How to Cut Through the "Noise" in Real Estate News
I recently read a fantastic article on reading the financial news, from the perspective of a financial analyst looking at stocks and bonds, and I was struck by the similarities to real estate news.
As a home buyer, most of the information you’re getting in the news is not very helpful at all. The purpose of this article is to help you scan headlines and content, and quickly assess what is relevant and what is noise.
You don’t drive looking in the rear view mirror
Reporting on past real estate statistics is much easier than predicting the future, which is why there are a lot of people doing it. The other challenge with real estate statistics is that the numbers reported today are describing deals that were signed 3 to 6 months earlier. It’s almost unheard-of to see someone buy a home and move into it in the same month. The purchase agreement is signed and time is built in to allow people to arrange financing, pack, and schedule movers. Often people arrange for the sale to close in June or July, so that a move doesn’t disrupt their kids’ school year.
Knowing that most reports are backward looking, how do we know what is helpful information? How can we identify hype masquerading as news and selective statistics that are “click bait”? Remember, people in the industry only make money when you buy not
Real estate investment blogs have become pseudo news sources. Real Estate Agents are not held to the same standards when describing expected future returns as Investment Advisors. See the quote below from well known Toronto real estate agent Brad Lamb.
|“My advice is simple. Buy a rental one bedroom condo in Toronto for $450,000. Rent it for $2,000 per month. Keep it for 25 years. You will own 100% of a condo worth $1.5 million in 25 years. It will go a long way to funding your retirement.”|
His advice hinges on home prices rising by 5% annually for 25 years while incomes rise at less than 2%, which is very unlikely, and he can’t guarantee those returns. Granted, condo prices in Toronto rose almost 20% last year, but that is no guarantee of future price increases. In fact, if prices continue to rise at this pace it increases the likelihood of strong government intervention and a market crash. An Investment Advisor making a similar claim for a growth fund would be reprimanded by their regulator even though stocks are more likely to provide a high return over 25 years.
Fear of missing out sells, fact-checking is passé, and misinformation (or choosing the information that supports an agenda) is more common than you think. Superficial journalism is shortchanging the public.
Four ways to cut though the noise
Is the article based on fact or opinion?
Do the facts support the headline?
Is it describing the past or predicting the future?
Can you test the truth of what is being said?
Below I’ll illustrate how to use these questions while reading the February 2018 press release from the British Columbia Real Estate Association (BCREA).
BC Home Sales Dip After Strong December
Vancouver, BC – February 15, 2018. The British Columbia Real Estate Association (BCREA) reports that a total of 5,306 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in January, an increase of 18.3 percent from the same period last year. The average MLS® residential price in BC was $721,477, up 16.2 percent from the previous year. Total sales dollar volume was $3.83 billion, a 37.4 percent increase from January 2017.
"BC home sales dipped 10 per cent from December to January, on a seasonally adjusted basis," said Cameron Muir, BCREA Chief Economist. "New mortgage rules requiring conventional borrowers to qualify at a higher interest rate likely contributed to the decline in home sales last month. The impact was magnified by a strong December as many households advanced their purchase decisions ahead of the policy's implementation."Despite the decline in January transactions, the seasonally adjusted annual rate of home sales was 101,800 units.
Compared to January 2017, market conditions tightened in all BC board areas except Victoria, where the sales-to-active listings ratio declined from 46.3 percent to 40.5 percent. Despite this decline, Victoria remains in strong sellers' market territory. Total active listings in the province were down 8.6 per cent to 20,901 units, compared to the same period last year.
Is the article based on fact or opinion? Fact.
This is most definitely fact but why did they report sales dipping? Let’s break it down:
- UP: 5,306 residential unit sales in January, an increase of 18% from the same period last year
- UP: Average MLS® residential price was $721,477, up 16% from the previous year
- DOWN: BC home sales dipped 10% between December and January
- DOWN: Victoria sales-to-active listings ratio declined from 46% to 40%
- DOWN: Total listings across the province dropped 8%
Do the facts support the headline? No.
- 18% more homes were bought this January than last.
- Home prices have risen 18% year-over-year
- 10% more people bought in December than in January
- Houses aren’t selling as quickly in Victoria as they used to but are still moving like hot potatoes
- 8% Fewer people are willing to sell their homes
- The headline is misleading. Prices are still rising, the market is still hot, people would rather hold onto their homes than sell them. Why would BCREA highlight the dip in sales?
Is it describing the past or predicting the future? Past.
The information provided sounds like it is describing activity in January, but it is actually describing purchase agreements likely signed between October and December. New mortgage rules came into force on January 1st, 2018 and the empty home tax came into force in the City of Vancouver. None of these changes are reflected in the statistics provided by the real estate association, nor do they offer an opinion on the magnitude of the impact.
Can you test the truth of what is being said? Yes, and it is False.
|"BC home sales dipped 10 per cent from December to January, on a seasonally adjusted basis," said Cameron Muir, BCREA Chief Economist. "New mortgage rules requiring conventional borrowers to qualify at a higher interest rate likely contributed to the decline in home sales last month. The impact was magnified by a strong December as many households advanced their purchase decisions ahead of the policy's implementation."|
I believe the statement made by the Chief Economist is a stretch, or completely false.
Canada registers resales when conditions are met (e.g. financing, home inspections, etc). People clearing conditions in the first half of January would have signed the purchase agreement in December before the new mortgage rules came into effect, and the majority who bought in January were likely were pre-approved for financing in December also avoiding the mortgage rules.
What did we learn?
Here’s what doesn’t add up:
- The headline is negative even though the numbers are very positive.
- Mr. Muir wrongly blames new mortgage rules for for a drop in activity
Is the BCREA trying to create pressure on the federal government to rescind the mortgage rules? Perhaps. Perhaps not.
Don’t get distracted by headlines
I hope this was helpful. If you are looking for balanced information on real estate prices and interest rates Mortgage Sandbox is tracking the various sources of information and providing summaries.
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