A lost cohort? No!

Tags

Creativity, Education, News

The new vocabulary used to describe the shape of the recession is either depressing or confusing, especially to the cohort of university students who are about to graduate.  Job offers have been taken back while many people with jobs have been laid off. The next cohort looks at this and must wonder: what will life be like next year?

I was part of a recent conference call with Tom McGee (CEO of the International Council of Shopping Centers, ICSC).  He had lots of sobering news but the point of the call, about disruption, was basically hopeful: where to put time and money to encourage and develop the next generation of leaders.

“Modelling”

Tags

Common Sense, Real Estate, Research, Statistics

To model something means to represent it.  People create models of poorly understood or hotly debated things because doing so clarify hard-to-understand issues, such as weather patterns (including climate change) and real estate price dynamics. That fact (and Covid-19) explains why models appear in the news so often now.  Models use mathematics and arithmetic since data on the current reality may not be available for another year or two.  This post discusses the issues at stake and how to use the output of a model.

Negotiating with tenants during a crisis

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Creativity, Negotiation, News, Property Management, Real Estate, Residential

Next week, many tenants will go to their landlord and say “I lost my job and I don’t have the money”.   Some large US retailers are preemptively saying that they will not pay.  Being a property manager excites many people because, at its core, the job is about helping people and solving problems.  The problem in this situation is a negotiation.

Derek Lobo and SVN Rock Advisors offered an 33 minute webinar with lots of practical advice on what to do on April 1 (and beyond).  For example, should you drop rent to a tenant having trouble?  (Answer: No because there are lots of more subtle solutions.)

How to resolve the problem of blind bidding

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News, Real Estate, Research

Some people are concerned that the process of buying houses is rigged against buyers. They feel that buyers pay too much and, especially to a buyer who is outbid, they feel cheated. According to thousands of messages on Reddit, somebody should do something; that phrase usually reveals that a problem is poorly understood.

So, what is blind bidding? Can anything be done about it? I will argue that any solution depends on the rules of the game.

The first step toward understanding is to recognize what blind bidding is and what it is it not. Buying and selling homes will never be like buying and selling a tube of toothpaste. The idea that there is a well-defined price for the house at 123 Main Street overlooks so many aspects of the process of buying or selling a house.

Homes and Songs

Tags

Canada, Real Estate, Residential

For your entertainment, the Canadian Real Estate Association compiled a playlist of songs about homes.

https://www.creacafe.ca/the-ultimate-playlist-for-realtors/

Probability, COVID-19 and not Real Estate

Tags

Common Sense, Education, News, Number sense, Real Estate, Research, Statistics, Systemic Risk

I teach Real Estate Market Analysis.  For many people, the hardest part of this course is acting on the idea that we live in a probabilistic world.  It is hard to find examples which illustrate that shift in perspective.  Recent events offer two very good examples.

1/ On Testing: The Ontario government notes that 4470 people have been tested for the novel coronavirus and only 74 have shown evidence of the disease (with another 580 pending) (as of today): about 2 percent of people test positive.

Lesson 1: Almost all of the people who display enough symptoms to be tested do not have the disease.  In other words, there is lots of uncertainty.  Don’t panic.

2/ On the stock market: Lots of people have lost a lot of money during the past two weeks.  Even yesterday, when the Toronto Stock Market index fell by the largest point loss in 80 years, it was possible to win.

Numbers add some perspective.  Using data from the 200 trading days between May 14, 2019 and Feb. 28, 2020 (when prices were relatively calm), the average change per day was 0.00 percent.  The daily (sample) standard deviation was 0.54 percent: i.e. if the daily change is between -0.54 percent and +0.54 percent then, regardless of the exciting media story, nothing special happened.  Even a 1 percent change fails the test of being 95 percent confident that it is abnormal (i.e. 1/0.54= 1.85 which is less than the critical level of 1.96 needed to be 95 percent confident that the observed outcome is not due to random variation).

The TSX Index fell by 12.3 percent on Thursday.  If you believe that randomness is described by the Normal distribution and in statistical independence over time, which is the basis of most familiar statistical analyses, then Thursday’s drop was equal to 22.8 standard deviations.  The best probability table that I use gives up at 4 standard deviations.  Excel claims that the probability of observing something even more extreme is about 10 to the power -113 percent (i.e. a 1 in 10000… chance with 115 zeros).

There are about 1600 stocks listed on the Toronto Stock Exchange and, on Thursday, at least 20 stocks worth more than $1 went up.

Lesson 2: A trend is nice but the trend does not apply to everybody.  There are opportunities.

Lesson 3: Have a sense of perspective: prices go up and prices go down.  That is true of stock prices and of house prices.  Recognizing abnormal requires having a sense of normal.  The language of probability and statistics was developed for that purpose.  Use it.

PA

A challenger to buying and selling real estate

Tags

Negotiation, Price Bubble, Real Estate, Residential, Statistics, Systemic Risk, Technology

Several recent reports (e.g. [1] [2]) discuss “ibuying”: the ability to sell a house immediately.  Zillow and Opendoor (in the US but not yet in Canada) are mentioned most often as being willing to set a price and to do a deal: no need to clean the house for visitors or wait (nervously) to see what the market would bring (or how long it would take).

30 years ago, I wrote a paper in which my co-author and I tried to explain why the process of buying and selling a used houses differs from that of a used cars.  So, this topic is near and dear to my heart.  At the moment, I am teaching a course in Sales and Negotiation where I offer tips and advice on negotiating the price of a house or the salary for a first job.  Given the limited time, I can only hint at the possibility that, 10 years from now, face to face negotiating may replaced by an app.

The goals of a seller are obvious: sell at a high price and sell quickly.  Anybody can satisfy those goals if they think that they can find a buyer willing to pay a suitable price.  A lot depends on managing risk (price and time) and that is where large companies have an advantage.  As the Economist magazine says, success “depends on whether their algorithms get the price right.”

In our paper, we compared how used cars are sold and how used houses are sold.  We offered eight reasons as being plausible, of which two are worth mentioning here: the cost of risk and the costs of holding the inventory.  Successful ibuyers need an algorithm which can, with great precision, predict the selling price and the costs to the ibuyer of selling the property.  Standardized properties would be most attractive.  Agents in large cities concentrating in this segment would be most threatened by the growth of ibuyers.  Smaller properties are also likely to be more attractive to ibuyers since, with suitable geographic diversity, a lower price per house means that the portfolio risk is more manageable.

Real estate markets suffer from a number of problems which frustrate simple economic models, including illiquidity (e.g. leading to a bid-ask spread), trends and price bubbles, being large and lumpy.  Each of these issues involve ideas which confuse statistical algorithms.  The limitations of a pricing algorithm would be tested in a city with a price bubble since bubbles are unstable: i.e. unpredictable in ways that statistical or machine learning models find hard to account for.

Finally, I think that this new way of doing business will also challenge appraisers who estimate a market value of a property.  Even if the ibuyers algorithms and automated valuation models are similar, appraisers do not need to put their money where their mouth is (other than professional reputation).  They do not need to acknowledge the risks in any estimate: I have never heard an appraiser say “This property is worth $556,677 plus or minus $23,456 19 times out of 20”.

(If you think that you are pretty good at predicting then you might consider the techniques used in Kaggle’s recent competition.  They are much more sophisticated than the methods used for popular price indices.)

PA

 

 

 

Developing Critical Thinking

Tags

Common Sense, Education, Real Estate, Real Estate Jobs

Employers say that they want it.  Supposedly, AI will convert the kinds of jobs which do not use it into roadkill.  There is a debate about whether millennials have got it.  Universities try to teach it in class and through experiences [1] [2].

Being able to think critically affects the real estate industry.  Lots of surprisingly young people are responsible for buildings worth a lot of money.  The owners want to hire people who responsible (i.e. follow instructions) even if critical thinking reveals when it is better to challenge “common sense” and to not follow the standard operating procedure.  Recent history has also led to a bit of laziness, since people could ride the surf of upward price trends.

Can critical thinking be taught?  It is best to start with: what is critical thinking?

Different meanings of Value

Tags

Education, Real Estate, Sustainability

Guest speakers visit my classes each year and introduce ideas too new to be included in any textbook.  Since my goal is to prepare the next generation of leaders, listening carefully to what the different guests say uncovers some variations on a theme: they remind me of the many different ways that people talk about “value”.

Remembrance Day and Real Estate

Tags

Education, Real Estate, Remembrance Day

On Remembrance Day, we are supposed to remember the sacrifices of veterans.  This act of remembrance may be more important at Canadian universities since, unlike US universities, seeing a student in uniform is rare.  A bit of remembering would indicate some deep connections to the real estate industry.  I am reminded of a speech given by Rex Murphy to the Toronto Real Estate Forum about 10 years ago, that received a standing ovation.

It is easy to talk about how the veterans of World War II, and that fewer and fewer remain.  It is easy to talk about how they returned home to create the society we live in today which, while good, is also a work in progress.

A more forward looking perspective would think of veterans who served as peacekeepers in many places around the world.  They served in places where, at any time, the rule of law may be replaced by the rule of whoever is in power currently.

Peacekeepers have served in places where the meaning of RoI that would be familiar in Canada needs to be paired with a second meaning.  Our students are taught how to calculate the return on an investment and very few need to worry about the return of an investment.  Physical and contractual instability does not encourage people to make the kind of long term productive investments commonly seen in Canadian real estate.

So, it is worth spending a minute or two of silence to consider our veterans and the lives they have lived.  Lest we forget.

PA