Market Analysis for the Week of November 26, 2007

By Erica Elliott
There’s Mad Money, SmartMoney, CNN/Money, and YoungMoney, all filled with tips on how to best spend your cash. Before getting anymore “investment advice” from sources with the word “Money” in the title, I’d ask you to consider the source of the information. Who are these “gurus” and “experts” advising us on how we should invest our money? If there’s one thing I learned in economics, there’s no free lunch. Hot stock tips? Certainly, for you and the 50 million other people watching MSNBC. And we’ve all heard what they’ve said about the real estate market.

Rather than forecasting long-term macroeconomic trends, these myopic pundits isolate sectors of the economy and analyze the short-term behavior of the market. Instead of discussing the overall strength of the current economy, commentators isolate the housing market and lament a decrease in activity from one month to another. You can’t point to a year’s worth of statistics and start hyperventilating into a paper bag. Economics doesn’t work that way.

In addition to ignoring principle economic concepts, these “experts” tend to ignore sociopolitical conditions of markets as well. Economies do not operate independently from the societies in which they exist, therefore, you can make all the supply and demand graphs you want, and you will not effectively model the projected behavior of the market. There are intervening variables, which is what makes understanding macroeconomic concepts so important for your success as a realtor .

These self-proclaimed experts will direct people to invest their money in any number of random stocks, bonds, or schemes, citing vague reasons such as “Tech stocks are so hot right now.” In reality, viewers or readers must remain skeptics to such advice. If these gurus really had hot information, it would be called insider trading - and people go to jail for that, Martha. Without inside information, it’s speculation. I won’t deny that well-qualified speculation is sometimes profitable, however, it’s speculation nonetheless. These “experts” are only successful because they spend their days reading newspapers and the financial reports from companies. You could be an investment expert if you spent your days reading all of this information, too.

There is something in which you are a specialist, however, and that’s real estate. Don’t let these talking heads weaken consumer confidence in your market! They don’t really know anything! They don’t have specialized knowledge about your area like you do! When was the last time the anchors on CNN did a CMA for a property in your market? When was the last time a reporter from The Wall Street Journal held an open house in your neighborhood? Yet they are qualified to give their opinions about real estate? Think about this.

Let’s take a look at an example of what one of these “experts” might say about real estate:

(Please note the sarcasm with which the letter below was constructed. This was designed by the author for illustrative purposes exclusively. In addition, the author in no way advocates licking Bratz® dolls.)

Dear InvestmentGuru,
I am a young professional who is tired of paying rent, but I keep hearing how bad the conditions are in the real estate market. I’m hesitant to buy, because I’m afraid I’ll lose all of my money if things go south. Do you have any advice?
Sally Smith

Sally,
Real estate is so 2006. You wouldn’t drink milk after its expiration date, would you? Then why would you think about buying a house?! Boy, it’s a good thing you wrote to me, because I can tell you exactly what you should do with that nice little nest egg you’ve collected. Keep on keepin’ on with your rent payments, because if you follow the investment plan completely outlined in the sequel to my first book, you could be a millionaire by 2080.
Emerging markets, that’s where the action’s at, Sally. Brazil, Russia, India, and China. Nothing is sexier than investing in Brazil right now. Sure, the government infrastructure is shaky, but they’re hosting the World Cup in 2014, and everybody loves soccer. They’ll get it together. It’s not like the government of Brazil would wait until the year before a major event to build an airport terminal and underground subway system! :::cough, cough::: China, 2008 Olympics :::cough, cough::: And speaking of China, disclosure-poor companies combined with state-controlled media make this such a wise investment choice. I don’t really know what’s going on, but I believe China when they say everything is comin’ up roses. False financial disclosure has never been a problem with a company before! (Enron?) And the quality of Chinese exports these days! Who really minds antifreeze in their toothpaste? I think it adds flavor! Surely the U.S. government would never enact protectionist trade regulations, thereby limiting the goods we could import from China and striking a blow to their economy! I just licked a BratzÒ doll and I can hardly taste the lead! What about India’s volatile equity market or Moscow’s penchant for interfering in businesses? I love all retro trends, like bellbottoms, shag carpet, and the KGB!
Seriously though, look how successful investors were with investments in Japan in the late ‘80s? People were making tons of money! The economy sustained solid and stable growth right up until the time it crashed in 1990. Now, let’s not forget, Sally, these are long term investments, through thick and thin. Think it would be hard to sell a house in this market? Ha, trying selling off some of these foreign investments! The lack of liquidity makes it so much more fun!
In summary, Sally, don’t be a fool. Investing in real estate may seem like a sensible move, but being a millionaire is not for sensible people. Think big! Who wants to own your own home when you could rent forever with all your money tied up in foreign countries while you pray that China decides to stop being a Communist state?! Go for the gold, Sally. Owning your own home is for losers, and losers never win.
Best of luck,
The InvestmentGuru

All kidding aside, use your head. The first $500,000 of capital gains from the sale of a primary residence is tax-free. You’d have to make a lot of money in investments to make the taxes on them worth more than investing in owning your own home. Studies show that regardless of market conditions, owning your own home for at least ten years will result in a growth in equity. Translation: You’ll make money. 99.8% guaranteed.

Most importantly, don’t forget: you are the expert in your market, not some talking head on TV. You know your market; you know the neighborhoods in your area. Go out and share your expertise with all of your potential clients!

Huntsville and Madison Housing Statistics

As I mentioned in this week’s editorial, one cannot make adequate conjectures about any economic statistic by looking at a month’s worth of numbers. In order to get an accurate picture of where the housing market is, we must figure out where we’ve been.

Using statistics compiled from the North Alabama Multiple Listing Service, I was able to analyze the history of the Huntsville and Madison housing market. What I found might surprise you, as it’s nothing but good news: average sales price of homes is up, average days on market is down, and we’ve shown consistent growth for over ten years.

Statistics from Entire MLS for Huntsville and Madison
Using Year-to-Date data for each year, 01/01 through 11/26

*1992 is as far back as the North Alabama Multiple Listing Service
has kept online records.

Did You Know?

1 out of 16 American households is buying a house this year and FHA-insured mortgages are on the rise. Home prices will appreciate over the next year. (NAR, 2007)

Currently, mortgage rates are generally lower. The average mortgage rate was approaching 6 percent in mid-November, down from 6.5 to 6.8 percent that we saw this summer.

And while sales have been declining nationwide (but not in Huntsville!), the pent-up demand from steady job gains continues to climb. Since the home sales peak in August 2005, 5.4 million jobs have been added to the economy. (NAR, 2007)

According to the National Retail Federation, more than 147 million consumers hit the stores after Thanksgiving, up 4.8 percent increase from last year. (National Retail Federation, 2007)

Black Friday saw $531 million in online retail spending, up 22 percent from last year. Thanksgiving day online spending increased 29 percent to $272 million. (The Business Journal, 2007)

More than $9.3 billion has been spent online during the season-to-date (as of Sunday, Nov. 25), marking a 17-percent gain from last year. (CNN, 2007)

On Cyber Monday (the Monday immediately following Black Friday), online retailers experienced a three-year record for most traffic in a single day – drawing 4.6 million visitors per minute – up 80 percent compared to a normal Monday. (CNN, 2007)

The economy was remained strong in the third quarter of this year – and last two quarters posted near 4 percent GDP growth. Exports were dominant with a 16 percent increase. (NAR, 2007)

The prolonged dollar decline has actually helped U.S.-made products be competitive overseas. The usual negatives accompanying a weak currency – higher inflation and higher interest rates – have not appeared. (NAR, 2007)

If the market is so bad, answer this question: What is the date of the highest S&P 500 close, since the inception of the index? October 9, 2007.

MSNBC reports – “Something to be thankful for: Affordable housing markets. A comparison of similar houses across the country shows that although there are huge variations in home prices, affordable areas can be found in just about every state.”

NAR Reports – “Median Home Prices Rise in Most Metros; Majority Show Modest Gains. The vast majority of metropolitan areas showed rising or stable home prices in the third quarter with most experiencing modest gains compared with a year earlier, despite a broad decline in existing-home sales, according to the latest quarterly survey by the National Association of REALTORS®.”

Despite all this good news, the media is reporting that the University of Michigan Survey of Consumers shows that Consumer Sentiment has fallen to a two-year low as of November 2007. What does this mean? How do we interpret this news and how do we combat this?

What is this survey? It is a near-real-time assessment of consumer attitudes on the business climate, personal finance and shopping. It is calculated out of 100, and is considered to be the most significant of all of the consumer attitude surveys.

The University of Michigan Press Release says: “The Index of Consumer Sentiment was 76.1 in the November 2007 survey, down from 80.9 in October and significantly* below the 92.1 recorded in November of 2006.”
*Author’s note: watch words such as “significantly”, “unexpectedly”, or “surprisingly”. These are words intended to influence your perception of what is being reported!

What does Forbes Magazine say about this index? “In analyzing any consumer sentiment index, it is most important to determine the trend of the index over several months. Simply put, the trend graphed out over four or five months is critical. Keeping this in mind, one needs to remain astute and block out news bits such as "the index is at 80 so things look gloomy" or "the level of consumer sentiment is up slightly from last month". The trend over several months - not a comparison of this month to the same month last year- is the undeniable benchmark. Commentary that focuses only on the single monthly figures, without looking at the developing trend, is misleading...keep in mind a murky outlook will depress consumer confidence.”

Let me repeat that last part: “A murky outlook will depress consumer confidence.” Murky? The media reports and press releases like the one presented above are downright bleak. What can we do? Talk to everyone you know about the market! You can help turn the perception of consumer sentiment around! Tell your sphere of influence, as well as to your dry cleaner, the barista at StarbucksÒ, your dog groomer, and your son’s first-grade teacher. It’s good for your business, and it’s good for the economy.

Do your part to spread the good news!