to 51 and dropped back to 46 as of Sunday  February 26th.  

Homes that were taken off the market in November and December have not come back on the market.  Once we get past St Patrick's Day we may know where we will be heading.  Right now home prices will not be a run away.  More homes will be over priced as owners refuse to admit or realize and or real estate agents are more interested in getting a listing; than being honest with there clients on the real market value of the owner's property.  Home prices are less now than they were last year.  What is useful is that with each decline, no matter how minuscule, the level of prices bring in another level of buyers.  Irrespective of what interest rates are.  Buyers will see the lower price of a home as a good entry point to buy their life time shelter.  Unlike stocks lower prices do not breed lower prices, they breed new buyers!

For those of you who think that I will wait until a bottom occurs you live in a fantasy land of denial.  Homes are unique, they fit individual likes and dislikes. Neighborhoods are also likes and dislikes.  Some neighborhoods are listed very seldom have a limited supply.  The neighborhoods are so enjoyed by owners that the sales are only from divorce, death and relocation.  All three are rare in occurrence.

Yes, there are those who would like to move to another "neighborhood".  They are cautious as the extra money needed to move up are in cash accounts with substantially higher returns than anything in the past 15 years.  Then they need to rationalize to themselves the capital gain taxes, the higher mortgage rate and higher property taxes.  To make that move there must be a very advantageous situation.  The additional consideration is amount needed to make the exterior and interior to the buyer's liking.

Now the interior and exterior liking is the next step in a healthy housing market.  Most buyers DO NOT WANT to remodel, paint and landscape.  This is the opportunistic investor/contractor known as the Fix and Flipper.  As long as the Fix and Flipper are active in the real estate market there is a "Seller's Market".  So far, that has not changed since interest rates have risen. It does not appear it will end soon.

To summarize, do not believe in the statistics and probability of real estate professionals.  Use your intuition, if you like it buy it.  If you want to sell, do not let taxes influence you.  I have too may times found in my life time in investing when a client did not want to sell due to taxes and lost as a result.

I recall a client I had as a stock broker who bought Warrants in Atlantic Richfield at the time of the Alaska Oil discovery.  About a $100,000 in warrants which were the right to buy shares at a set price by a set date.  Any time between now and then they were tradable on the New York Stock Exchange.  Within months his return was over 50%.  I advised to sell as the warrants had only a few month to last.  He refused due to sort term capital gain's taxes.  The warrants expired worthless!  

As stated in my last letter, if you have questions, need help buying or selling property.  Do not hesitate to call, email or text me.

Thank you

Gary McKae