Home buyers and sellers: "empowered" or "ignorant"?
Long-suffering readers know that I'm skeptical about how much the Internet empowers real estate consumers. Of course, the 'net does an very good job of empowering consumers in their minor purchasing decisions...or maybe it just does fairly well...or maybe you should read all those empowering user reviews with more than a little skepticism. Because I wouldn't be the new owner of a very cool BlackBerry Storm if I'd believed all the online pundits who assured me it was "buggy...extremely disappointing...a sorry piece of junk...sure no iPhone." Boy, did they make me feel empowered!
Until I realized that the "users" giving the Storm just one or two stars were people who'd only heard about it, many of them iPhone fanboys, while the people giving the Storm four or five stars were those who'd actually used one. Which explained why so many of the negative user reviews were posted before the Storm was released. And thanks for sharing!
So the online debate about the Storm turns out to be a lot like the online debate on the pros and (mostly) cons of agents and homeownership.
I won't write a user review for the Storm, but I will give a full five stars to Economics Explained, by economists Robert Heilbroner and Lester Thurow—and I've actually "used" it! Long-time readers will remember that I swore off economics-for-dummies books after one economics popularizer turned out to be more interested in playing to the peanut gallery than demystifying the dismal science. And then there was that unfortunate incident involving Freakonomics, the Ringling Brothers/Barnum & Bailey clown-nose-and-baggy-pants version of economics, whose top priority also appeared to be keeping the peanut gallery happy.
So what is this "playing to the peanut gallery", and how does it detract from whatever integrity a message might have?
To illustrate I'll give you an example I saw on a TV show that I and many children, housewives and other shut-ins watched in the 1960s, Art Linkletter's House Party. Back in the day Art, who's still around and older than God and the gray eminence of daytime TV, had an afternoon show that served up interesting real-life characters to his real-life but mostly uninteresting audience—I know this because if we'd been interesting we'd have had something better to do. One day he trots out this old duffer, an amateur Mr. Science, who quickly embarrasses himself and Art by proving to be a droning eccentric in front of a TV camera. Mr. Science is dying and the studio audience, most of whom wear cat's-eye glasses and pillbox hats, is lapsing into sullen apathy. Art, trooper that he is, knows he has to do something—anything—to get his audience back. So he starts mugging, rolling his eyes and smirking behind Mr. Science's back every time the old boy opens his mouth and moths fly out.
Now Mr. Science is getting that vital audience reaction, but it's not the audience reaction Mr. Science expected. This throws him for a moment. You can almost hear the gears clanking and grinding in his head: why is his (no)-fun-for-all-ages science presentation suddenly getting hoots and belly laughs?
Then Mr. Science gets it... It's sobering and revelatory, even as a kid, when your favorite kindly TV personality panders to the basest in his audience. It's even more so, even as a supposedly worldly adult, when men of science do it.
Economists Heilbroner and Thurow don't play to the peanut gallery. In fact, they take a remarkably unbiased and level-headed approach to demystifying economics, which I guess means that I mostly agree with them. For example, they admit that economics doesn't have all the answers alert the media! In fact, they admit that economics in its copious bounty always offers us not one, but five or six, vaguely unsatisfactory answers to any one question, a clue that it might be more ideological throw-it-against-the-wall than rock-solid science.
But Heilbroner-Thurow and I part company on this point: "the prevalence of ignorance" in the marketplace.
In their chapter "Where Markets Fail", the boys assert that "the whole market system is built on the assumption that individuals are rational...that marketers [consumers] will have at least roughly accurate information about the market". "Without correct or adequate information", they continue, "marketers obviously cannot make correct decisions. But typically marketers do not have adequate information. Consumers guide themselves by hearsay, by casual information picked up by random sampling, or by their susceptibility to advertising." As an example, they cite toothpaste: "who has time to investigate which brand...is really best or even tastes best?"
Sharp-eyed readers will spot this economics maxim as the basis for Case-Shiller's use of "interval weights", in their widely-quoted home price index, to correct the "mispricing" errors allegedly committed by home buyers and sellers. Although only the handful of people who've read their methodology are aware of this, the Case-Shiller statistical model assumes "that the two sale prices that make up a sales pair [two consecutive sales of the same house, used to calculate price changes over time] are imprecise, because of mispricing decisions made by homebuyers and sellers at the time of the transaction". "Mispricing decisions?!" Yes, dear boy, "mispricing variance occurs because buyers and sellers have imperfect information about the value of a property...The difficulty in assigning value to each of [hundreds of house] attributes, especially when buyers and sellers may not have complete information about each factor, means that there is significant variation in sales prices, even for homes that appear to be very similar".
(I wonder if Case and Shiller realize that you could say the same thing about each of the three leading home price indices, including their own, especially when the public, 99.99 percent of whom have never read their methodologies, has "imperfect information" about the "hundreds of attributes" that make each index "imprecise"?)
In other words, economists, in their wisdom, have decided that all of us consumers are ignorant. Even when we make the biggest purchase of our life, our homes. Because, economists say, we're befuddled by the hundreds of unspecified and supposedly unknowable attributes each house has. Even though buyers know 99 percent of what they need to know when they a) decide they like the house, b) decide they can afford the house and, c) decide the inspection reports and seller disclosures make them reasonably comfortable about buying the house.
In other words, "don't blame us economists if we can't make sense of the marketplace, because it's screwy, and it's screwy because all you consumers are ignorant". (Or, alternately, "don't blame us economists if we can't make sense of the marketplace, because the things that really drive markets can't be plugged into our statistical models, so we'll just say it's your fault, and you'll never know this unless you read the fine print.") And this consumer ignorance is so profound that it makes home sales data worthless without dexterous monkeying by Case and Shiller. Said monkeying having never been disclosed in any reporting I've read that quoted their index as if it was handed down from Mount Sinai.
You know, I'm willing to admit that most of us, maybe almost all of us, buy our toothpaste for less than entirely rational reasons, although I just buy whatever my dentist tells me to buy. But I think maybe most of us put a little more thought into buying a home than buying a tube of toothpaste. And if you've ever worked with buyers—or been a buyer yourself—you'd think so too.
What makes this consumers-are-ignorant theory so ironic now—Heilbroner and Thurow were writing in the early 1980s—is that the economist who today recites it as received truth may also be the same economist testifying before the FTC that the abundance of real estate information found on the Internet makes the real estate agent either irrelevant or far less necessary than before the 'net and therefore far less deserving of the commission he or she charges. Yes, the Internet empowers real estate's consumers to the point that they know as much, or almost as much, about the marketplace as those dinosaur agents.
So which is it? Do consumers put as little mental effort into buying a home as they do into buying a tube of Pepsodent? Or are they self-taught masters of the real estate universe? Or both? Or neither?
The answer, as so often in economics, depends on your ideology, which depends partly on your agenda and mostly on how you'd like the world to be. I can tell you what the real estate economists and those who think their favorite economists are infallible say. They say "both". Yes, buyers and sellers are just plain suckers, pushed around by whims and agents and market forces they don't begin to understand. But buyers and sellers are also empowered, making critical decisions successfully, based on information gleaned from the Internet.
I guess that clears that up.
I'll tell you what I think, after eleven years of working with buyers and sellers and would-be buyers and sellers and the occasional tire-kicker and people just freaked out by the challenge of buying or selling a home.
I think the answer to Case-Shiller's chronically "mispricing" buyers and sellers is that homes aren't commodities like tubes of toothpaste, particularly in older neighborhoods but also even in new developments where that most important of real estate attributes, location location location, can vary significantly from house to house.
I also think that someone should tell Case and Shiller that prices for homes that not only appear similar in the county assessor's records they're limited to, but are similar, will vary significantly by season, within the same year or multi-year market cycle. And that each buyer values each home a little or, sometimes, a lot differently, as anyone who's received multiple offers on a home can attest.
And, finally, that "correcting" the sales data of homes they've never seen, for buyers whose motivation and level of understanding they'll never know, in markets hundreds or thousands of miles from their ivory tower, is just one more marble monument to economist hubris.
As for the prevalence-of-ignorance idea as it's generally applied to real estate, I think that buying or selling a home, especially for the first time, is so monumental an undertaking, even when market conditions supposedly aid either the buyer or seller, that its monumentality powers those who successfully undertake it, a genuine empowerment (as opposed to a virtual empowerment) that economists and other skeptics are ignorant of because apparently so few of them know the effect from personal experience. I believe this because, unlike the people who short-change home buyers and sellers, I've seen that empowerment up close and personal. I also think that real estate consumers can learn something from the Internet, much as I did when researching the BlackBerry Storm, but that they'll need to power-shovel through so much nonsense and posturing, without necessarily recognizing it for nonsense and posturing, to find so few grains of truth that it's probably not worth it.
And finally, I think that no one has ever had a variety of professionals assist them, every step of the way, in buying a tube of toothpaste.