In the movie the Matrix, Keano Reeves’ character is seeking the truth. When he encounters a prodigy apparently bending a spoon with his mind, he is told, “Don’t try to bend the spoon: That’s impossible. Instead, only try to realize the truth: There is no spoon.” Could this be the advice real estate agents need to explain to their customers?
If there is no spoon, then there is no housing market. At least, not in the way we talk about it in popular media and conversation. We hear people ask, “How’s the market?” and the only rational answer is, “Which market?” Yet this simple necessity has been consistently overlooked by too many people with too much access to a worried public. In a classic mistake of media-meets-mania, we’ve packed a complex economic analysis into soundbite-sized charts and indices.
All of which are wrong.
Most REALTORS are trained in the following truism: “All real estate is local.” Either that’s a trite cliche, or it’s a useful shorthand for the proper way to measure the fragmented, loose patchwork of local housing markets that matter to individual consumers. Assuming the REALTORS are right, then the media, and its popular eggheads, are wrong.
If the real estate industry is right, then “nothing” dropped 27% in July.
Like the spoon, there is no national housing market. Not, economically speaking. Not in the same measurable sense that we think of other sectors of the economy. Simply adding up different local market trends doesn’t create a homogenous sector on a national level. Yet that’s what most of the measurements we use to report market movements actually do.
But it doesn’t work because the products (houses) are infinitely variable in shape, size, location, feature and price. The production methods (pricing, marketing, selling) used by different companies in different states varies as much. There’s no “McDonalds School” of real estate anything – building, pricing, selling, servicing or profiting. Every local real estate market combines a a motley crew of consistency, accuracy and efficiency in buyers, sellers and REALTORS. It’s like trying to aggregate the the performance of local “yard sales” into a “national” industry.
And meaningless. Even consistently measurable factors such as unit availability, consumer demographics, income levels, taxation zones, school performance and unemployment rates are so different every ten miles or so that discussing it on a national scale is senseless. (In fact, the process of selling property varies so significantly by agent within the same company, it could be argued that housing markets are so small, they should be measured on a per-agent basis. For our purposes here, we need not go that far.)
We can say that any national claims that the “housing market” is rising or falling or anything is intellectually impossible.
What, then, do all those charts and graphs we see in the media measure? Analytically speaking: nothing. The adding-up of local sales units or prices, then comparing it to the month or quarter before, doesn’t constitute a national trend. That’s why the same media outlets report housing falling somewhere at the top of their page, while noting prices soaring elsewhere at the bottom of the page.
The simple fact is that unlike other product or service markets, housing isn’t produced or traded nationally. Most buyers move about 12 miles from their previous home. A tiny fraction relocates nationally. Competition isn’t national either. Boston sellers do not compete with Miami sellers when setting the price or terms of their home. Nor do Charlotte buyers consider what Los Angeles buyers are offering today.
Worse, the use of housing as an economic “indicator” is tenous, at best. Try to find an economics textbook that includes housing as a measurement tool. Money supply, inflation rates, unemployment levels, taxation rates, even “price indices” of homogenous commodities are useful. Gasoline, milk, the Big Mac index.
But a “housing index” is as absurd as a “wristwatch index.”
This analytical mistake also leads to economic policy mistakes. It’s chicken-and-egg thinking to claim that the mathematical aggregate (increasing or decreasing) of local housing consumption drives the national economy in the same direction. Housing doesn’t drive economic activity; economic activity drives housing purchases. A recovery won’t happen if people stary buying more homes; the economy needs to recover before people can start buying more homes.
Talking about the housing market as if it were a single, homogenous industrial sector – and reporting its aggregate increases and decreases – is not only inaccurate. It’s dangerous, especially in a recession of today’s duration and depth. Misapplying aggregate market performance as an guide to local behavior can cause an already worried consumer to lose confidence, question spending and delay consumption – in otherwise healthy local markets. REALTORS need to take their own advice, and help consumers find the truth: There is no spoon.