The state of the housing market, using beer!
Last night I got in to a discussion at a pub with someone about housing prices. He said things are fine because even though sales are down the prices are holding. I could not get it through that this was not the case that the high end was skewing the numbers.
Today, on website calculated risk, I read the following. This is by far something any Joe Sixpack should understand. Just apply it to the housing market and it will be like an awakening to what's going on in Real Estate.
There are 50 dudes in a bar. They make from $20,000 to $200,000 a year and the median salary is $43,000. A bunch of the poorest suckers have to leave cause, you know, it's late at night and they start their low paying factory jobs.
Now, the salary range at the bar is $30,000 to $200,000 and the median is $60,000. No one is richer.. the broke blokes just left.
The End.
Anyhoo, It just illustrates why one should look at a combination of transactions and average price to get the total $ volume. This gives you a proper idea of what is happening in the market without needing all these confusing analogies.
But really, a better analogy would be that you have a bunch of guys hanging around selling beers for different prices. Now, a bunch of people are hanging around buying beer and having a party.. but then after a few hours some of the poorer drunks start running out of money.. so they don't want to pay $1 for the cheap beer. But the $1 beer sellers borrowed a bunch of money to buy all their beers and they need to sell for a certain price to pay back the bank.. so they just stop selling beer. Now, the median price of beer goes up because the rich folks are still buying $5 beer and everything is cool.. but then eventually, the bank comes by and wants its monthly beer-loan payment.. and starts taking back the beer stash from some of them. Others start selling beer for $0.50 and maybe mop the floor for extra money hoping to pay back the bank so they can keep the beer stash and the other money they made.
Now you have the rich beer partiers slowing down because maybe some of their money is running out and none of the poorer beer sellers are able to sell off their beer stashes to move up and buy fancier beer and keep the rich beer party going.
Good explanation wouldn't you say?
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3 comments:
Good explanation wouldn't you say?
No, that was somewhat confusing. But I've figured out why. I think that where you say that "the bank comes by and wants its monthly beer-loan payment," you should indicate explicitly that the bank wans its monthly beer-loan payment from the $1 beer sellers. That sentence's beginning referred to rich folks and $5 beer.
At any rate, I doubt there's much of any hope of getting people who still don't understand the housing situation to understand it. They're probably generally either not interested enough in the matter to care what the truth is, or so against the reality that they've become deluded.
I've noticed that in virtually all talk of the housing market and home prices, only what is best for sellers is considered. People consider any drop in home prices to be bad, even though it's good (actually, just less bad) for buyers -- and at this point really just decreases seller profit, from incredible to great. Are home buyers considered to be unimportant, or even scum? I've never owned a home, so even if this is common knowledge, I'm oblivious to it.
The bar theory of declining home prices.
I love it.
All analogies are imprecise and open for interpretation, but this is as good an explanation as I have heard.
"But I thought home prices never went down!" Sorry, you thought wrong.
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