Landmark Links September 16th – The Carrot and The Stick

Lead Story… Investopedia defines Behavioral Economics as the study of psychology as it relates to the economic decision making processes of individuals and institutions.  IMO, one of the more fascinating applications of behavioral economics deals with the largest investment that most people make in their lifetimes: buying a home.  It’s all a matter of motivation.  What motivates a person to buy a home versus renting?  Much of the preference is based on mobility (renting) vs stability (buying) depending on where a potential buyer or renter sees their life going in the foreseeable future.  However, there is also a very substantial financial motivation that manifests itself in the form of one of the two primary economic forces: fear and greed.

During the housing bubble of the mid aughts, greed was a primary motivating factor in converting renters to owners.  There was a (foolishly) widely adopted mantra back then that housing never fell in value and that acquiring property was a road to riches even if it meant leveraging up to your teeth.  People were buying homes up and calling them “investments” when they were really just speculating on potential future appreciation.  This type of behavior is also driven by a variation of fear: Fear of Missing Out or FOMO for short which was the chosen mantra of the “buy now or be priced out forever” crowd.  Greed in expectation of asset appreciation and FOMO are classic bubble fuel because they tend to make the current price of an asset irrelevant to a prospective buyer.  Once these forces take over the mind of a buyer, the only thing that matters to is the future projected value appreciation.  In the end, trees don’t grow to the sky and we all know how that turned out.

Today, prices are rising again but buyer motivation is quite different than it was a decade ago.  Online real estate website Redfin recently posted the results of a survey of 1,800 home buyers  taken in August that contained this fascinating statistic:

High Rent Driving Tenants to Become Owners

Nearly half of all first-time homebuyers, 45.4 percent, said they were most influenced to get into the housing market because of high rent. In comparison, a year ago 24.7 percent of first-time buyers said they were house hunting because of high rent.

Most-influenced

Among all buyers surveyed, 22 percent said the cost of rent motivated them to get into the market, up substantially from last year’s 12.8 percent but down from 24.4 percent in May.

Overall, 26.3 percent of all buyers said they were most influenced to purchase because of a recent life event, like the birth of a child or a marriage, an identical number to last August.

A whopping 45.4% of first time home buyers said that they decided to purchase a home because rent was too high.  What’s particularly notable is that number is up over 20 percentage points from a year ago.  The second most common answer was a life event.  These are hardly indicative of a bubble or market peak.  Note that those two factors add up to 48.3% for all buyers and 68.8% for first time buyers.  Unfortunately they didn’t publish the whole data set so we can’t see where “Expected Appreciation” or “Investment Return” was on the list.  However it couldn’t have been more than 31.2% for first time buyers based on the numbers provided.  This is a substantial behavioral shift from the bubble era.  I’ve never bought into the “a house is always a great investment” narrative but I don’t buy the “a house is a terrible investment” one either.  The real “investment” value of a house is the hedge that it provides against the rising cost of shelter, primarily rents.  If a buyer purchases a home in a market where future rents are expected to rise substantially (like coastal California) then he or she would typically be willing to pay more because the ownership hedge is more valuable in a market where rents are largely stable because supply can be easily added as needed (Houston, TX for example).  The Redfin findings are encouraging because they indicate that buyers are behaving rationally.  Despite rising prices, buyers today aren’t primarily motivated by FOMO or projected appreciation but rather by an analysis of whether they will be better off financially renting or owning.

Economy

A House Divided: A lack of consensus on inflation at the Federal Reserve means that the central bank is more likely to stand pat than do anything with rates.

All About the Benjamins: A new study confirms that money can’t buy happiness….but confirms that cash often does.

Finally on the Rise: After years of stagnation, median incomes are improving again, and the biggest gains are coming where they are needed most: among the poorest deciles.

Residential

On Point?  Leading VC fund Andreesen Horowitz announced this week that it’s getting into the housing business. To be more precise, the tech investor is backing a new venture called Point which is set up to purchase portion of a homeowner’s equity in a preferred position and participate in the upside at sale.  I want to take some time to digest this one a bit deeper before writing more but I can see several potential fatal issues at first read.

Great Migration: Seattle’s already-hot housing market could see a large influx of Chinese capital now that Vancouver, Canada has told foreign buyers to get lost by imposing a 15% foreign transaction tax, sending sales tumbling.

That Sinking Feeling: San Francisco’s city Building Department is getting hauled in front of the Board of Supervisors to explain how/why they approved Millennium Tower, SF’s incredible sinking luxury condo building.

Profiles

Tough Grader: Want your product to be labeled “Bear Proof”?  It’s going to have to withstand 60 minutes in an enclosure with some of the most difficult reviewers in the world: grizzly bears.

There’s No Place Like Home: The story of how Amazon out-executed both Apple and Google and positioned itself to dominate the technological infrastructure of your home.

Surf’s Up: Surf parks, or giant pools nowhere near the ocean with perfectly formed man-made waves are about to go mainstream.

Chart of the Day

chart3_census_incomepercentile

WTF

Where’s the Beef?  A restaurant patron in Florida was arrested for trashing a Wendy’s after being dissatisfied with her food.  If she expected decent quality food, I don’t know why she was in a Wendy’s in the first place.  In More Fast Food News: Burger King is about to start offering something called Cheetos Chicken Fries.  The race to the bottom for fast food continues unabated.

Apocalypse Now: What happens when millions of people in a city with poor infrastructure ceremonially sacrifice animals before a torrential monsoon downpour?  You get rivers of blood running through the city, which is exactly what is currently happening in Bangladesh.

Frivolous: An Austrian teen is suing her parents over their posting embarrassing childhood photos of her on Facebook, including potty training pictures.  If I couldn’t post embarrassing pictures of my family on social media, I’d quickly lose my will to live.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 16th – The Carrot and The Stick

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