Remember studying the bell-shaped curve in high school? Simply put, that was the curve that conveyed the concept of the normal distribution of things. I'm not a brain, so don't worry about me getting algebraic with you. However, the teacher who taught me this concept 30-plus years ago deserves a pat on the back, because it helps me make sense out of the extreme range of opinions regarding our real estate market and where it's headed.
In layman's terms, the bell-shaped curve suggests that most outcomes (and opinions) are clustered around the average. You can predict with a varying degree of confidence how far away from the average an event will happen, but there are outcomes that cannot be predicted. These events are called outliers. Don't worry; there won't be a pop quiz tomorrow.
People's opinions on the real estate market can be predicted using the same principle. The next time you go to Carrabba's, look at the 200 people ahead of you that are waiting for a table. (You have nothing else to do.) Most of them will have an opinion of the direction of our real estate market. These opinions will range from "a market collapse of Biblical proportions" to "we are past the bottom and on our way to double-digit appreciation again" (both outliers). However, most people's opinions would be clustered somewhere in between.
How can opinions vary so much when everyone is or should be looking at the same road signs? For example, a recent article in The News-Press reported that existing home sales for March were up 50 percent over February. Most of us read it and just mentally filed it away as positive information. One positive month does not equal a trend! But those with extreme opinions on our market, the outliers, have already cut it out and have it magnetically affixed to the refrigerator. It hangs as supporting evidence in favor of their beliefs, although they are completely opposite from each other.
One extreme believes that such positive news is a fabrication or manipulation of data in order to pander to the real estate and development industries, who are major advertisers with the paper. Can you spell conspiracy theory? The road sign this group sees is one you would only see while driving in the mountains, the one that warns of a steep descent ahead. Some in this group have e-mailed me and predicted that home values would fall to 1980 levels!
The other extreme believes that our residential market is well past the bottom (mostly sellers or agents who sold tons of investment property). They believe if it wasn't for all the negative stories in the newspaper, and people like me preaching that prices must fall, they would be back in the clover. Some have even encouraged me to announce that the good old days are back and that would open the floodgates of buyers. Their road sign would say "End Construction," as they feel there is nothing but smooth driving ahead. For some reason, this extreme sounds a lot better to me!
Then we have the middle ground folks. This group's sign would read "Speed Bump Ahead." There are positive indications that our market is recovering, such as inventory growth is slowing, pending sales are trying to inch upward and markets like new home construction in Lehigh appear to be reaching their bottom. Statewide, there seems to be positive momentum on solving spiraling property tax and insurance costs, two nagging issues that will determine how much of the Baby Boomer market we will really get.
Even with this cumulative news, patience will be a virtue here, regardless of how tempted you are to hit the gas pedal. It's hard to believe that it's been almost two years since our market peaked, but we are still very early in the recovery stage. There will be more negative headlines and sad stories before we reach the land of milk and honey, so keep your seat belt buckled and your expectations in an upright and locked position.
The bell-shaped curve may help me to understand the continuum of opinion, but my sign of choice would show a different curve, the one that indicates there is a cure ahead. Our market is beginning to turn, but we will experience bumps and ups and downs before we hit the straightaway. Don't worry about asking "are we there yet," because like driving on new pavement, you will know it when you get there.
By Denny Grimes
Originally published on May 06, 2007
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