Looking for truth in all the wrong places.
At an open house a year or so ago, a neighbor informed me that she was sure she could sell her home at exactly the right point in the market cycle. Ever helpful ("a Boy Scout is...") I warned her that no one successfully times the market except by dumb luck and accident. The real estate market—any market I'm aware of—is never that predictable.
And although I didn't say it, knowing this is what separates the smart investor from the average investor. No, knowing this is what separates the investor from the wing-and-a-prayer speculator. It's the difference between investing and gambling.
She mulled over what I'd told her and said, "I can follow the market by reading the reports and studies".
Then I tried to tell her that even the academics—especially the academics—writing scientific-sounding reports don't know where the real estate market is going. For years I've watched them bumble and stumble. Maybe the reason they do so poorly is that real estate differs from the other markets they analyze. Or maybe they just do a poor job analyzing any market.
But I knew I wasn't getting through. Maybe somewhere people still laugh at "pointy-headed professors" but not here, where well-educated people look to the academic for revealed truth, pure verity free of commercial taint. After all, what agenda could an academic possibly have? He doesn't sell homes. Except that everyone has an agenda. And when an academic succeeds in getting his name, and the name of his employing institution, in the newspaper frequently, you have to wonder if selling might be part his job description too.
Recently I came across more proof that you can't take "reports and studies" to the bank. In a September 28, 2005 Mercury News article, "Slowdown in housing market seen", dueling high-profile economists give inquiring homebuyers something less than clear direction on the course of real estate.
"Prices will fall dramatically!" "No, prices may just plateau."
Take that to the bank.
"Housing construction will continue!" "No, housing construction will fall."
It's a bit puzzling that the same economist would say "prices will fall" in one breath and "housing construction will continue" in the next, because falling prices indicate falling demand, and if home builders are having trouble selling what they've built, they aren't going to build much more. And a year after this frequently-quoted futurist's prediction, sure enough, single-family starts are down 30 percent, according to the California Building Industry Association.
But there you have it: "reports and studies", served steaming hot from the halls of academe, smorgasbord style. Just pick the truth you prefer. We all do.
Of course, these mixed signals could just be an honest difference of scientific opinion. Economics is a social science, which makes it a your-guess-is-as-good-as-mine science. It's not like these guys can validate their scientific existence by developing a successful vaccine or a faster chip, or even by accidentally burning down their lab. Their science exists in an airtight vacuum, hermetically sealed from real life.
If a tree doesn't fall in the forest, and someone who can't see the forest for the trees hears it anyway, is that science?
Here's the other economist, shedding more heat than light on the market: "It's like a pyramid scheme. The market looks hot. They all rush in. Prices go up. But this can only last until there are no more people to rush into the market." Pyramid scheme? That's one small step away from saying "all homebuyers are suckers", which strikes me as a fine example of academic arrogance. Hey, maybe we should just make market cycles illegal (wait, comrade, I think they already tried that). Anyone who swallows this line hook, line and sinker will be darn sure he's never the last person into the "pyramid". So he'll sit, and sit, and sit, oblivious to the risk that sitting offers.
And how can an economist, of all people, call homebuyers credulous dolts simply because they're using bargain interest rates to leverage themselves into the American Dream? Okay, maybe "American Dream" sounds corny. Then how about the pride and feeling of accomplishment, the freedom and long-term wealth accumulation that comes from owning a home? And if that sounds corny to an economist, maybe he should descend from his ivory tower and rub shoulders with homebuyers. Nothing clears up misconceptions about people better than actually standing next to them. Nothing explains a market's motivations better than being in the market, not just peering at it through the wrong end of your telescope.
Economists of the world, throw down your algorithms! Lease a Mercedes! Try selling real estate! You'll almost certainly fail miserably, like most new agents, especially the ones who take themselves way too seriously, but at least you'll be more relevant!
And not a moment too soon: "Asking someone to forecast an irrational market is like asking me to predict what a crazy person is going to say next. These things have a life of their own." Translation: "It isn't my fault I'm wrong so often. It's the market's fault." Be sure to use this line the next time your boss tells you you're screwing up. Here's a better translation: "Hey, don't ask me, 'cause I don't get it. Real estate isn't the financial markets I was trained on. Something else (see American Dream, above) is out there besides the props I usually work with, greed and fear, and I'm clueless."
Truth-seekers, I'll pass on a tip from Hermann Hesse's Siddhartha: truth comes from experience, not from teachers. Throwing rocks at real life from the sidelines—those "reports and studies"—will not enlighten.
Want truth? Do what the sideliners won't. Get in the ferry. Cross the river. That's the only way you'll know.