Realtor Cognitive Dissonance

"Ten Showings, $10,000"

I hated discussing ideas with investors. Because I then become a Defender of the Idea, and that influences your thought process. Once you became an idea's defender you had a hard time changing your mind about it."

--Author Michael Lewis, quoting investor and fund manager Michael Burry in The Big Short (p. 56)

I've been using the long holiday weekend to do some recreational reading (yeah!), including the wonderful The Big Short by Michael Lewis (Thomas Wolfe and Lewis are my two favorite writers).

In my experience, something analogous to Burry's experience with investors (above) happens to listing agents, too: namely, in the course of pitching a home to prospective Buyers, it's easy to lose your objectivity about the home's value, and become convinced that it's worth the asking price.

Unhh-unh.

Unless the listing agent is buying the home, it's worth what someone (else) is willing to pay for it.

The Danger of Sitting Tight

That's why Realtors say, "ten showings, $10,000."

Translation: if ten serious, well-qualified Buyers view a home and all pass -- the home's (at least) $10,000 overpriced (make that 3% - 5% for a more expensive home).

So what's so bad about the listing agent thinking a home is properly priced when it's not?

They'll be slow to counsel a price reduction, which will (eventually) cause the home to linger on the market.

In turn, homes that linger on the market often need to be deeply discounted to sell.

New Consumer "Payment Hierarchy"

Credit Card Bills Trump Mortgage Payments

I attended a private dinner this week where the featured speaker, a senior executive at FICO, offered a wide range of comments. Since the talk was off-the-record, I won't mention the individual's name, but the insights were fascinating.

In a nutshell, FICO is observing a sea change in how consumers prioritize their debts.

Twenty years ago, here's how it looked:

1. Mortgage
2. Car payment
3. Utilities
4. Credit Cards

Today, that hierarchy has literally been turned upside down:

1. Credit Cards
2. Car payment
3. Utilities
4. Mortgage

To say the least, this change has huge implications for housing, and the economy generally.

Two conclusions seem inescapable:

--The risk of continued mortgage defaults is quite high, especially in locations where homeowners are deeply underwater (i.e., their home is worth less than their mortgage). According to the executive, the % of underwater mortgages nationally is now 40%(!).

--The U.S. consumer is tapped out, and especially vulnerable to anything that makes installment debt (credit cards) less available and/or more expensive. Which is pretty much what's happening now.

When you're living off your credit cards, it's safe to say that any financial "cushion" you once had is already gone.

The executive was optimistic that the Federal Reserve was on top of things, and reacting appropriately to the economic crisis; less so that Congress would surmount politics, and spend and tax appropriately.

Silver Linings (Kind of)

Silver linings? The executive cited three (kind of):

--Per above, solving today's economic challenges isn't a question of knowing what to do -- there's actually a surprising consensus amongst policymakers about what's needed (I've noted this on previous posts). Rather, it's having the political resolve to do it (the ball's in Congress' court, not the Federal Reserve's).

--While the ranks of consumers with low FICO scores is swelling, so is the number of people with high FICO scores. The executive called this phenomenon a "flattening out of the bell curve"; the explanation is that many consumers are spending more conservatively, paring their debt, etc. as a result of the financial crisis.

--Everyone's mailbox is a lot emptier these days without all the junk mail, credit card solicitations (have you noticed?).

P.S.: It's too off-color for this blog, but Tom Wolfe has a hilarious, updated version of the "first base, second base" vernacular that every high school boy knows. FYI, "first base" is still kissing -- everything else is different. You'll have to read his novel, "I am Charlotte Simmons" to find out the rest.