Why you can't take the experts and their statistics to the bank.

Or why you don't buy a home by the pound.

I often say that every article on this site begins as a response to a client's needs.  And sometimes, like a few months ago, I'll finish an email and realize I've written another article. 

Back in January a buyer client, thinking of making an offer on a home in San Jose, emails me that the average sales price within 0.8 miles of said house is $455 to $493 per sq.ft.  That's great information, right?  Not necessarily, because you can see right away that even a blindfolded student driver could drive a Hummer through the 8 percent spread between $455 and $493 per sq.ft.  So is an 1165 sq.ft. home in that neighborhood worth $530,075 or $574,345?  Or, put another way, would you mind paying $44,270 too much for the house?

Thought so.  Let's continue.  The house she likes is in above average condition and if she uses the high end of the range, it's worth (1165 sq.ft. x $493) = $574,345.  Even if she adds a slight premium, she says, the house is worth no more than $585,000.  It's listed at $649,000 but has hung around sixty-two days, so buyers are unanimous that it's over-priced.  The only question—and it's a big one—is "by how much?"  I'd seen the house a few weeks after it came on and had a long talk with the listing agent, who told me that several agents in her office had assured her that at $649,000 the house would sell in days (and they didn't mean sixty-two days). 

(And by the way, a great big "thank you" to every agent who helped her appraise the house.  Listing agents should always take an office appraisal with a grain of salt.  Most of your office-mates won't want to risk offending you by telling you how little they really think your darling listing is worth.) 

My client then mentions an article in the December Fortune magazine which says that home prices are expected to fall 5 to 10 percent nationwide between then and the end of 2010.  San Jose is expected to drop 15.28 percent in 2010, then rise 6.14 percent in 2011.  She quotes the article as saying that "(l)ast year the projections were pretty accurate, forecasting a 14.4% [nationwide] decline in 2009; the actual figure is around 13.2%".

Long-time readers (both of them) will instantly recognize that by quoting one-size-fits-all housing market statistics and self-proclaimed real estate experts in the same breath, my client has innocently pushed two of my buttons.  Of course, it's not her fault:  she's just trying to careful about her homebuying decision, using data that seems accurate and relevant.  It's exactly the kind of thing I'd do if I was her...not knowing that it isn't that simple.  Nothing about homebuying is that simple.  Which is why people look for simple explanations.

I respond to her something like this, although not nearly as acerbically: 

I understand why you’re trying to be analytical about buying a home, but it’s more difficult to interpret the data than most people think. 

For example, the home where you and I met, perhaps a half mile from the house you're considering, sold for $625,000 with six offers, one at $630,000, two at $625,000, and it appraised with no problem.  At 1322 sq.ft. that’s a sales price of $472.77/sq.ft.  Since my listing was above average, and above-average homes usually sell for 5 to 10 percent more, this tells us that $472.77 is probably the high end of the range for homes in that area, right?  No, because my listing was on a busy street, and a busy street means a 5 to 10 percent deduction.  So it’s no surprise, at least to me, that my listing sold for almost exactly the 2009 average sales price/sq.ft. of all Area 15 (Campbell and adjacent San Jose neighborhoods) homes of 1400 sq.ft. or less:  $472.98.

(Enough numbers for you?  Want more?  Okay then!)

Note that I compared only Area 15 homes of 1400 sq.ft. or less.  Why?  Because the larger the house, the less the home will sell for per sq.ft., all else being equal.  Yes, when homebuyers buy a larger house they get a volume discount.

Here's an example.  The average size of all Area 15 houses sold in 2009 was 1677.1 sq.ft.  The average sales price of that 1677.1 sq.ft. home was $674,829.06, or $402.38/sq.ft.  That's a substantial 15 percent less than the average sales price/sq.ft. of homes 1400 sq.ft. or less.  Why make this distinction?  Because someone using the Area 15 average of $402.38 to bid on my listing would have offered $531,946 and, in fact, we did get a verbal offer of $550,000 from someone who was probably using this kind of broad (and misleading) market average.  At $550,000 he certainly didn't risk of overpaying for the house but, on the other hand, he had a snowball's chance of getting it.

(It's probably significant that this buyer lives in Los Angeles:  so much for buying homes over the phone and by the pound.) 

I don’t know what your source is for those sales price/sq.ft numbers (Redfin?), but does it tell you

Probably not, because not one of these vital factors can economically be extracted from the huge amounts of data real estate aggregators buy, minimally process and then resell.  Besides, their customers (people scouring the Internet, "the homebuyer's friend", looking for "inside information" like sales price/sq.ft.) often have little if any idea how nuanced this data can be, so why bother?  Even the aggregators may not know, and I'm pretty sure they don't care.  Their gig isn't real estate valuation.  Their gig is selling real estate data that appears to be information.

Now, I’m not saying that the house you like is worth more than you say it is, but I am suggesting that if your source for sales price/sq.ft. uses a universe of, say, just three homes, and that

I’m not saying that’s the case, just that

And any good researcher knows the quality of his or her data, because even (and especially) the Internet didn't do away with the caveat "garbage in, garbage out".      

Next let's look at the credibility of the economic forecasting you read.  The Fortune article is based on information from Moody.com.  By Googling I found this March 3, 2008 article with the unintentionally ironic headline “Forecast:  no housing recovery until 2009” http://www.boston.com/realestate/news/articles/2008/03/04/forecast_no_housing_recovery_until_2009/.  In it, Moody is quoted as predicting that real estate would turn around in late 2008, exactly when real estate tanked.  Whoops!  Gotta get that crystal ball retuned.  When I read someone's fearless prediction I like to know his or her track record, but Fortune's 2009 article doesn’t mention Moody's 2008 wrong turn in market forecasting, perhaps because Fortune's writer isn't aware of it, or perhaps because if Fortune readers knew Moody is fallible they’d wonder why they should believe every word in the article (and in Fortune). 

But, hey, what's the risk in seeing whether prices go down, especially if they really do go down 15.28 percent?  Isn't that upside worth waiting for?  Answer:  there's risk in every action and inaction.  Moody also says interest rates will go up one point this year.  What does this mean to you?  The loan you're approved for, $417,000 at 5 percent, has monthly payments of $2229.26.  If your interest rate goes up to six percent, your payments go up to $2487.69, an increase of 11.59 percent.  So here's the risk:  if interest rates do go up one point in 2010, and Area 15 home prices go down 11.27 percent in 2010, as they did in 2009, you’ll just break even by waiting for prices to go down—if they go down.  Just curious:  does Moody or Fortune offer readers a money-back guarantee?

Thought so.  By the way, the article doesn't say where Moody gets its projected 15.28 percent decline in San Jose prices.  Is Moody saying that every San Jose home will lose 15.28 percent in 2010?  Or is it saying something far more likely, that low-end home prices will continue to go up, while top-end prices will continue to go down, with midrange homes somewhere in the middle, and that the average of all these price movements will be -15.28 percent?  (Or does it even know that the market here is that nuanced?)  Wouldn't that be good information for a home buyer?  Moody is mum on this, perhaps because they don't know, or perhaps because the Fortune writer didn’t think to ask. 

And speaking of credibility, there’s a Fortune staff writer, Jon Birger, who in 2005 blandly assured readers that there would be no housing crash.  But he writes for Fortune, so everyone assumes that a guy who (little-known fact) majored in history at Brown knows what he's talking about when he talks about real estate.

Thereby illustrating the power of a strong brand.

By the way, when I requested Birger's bio from Time Warner, I never got a response, let alone a bio.  And I was a subscriber.  I had to dig up Birger's credentials all by myself.  Something most readers wouldn't think to do.

And by the way, now that we're well into 2010, how did Moody's December 2009 prediction turn out?  Are prices sliding?  No, Area 15 sales price per square foot is up 3.35 percent this year.  Gotta get that crystal ball retuned.

Of course, I’m just a real estate agent, not a writer for a major financial magazine trying to make sense of statistics just dumped on his desk, but even in January 2010 when my client and I were emailing it seemed to me that a market where

No, friends, a market teetering on the brink of losing 15.28 percent would be dead as a doornail, which is to say, as d-e-d dead as the market was in late 2008, when nothing was selling.  Even d-e-d deader, because even after the worst period for sales in years, Area 15 prices went down just 11.27 percent in 2009 on a sales price/sq.ft. basis.

Well, I've thrown around a lot of numbers and maybe even a little mud, but my point is that we all want the certainty that brand-name experts and their statistics seem to offer.  But if we examine those statistics carefully, we find that all they really offer is irritating nuances and differing and even conflicting explanations, depending on how they're looked at.  And if we look at the experts just as carefully, we find that

Statistics have credibility with us because they can be made to say almost anything anyone wants to say (and hear).  Experts have credibility with us because they don’t remind us of their mistakes, and because every expert quoted in the mass media says something that many people want to hear and believe.

But don't ever make the mistake of taking them to the bank.  Because the bank is one place where money talks and experts walk.

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