FOMO vs Common Sense
With an update below. And Zillow hits the skids!. The news cycle blares apocalyptic news every day about the state of the current housing market. FOMO shouts buy now! Let’s check FOMO vs common sense choices. Like every story these days, news programs cycle repetitively through any event like its Armageddon. They throw more and more fear into the anecdotes they tell so the rest of us start to believe just how bad it is and it’s the end of the world for ____________ . Fill in the blank with the current news topic of your choice. Today’s topic roiling the public is the “housing shortage.” And it’s really clickbait to see if the news outlet can top other news outlets “for just how bad it is” scaremongering of the public.
A Twitter thread from the CEO of Redfin illustrates both FOMO vs Common Sense. It also just quotes some statistics. But we need to break down the components as to FOMO, Common Sense, and plain statistics. To do so, we’ll categorize parts of the thread. The link noted provides the full thread to read if you so choose. The statements are those of Glenn Kelman, the CEO and not this site unless noted.
FOMO
- It has been hard to convey, through anecdotes or data, how bizarre the U.S. housing market has become. For example, a Bethesda, Maryland homebuyer included in her written offer a pledge to name her first-born child after the seller. She lost.
- There are now more Realtors than listings.
- In Redfin’s annual survey of nearly 2,000 homebuyers, 63% reported having bid on a home they hadn’t seen in person.
Common Sense
- In 2020, new-construction permits were *down* 13% in DC and New York, 40% in LA, 48% in Chicago, 50% in Seattle, 79% in San Francisco. Permits were *up* 25% in Miami, 56% in Vegas, 96% in Greenville, 122% in Detroit, 246% in Knoxville.
- In an April survey of 600 Redfin users who had relocated in the past year, about two thirds of the people who moved got a house the same size or bigger, but about the same proportion, two thirds, spent the same or *less* on housing.
- Even though most of the people who moved got a bigger home, 78% reported having the same or more disposable income after their move. Idaho home prices could triple and still seem affordable to a Californian.
- [Referencing moves from high tax to low tax states noted below] This migration to lower-cost areas may lead to lower workforce participation. For many families relocated by Redfin, the money saved on housing costs lets one parent stop working. A wave of Redfin customers are retiring early.
Statistics
- Inventory is down 37% year over year to a record low.
- The typical home sells in 17 days, a record low.
- Home prices are up a record amount, 24% year over year, to a record high.
- And still homes sell on average for 1.7% higher than the asking price, another record.
- But in two of America’s largest cities, inventory has increased, in New York by 28%, in San Francisco by 77%. San Francisco hasn’t had an inventory increase this large since 2008. And still in both markets, prices are increasing.
- For low-tax states, 4 people move in for every 1 who leaves. For Texas, this ratio is 5:1; Florida has a ratio of 7:1. Cites & states have no leverage to raise taxes, after many promised new money for social justice; the federal government will have to fund long-term investments.
- The average housing budget for out-of-towners moving to Nashville was $720K, ~50% higher than locals’ $485K budget. It used to be coastal elites who worried that every adult in the family had to win a career lottery, just to afford a home… 90% of people earning $100,000+ per year expect to be able to work virtually, compared to 10% of those earning $40,000 or less per year. The folks who need low-cost housing the most have the least flexibility to move.
Competing Against a Computer Programmed for FOMO
Why did buyers have to overpay? Computer algorithms showcase one reason. For example, Antonio Pellegrini listed a home for sale in May, 2021. The two-bedroom home in Fountain Hills, Arizona, 30 miles north of Phoenix, priced at $342,000. After 25 days on the market, there were no takers for the 1,400-square-foot home. The broker recommended the owner consider lowering the listing price.
Then Zillow happened. Zillow had created an automated home buying arm and set up computer algorithms to make offers for homes based on its knowledge of market prices. It also tracks what homes potential buyers search for and where they search. The company’s Zillow Offers instant homebuying – or iBuying – division offered $406,000 for the house. With a price 16% above listing price, the sellers wasted no time selling to Zillow.
Today, Zillow has listed the house on North Saguaro Boulevard for $364,000. This reflects a loss of $42,000 not counting closing and carrying costs. Realizing losses of 15% or more on billions of dollars of homes is likely to affect Zillow’s bottom line. The broker notes there was no bidding war and apparently no human review. Also, no due diligence or investigation of pricing appeared to take place.
Zillow has recognized its folly. It recently stopped any more offers dead in their tracks. For now. Zillow Offers makes up about 60% of Zillow’s operating expense and revenue. An it holds billions of unsold, unmarketed properties on its books. In early November, Zillow announced it made a major error and now needs to sell 7000 houses it overpaid for and needs to sell. It also will close its home buying operation and layoff 25% of its total workforce.
It’s a good victory for buyers and against FOMO when this type of buyer craters.
The Upshot
FOMO creates a panic that someone is getting something but not me. I want my share. This leads to irrational actions, causes and effects.
For Common Sense, individuals react reasonably to the market. Move to get a larger house, pay less to own the new house, and keep one’s current income in a lower cost location makes perfect sense. If that move also brings the ability to live on one income instead of two, it can change family dynamics and personal health. Continue two incomes in that situation and a dramatic positive change in financial health results. Builders will react to the change in migration patterns and build accordingly. In the current case, that building has been tempered by rising materials costs.
In our next post, we’ll look at what those wacky politicians have in store to “help” with the current housing imbalance. In November, CoreLogic forecast a quick decline in home price appreciation over the next 12 months. Look at the comparison to the period around 2008!
Housing Effects, Rates and Home Sales
Clearly FOMO boosts home sales as buyers panic that an opportunity may pass them by. take a look at the chart below for the 10 year Treasury bond. This bond serves as the benchmark for 30 year mortgage rates. Why a 10 year bond for a 20 year mortgage? Pick up a copy of Winning Mortgage, Winning Home to see how these inter-relate and how that affects your interest rate options for borrowing.
This charts reflects the most recent 6 months. Note the peak in interest rates for the 10 year bond in the May 2021 period. This corresponds to the big FOMO buying panic in the spring with maximum over-payment by buyers. Buying panic settled down by late summer and early fall, although buying continued to be elevated and pushing prices up every month. Then is late September, major increases in rent rates corresponded with increases in interest rates and inflation panic. FOMO buying of homes kicked in again.
Renters faced with severe jumps in rents migrated towards purchasing. Be careful of jumping into trend following and paying too much for a house. Inflation from the current government spending spree and proposed additional spending by the current administration will continue to escalate for home heating, electricity, food, and other costs. At present, inflation already passed 5% (highest in 40 years) and may be heading to more than 10% in the next 12 months. It may not reach that level, but don’t be caught by surprise with a budget that can’t afford that inflation.
