Inman Connect San Francisco 2016
August 4, 2016, Emeryville, USA
Inman Connect San Francisco 2016
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New Strategies for Thinking about Real Estate Market Economics
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An economist professor of real estate and visiting scholar at the San Francisco Federal Reserve Professor Christopher Palmer uses maps, metrics to uncover unexpected housing market trends and probe the story behind Community change. Please give a big welcome to Christopher Palmer. Markets hate uncertainty not a bad segway from our last talk. You hear this if you see the financial news, you hear this all the time. It's an explanation for what happens and why the market went up down or sideways. The market went up after bad

news one explanation is markets hate uncertainty and their happiest uncertainty result is resolved or what are the Talking Heads say when the market went down and there's no other explanation and an arms-length well  the same markets hate uncertainty when I was studying for my PhD I discovered that nearly thousands and thousands of articles have been written by Economist about Choice under uncertainty and you know this I'm here to tell you that on an intuitive level, you as real estate professionals understand uncertainty and what it does and what its effects are on an intuitive level better

than most and you're also equipped to deal with it and thrive in those situations. You don't have to look far for the sources of uncertainty today for the major sources. So here we have Brexit. Here's another major source of uncertainty. Trump these kind of political uncertainty macroeconomic uncertainties security uncertainty social unrest have a major effect in our Marketplace. There's some major macroeconomic things that were always reading about and where I was trying to figure out. How is this going to affect me? How's it going to affect my bottom line? What's going to happen

with the debt-ceiling we have that crisis every now and then what's going to happen with oil prices will my currency lose value overnight. So those of us that are that live in working Gateway markets know that there are a lot of foreigners who would much rather have their money invested in American Real Estate and until recently London real estate, then they would in their own checking accounts and their own saving accounts and their own currency. There's another one that's very near and dear to the hearts of real estate professionals interest rates. What's going to happen with

interest rates when they're high. Are they going to stay higher? They going to decreases should we wait and see so what exactly is the problem with uncertainty problems? Maybe you've dated someone like this. Maybe you have been this person that asked him. Problems with the wait-and-see approach think for the psyche of a first-time home buyer. Will there facing a buy vs. Rent decision. They're also facing what we call a first-time household formation decision, which is about the least sexy way. You could possibly put that particular decision. I've said a lot of bad lines in my

life, but I don't think I've ever said hey baby you want to do some household formation with me and become first time home buyer with me that decision that they're facing they can wait and see if they can let it ride and let it wait and see how things pan out. Someone is thinking about trading up in there. Probably not in a horrible situation right now when there is an increase in uncertainty and they're not exactly sure what's on the horizon. They might just wait out that decision a little bit. How about a second time a second home buyer thinking about do I want to have that vacation home.

Do I want to have that extra option on my vacation, or maybe not this year. Maybe I want to wait and see how that pans out. So of all the drivers that we talked it. In macroeconomic uncertainty brexit, for example, if you want a case study in real estate and uncertainty Google brexit Real Estate and learn how everything in the UK property Market hit the fan right after the vote. Add to that each family's macro micro economic uncertainty. We talked about macroeconomic uncertainty. What's the micro economic uncertainty? Well, am I going to get this promotion? Are we going to have kids are we going

to have more kids is my aging parent going to have to come and live with us. What is my future income going to look like my wife and I are thinking right now are our three little kids and us are we going to outgrow this house or we have an opportunity to trade up in the future or what kind of mortgage do we want to get right now if we do a refinance because how long are we going to be in our particular house right now? So you later on to all of that this microeconomics answers a lot of us are here as real estate professionals lot of us are also here is business owners and you face this

uncertainty all the time you faced the uncertainty of trying to disrupt an industry or desperately trying to make sure that you are not disrupted. So as you think about the uncertainty what are the rules that the game is going to be played by in the future, you know, this you live this. Let me do a little bit of a Dive in one source of uncertainty and we'll talk about how it plays out in real estate and how you could deal with this. So this map is from some research that I've done in the other people have done looking at what areas of the country have been most impacted by globalization. No

make no mistake about it. I am a fan of free-trade. I'm a fan of globalization the total benefits clearly outweigh the total cost of free trade and globalization. However, those costs are concentrated. They are the burden is not shared. Where's we all benefit from sale or prices from free trade? We don't necessarily bear the brunt what happens when you do globalization. So that's what this map shows the dark areas the red areas on this map are where play people work in industries that were most affected by import competition from China. So they're making the things that are now only by China

and things are going upside down in these areas. What what's happening? What is this have to do with real estate layoffs are happening rate is rising a little bit wages are falling in. My research shows that not only are they falling on average in these red areas. These hardest-hit areas. They're falling even more for low-paying jobs low-skill jobs in these areas. They're the hardest hit happening in these places. So they're more likely to vote out the incumbent get this guy out of here things aren't going well. And what does this have to do with real estate? They're also more likely to miss

a mortgage payment in these areas. So what does that mean? You can imagine that if you're in one of these hardest-hit areas the buyers and the sellers in here are going to be in a wait-and-see approach things are going down. I'm not sure how long it's going to last. Is it going to stabilize? Is it going to rebound? I'm not sure what to do. And so I'm going to wait and see. Let me show you another map. This is a map of somebody's Facebook friends somebody that lives in Los Angeles and you can see here. They have a bunch of friends in and around La but they also have a big exposure in the

Northeast in the Philadelphia area Okay, so just think you're that for a second. Just one random person. Here's another random person from Los Angeles has a high exposure to Utah for my little sister just moved and so think about the sources of uncertainty that their perceptions of uncertainties going to be colored differently based on their exposure to Utah or the other exposure to Philadelphia. And here's one more for you here the Minneapolis exposure against somebody from La thinking about the LA Market, but their perceptions are also going to be colored by what by Minneapolis

they're not going to be colored by Philadelphia. They know practically nobody there, but they are going to be colored by Minneapolis and not Utah and not San Francisco and not Seattle and not Oklahoma. So what is this mean for real estate will in a study that by the way you could have seen covered on Inman news some researchers showed that you A friend that work matters for your home buying activity. If you have most of your friends in a hot housing market, you are 5% more likely to buy a home in the next couple years. So your information is sourced from your network. Not only your social

network. That's just a nice proxy for where you get your information from and what areas of the country you're exposed to. So, what does that mean for each of us means that the perceptions of real estate riskiness that we confront and that we Face are driven in part by objective facts about the local market in firsthand observation and in part by our friends and our family and our people that may live across the country or across the world. So important takeaway here is as we deal with uncertainty as we deal with the effects of globalization, for example, we need to have a good sense of

where our data comes from. We need to check our sources and so you might live in a hard hat area. You might also not live in a hard-hit area, but your decision or your client's decision is being driven in part by what they know about Oklahoma or Messi or mean or Utah? Can commitment problems be overcome maybe some of you are a recovering commitment problem person. I hear something that it was a little thing seemingly that made a big difference. I'm going to talk to you about the first time home buyer tax credit, which I expect many of you have very fond

memories of certainly Senator isakson. It was a big proponent of the bill had very fond memories of the 1975 tax credit when he was a realtor. That was a great idea and he was very quick to bring it back. Okay. So this was an $8,000 credit. The average house in America is $200,000. This is a 4% discount. I don't know about you but I don't really jump at signs on a pair of jeans that say 4% off and yet look at this graph Association of Realtors existing-home sales, you know about the Boombox pattern that you see in the beginning of the graph no surprise there and then you see these

somewhat violent gyrations, which might have been happy gyrations for you. Where are they happening there happening right around the expiration the plan expiration of these tax credits to attack crossword. To expire in there was a flurry of activity for 4% off. Why would that be why would such a little thing make a difference will one thing we know about sellers of real estate especially residential real estate is at their loss of verse people know exactly what they paid for their home and I'll be darned if they sell it for a dollar less than they paid for it, right? So there's this aversion

to selling for a loss. I have to sleep with that. They feel like they made a bad decision and they don't want to do it. They want to squeeze out to at least gets out what they paid for. It. Never mind that it's been 10 years that it's been depreciated that they've enjoyed all of it. During this time. Around these expiration date. We see the fraction of people that are selling for a lost Skyrocket. It happens right when the first time home buyer tax credit is most effective. So this is basically convince sellers to get off the fence and make a deal and why were they willing to make a deal been

because they knew that buyers were expecting them to make a deal and fires were coming in and saying this is a great time to get off the fence. So the first time home buyer tax credit brought together consenting adults for a relatively small price. So what do we learn from? This little things to matter now, you might have some version of the tax credits in your area different states and cities have this but also little things like credits and like concessions are can make a big difference. Now the realtors that I've interacted with certainly know this they're always greasing the wheels and

finding a way to smooth things over and say will you know what? I'll just replace that door for you that you don't like in let's just make a deal. Okay, so little things can make a big difference one more little thing for me to mention is interest rates might be a big thing might be a little thing but in uncertain times I can people off the fence Let me tell you another little thing that you can mention is Silver Linings. This is about Pitch. This is about framing. So here's a silver lining of those one of those being in one of those hard hit areas. So if you look at what happened to

house prices in an area that was effective that was especially affected by trade with China. They were much more stable. They so this is it. This is the Zillow house price index. The blue line is areas that were not impacted by globalization and the red line is areas that were impacted so you could say wow, they just really didn't get the appreciation from the boom and they kind of missed out and that might have been a sad story in 2005 2006, but then by 2009 actually looks like a pretty stable safe bet to be in one of these places. So there's a silver lining that you're probably adapt it doing

because you have paid attention to how the National Association of Realtors does this. Okay house prices are going up. Great investment opportunity get in now house prices are going up. You're going to see some appreciation house prices are going down affordability is increasing. What a great time to buy a house when you can take advantage of affordability, right? So these kind of spins are very useful in thinking about what what's the Silver Lining can help me get over the hump of some inertia. One more thing that can be useful to do is to stress test ourselves. Okay. So the Dodd-Frank Act

make bank stress test themselves under the watchful eye of the fed. And this is something that I teach and research about a lot is banking. Okay. So what do they have to do during this? What does it mean to stress test yourself for the bank basically takes its own tires. The bank's its back and and takes all of their balance sheet and all of their accounts and they say what would happen to us house prices fell what would happen to us? If unemployment rate went from upper forced to say low 7s what would happen to our book of business? What would happen to our loan portfolio? What would

happen to our deposit? What kind of financial state are we likely to be in? Could we handle this kind of an adverse situation? We can do that in our own lives very very useful for us to Think Through. What is the situations that we might face in the future? Think about those contingencies think about those scenarios think about my family balance sheet or my family or my business is balance sheet how close to the edge am I what how risky is my income stream? What if house prices fell would be fine? Maybe I would be fine if I lost my job. What would be my exit strategy How likely am I to lose

my job how close to solvency would I be in the following situations would my business suffer if there was a national recession with my business suffer if there was a tech bubble that burst as you think through these scenarios a couple things might happen, you will get clarity you'll get confidence and it's a reality check. You might not make some decisions cuz you realize you wouldn't really be possession positions to weather the storm if you made that decisions or you might realize hey, I got this I can handle this situation is actually not so scary to me. Haunted scary, but

when I actually worked through what would happen to my cash flow or what would happen to my business or what would happen to my ability to make my mortgage payments not so bad. So just like bank stress themselves. We can stress or stress test ourselves and we can encourage our clients to stress test themselves as well. This reality check gives us fortitude. So let me sum up you are biased I am biased we're all biased some of that comes from just the fact that we might have a particular color that we bring our particular lens that we bring to a situation

based on our network based on the people that we interact with. So icky thing that we can do is to provide objective information validate the gut feelings wherever they come from of the people that were working with provide with it some objective information that might be better or worse than their perceptions they have and there's value that's created when we can bring that information to the table little things can help overcome inertia a 4% discount seem to have made a big difference during the first time home buyer tax credit interest rates, which incidentally or something

is a lever that the FED poles they decrease interest rates when times are uncertain because they're trying to motivate people to get off of the fence and the play ball. So little things like whining out that interest rates are a great opportunity that said we're all kind of burned out in hearing that interest rates are historic lows little things can Come inertia, and there's lots of ways that you already Grease the wheels find the silver linings to turmoil. So that could be that house prices in hardest-hit areas are very stable. There wasn't a lot to be indifferent about and so that

means there wasn't a lot to crash. Stress-testing will give us confidence and Clarity it will give us a reality check and it will help us figure out exactly what kind of a situation wherein and finally all of this wrap this up. What does that mean opportunistic people with fortitude can thrive in uncertain times. I encourage you to seize those moments. Thank you.

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