Saturday Cup of Joe: a lending and techish newsletter
Friends & Colleagues:
This week we look at:
· Facebook’s new venture into residential real estate (Have You Heard?)
· Whether owning a home is still a good investment (Got Me Thinking)
· The success and failure of two real estate apps (A Look Ahead)
· Added a quick hitter to weigh in on (see below)
Of Interest: Solid overview in Thursday’s Washington Post of the housing market, including an interview with friend of SatCOJ — Dr. Rick Roque.
Quoted in SatCOJ last week and in WashPo this week, I guess we know who the industry trendsetter is. The article bounces around between economists, executives and sales people who see the industry at all levels — the 30,000 foot view and the month-to-month numbers. Seems like home affordability is the bigger concern and inventory, though a top mention of several experts, is secondary. Low or stagnant wages as well as student debt have stalled many first-time homebuyers. What’s forming is an unfortunate gap between what’s available and what’s affordable (or perceived to be affordable).
The Takeaway: This article highlights the complexity and how much of the housing market is “soft data” or buyer/seller expectations. Consumer expectations in this area could not be harder to read right now. One expert compared it to an onion but the truth is there is a lot of conflicting messages. Some areas of the country are taking off, others are struggling. Some millennials are saving their money and risk-adverse, others are borrowing money on smartphones and applying for mortgages without talking to a human being. Some millennials are starting companies or rewriting the definition of gainfully employed, some have boomeranged back into their parents’ basements. My takeaway from this article was hold tight and see what happens.
Have you heard?: Facebook is moving into real estate development / property management. In a deal with Menlo Park, CA allowing Facebook to expand its corporate headquarters, the company agreed to build 1500 units of available housing and not restrict access. Meaning, the housing will be available to the general public as well as Facebook employees. Under the plan, 15% of the units would be reserved for low- or middle-income families, and the company is offering numerous other benefits for the city, including millions of dollars to study and improve transportation. It will be fascinating to watch this unique partnership and see if large companies like Google follow suit. Further complicating this discussion is the infrastructure of the previously small towns in and around Silicon Valley. Perhaps that is part of the investment in “studies” that Facebook intends to provide Menlo Park.
Got Me Thinking: Do we know that the calculation making homeownership valuable are still true? Real estate is both a cyclical and local market, but we all agree it is a true market. For many years, it was an unquestioned truth that homeownership was the best investment and strongest financial move anyone could make. Is that still true? At the risk of annoying those who know me best by bringing up Moneyball again, it was also true for years that home runs (HR) and runs batted in (RBI) were the measure of a valuable baseball player. Additional data and a creative perspective has altered that math.
This week, Bankrate.com published a survey that identified as real estate as the preferred long term investment for respondents who did not need to access their investment for 10 years or more. We would all agree that simply based on inflation it is likely that type of investment wouldn’t lose value. But are we sure it would actually build value? It might hold your money steadily, much like a savings account, but will it build wealth? I’m not sure we know anymore. Certainly in some markets — Boston, San Francisco, DC — it seems true that the local economies will maintain at least 10 years of property values. I don’t have the data, but I assume DC has grown or maintained property values through even the recessions of the tech bubble and housing bubble (for the most part). Those markets aside, the key question is between 2017–2027 what is the most efficient use of available funds for an individual or married earner?
A Look Ahead: Predictive data. A tale of two apps. First, a real estate app looking to make a splash in lending but (in my opinion) falling short. Second, Google Maps essentially providing a free service for 25% of what a buyer’s agent used to do for prospective home buyers. And killing it.
According to National Mortgage News, the SmartZip program, SmartTargeting, runs through about 2,000 variables in a local real estate market to make a prediction of who is most likely to sell their home in the next year.
It zeroes in on the year a home was built, how long it’s been owned, each owner’s number of children and their ages, each owner’s estimated net worth, how long they’ve lived in the home and details of their current loans, including their loan-to-value ratios. The program claims to predict sellers. SmartZip’s selling point: Those 45 sellers need someone to list their homes for sale and perhaps an agent to work with in finding a new house. And the sellers who are looking for a new house will need a new mortgage. (Here’s the company’s pitch — in an area with 1,500 homes, no agent is going to knock on the doors of 300 homes — the top 20% — let alone all 1,500 homes. But if the agent can call on 2% of those top 300 owners — six people — it’s manageable.) My problem isn’t with the tool for agents but that it’s way to disconnected from needing a mortgage to be useful to most loan originators. Seems like they are grasping to make it a lending tool.
On Monday, Google Maps reengineered the entire site/app to be more user friendly. Part of the redesign includes “areas of interest” which is loosely based on the volume of bars, restaurants and things to do in the area. These areas are orange. See Boston. (Source: Slate Magazine, check out the story here)
You might be wondering why I included this or asking the question — how does this impact the real estate market? I think it is just the beginning. For starters, Google is using some sorta value judgment or measurement even if it is reviewed/approved by humans before being published that identifies the “best” areas. Commercial and residential real estate is about location, right? Subjective value judgments about location impact values. But Google Maps is for out of towners or visitors, not residents, right? Not so fast. We’re all using GPS on our phones now and fewer and fewer of us are actually plotting out directions or getting lost in new or strange places. Google can ensure you never have to go anywhere but where the “best” places are. Second, if orange is the color of “areas of interest” and parks are already green, is it really that much of a stretch before they can identify commercial space or available commercial space and “desirable” residential rentals versus available residential homes? Google might be more effective at place making or branding than the marketing companies hired to do it. It was a relatively minor upgrade, I admit, but it seems like the tip of the iceberg for layering data within a commonly used tool. To what end? I’m still working on that part. (Obviously.)
Quick hit: Should appraisers continue to receive an execute purchase contract as part of the valuation process? Here’s an opinion that says ‘No way.’
Sidenote: A propos of nothing, I stumbled on a website that purports to sell quality suits for $100. They came up with a good name for the site too. http://www.hundreddollarsuits.com/ I have no idea what to expect and I believe at least the pants are sent untailored. Thinking about giving this site a try. Anyone ever heard of it or, better yet, ordered a suit online? In related news, what’s the best way to wear a brown suit?
Today’s Thought: Beware the nugget of truth. It is a common trap in management as well as data analytics. A small piece of information, data or even gut feeling explains an event or explains an occurrence causing us to overlook all the valuable lessons hidden behind that nugget of truth. Just because something happened one time or a complaint has a small amount of truth in it does not make it rule to be relied upon. A good example of this might be when someone’s intentions are right but the execution is wrong. We may give them a pass on accountability because they were coming from a good place. Conversely, someone’s intentions might be off base and we, as managers, suspect they are pushing an agenda that is not beneficial to the team (e.g. jealousy, bitterness, naivety) but they are correct in their observation or assessment. What do you do with that? Indulge the truth and you risk alienating the team members with a positive attitude. Dismiss the message because of the person’s motivation and you risk missing out on an opportunity to improve the employee, the team and the company. This is also why I say, beware, because it’s not an automatically good or bad thing. It’s more an awareness issue. Being aware of the nugget of truth allows a leader to ensure we have the entire 360 degree consideration before acting.
Bonus article: Interesting list of 9 things to demonstrate to your children.