theDirt Weekly: Supply, demand, and the best time to buy a new lawnmower
February 4, 2023
It was time for a new lawnmower anyway. The old mower was abused from the mishandling of one too many teenagers (and, perhaps, their father) and refused to run. Besides, winter is a great time to find a deal on a lawnmower. My second son (who had been asking for a new one as mowing is his chore) researched and recommend a new mower to me based on a budget and good reviews. Then off to the Big Box Store we went.
Boy did we go on the right day. Arranged in a line at the front of the store was last year’s lawnmower inventory. In the line were several models of exactly the brand we sought, fully assembled and ready to roll. And they were marked with big yellow pieces of paper: Manager’s Special, 50% off. Who doesn’t love a deal like that? I was so proud of our find that I snapped a picture and texted the wife (for whom ‘a really good deal’ is a measure of success in life). I could hear the brownie points accumulating on my player’s console like so many green 1-up mushrooms in Mario Bro’s. It was a good day.
There are few economic principles as predictably true as the relationships between demand of a good, the supply of a good, and those two factor’s effect on PRICE. It’s a simple enough concept to grasp - all the way from Econ 101: if people desire a thing and that thing is in short supply then the price will rise - think diamonds, or toilet paper during COVID. The converse is also true1. In the case of push lawnmowers at the local Big Box Store on a January Sunday in Texas, there was too much supply and not enough demand. That day, prices of lawnmowers fell dramatically. And this was predictable due to the facts of seasons and inventory cycles, etc. Lesson: if you want to snag a deal on a lawnmower, shop in January.
Lessons in importance of supply and demand: Hay supply near 50-year low, prices near record high
So Mr. Smarty-pants-big-shot, is now a good time to buy real estate?
And this is where it all gets really sticky. It’s also why economic theory is great on paper but of limited value in real life. Because while real estate certainly follows the basic premises of supply and demand, the nature of real estate (you can’t move it, no perfect substitutes, government manipulation via subsidy, interest rate controls, etc) and the magnitude of the other factors, direct and indirect, that can affect the price of a single plot of land are such that there are rarely any clear cut answers. Also, and as you might have noticed, real estate is not a lawn mower.
You cannot live in a lawnmower. A lawn mower is not priced in the hundreds of thousands of dollars (or more). A lawn mower doesn’t require a loan for most people to purchase. If I buy a lawn mower one day and lawnmower prices tank the next, I might be a touch miffed, but it will not ruin my life.
But while a lawnmower is certainly not real estate, the markets for both do have some things in common. Both are notably seasonal. In fact, the busy season for lawnmower sales is largely the same as the busy season for real estate: which is when the weather is warm and the grass is green. Lawnmowers and real estate also share a cycle of supply and demand mismatches of which the Wise Investor can take advantage. That is if you know what to look for. So what are we looking for?
Of the two (supply and demand), the supply of a type of real estate (e.g. single family homes) is easy to measure. To determine a figure, one need only count the houses in existence and add the houses coming online soon - the first can be found in property tax records and the second in platting records as subdivisions are created. And because one can measure supply so easily, and because those measurements are so widely available, this is also where most of the talking-head analysis exists. Way back in August, I wrote of the Inventory Argument where there seemed to be two factions in the real estate nerd world: there is not enough supply of homes which will lead to further price increases over time versus there is a vast oversupply of homes which will lead to a price collapse. Each argument is filled with numbers and charts and many impressive sounding if-then statements. But while housing inventory partisans might protest otherwise, neither side truly knows for sure which is the correct take. That’s because the answer to the inventory question (supply) is different as one drills down to states and cities and specific neighborhoods. So the investor might turn to the other side of the coin for some help.
BUT! Demand is slippery as a greased pig. At least when it comes to measurement. That’s because demand is dictated by all the feelings, whims, and desires of humans - flimsy pegs upon which to hang any hat. I remember when Starter jackets with NFL logos were all the rage back in the 1990’s; within a short time they became oversupplied and common and therefore cliche and passé2 and out-of-fashion. The bottom soon fell out of the Starter brand (Starter went from a fashion symbol to a Wal-Mart special). But we are speaking of real estate, not clothes, right?
But just like fashion, real estate demand is further complicated and shaped by feedback loops and herd effects. Some of those are encouraged by price change itself - in a supply-demand theoretical paradox luxury goods seem to increase in demand with an increase in price. And you just never know in which direction and how far it will go. Price increases can increase demand due to FOMO3 or ‘keeping up with the Joneses’ - both phenomena experienced in the stupid bubble market of 2021 and early 2022. Conversely an avalanche of price decreases can freeze a market due to Fear. Think Housing Bubble in 2008. But such cannot go on forever and tides always turn. So then the waves shift and the same house that commanded bidding wars and lasted mere days on the market yesterday will suddenly languish as a worn-out and unloved listing as prices fall and fall today. Based on that information and price trends observed today, one might conclude that demand is decreasing. BUT!
When the Wise Investor considers the question, ‘Is now a good time to buy real estate?’, he or she must not only consider supply and demand. No, no. The investor must also consider what is going on with debt markets (mortgages), interest rates, national economic policy, monetary policy, etc. Because all of those affect demand too. Then… said Investor needs to consider the variety of state, county, city, local, and hyper-local factors. For example, is the Texas Triangle4 likely to see gains or decreases in commerce and population into the future? That sure affects future supply and demand in Texas. Is the person living next door going to turn into a hoarder of used, rusty automobiles stored on the front lawn5 ? That certainly affects demand for that house and neighborhood. Only when the Wise Investor throws all of those considerations into a pot does he or she have a proper stew on which to chew. Only then can the Investor begin to answer the question: is now a good time to buy. And right now the answer to the question is… a solid maybe. Now we’re getting somewhere.
Discourse Lounge: Bay Area Cities to Lose ALL Housing Zoning Powers in 2 Days (A great read and a great lesson on why it’s VERY important to be familiar with all the politics that shape real estate and land use in an area; also a great lesson on the idea of RISK)
Dear reader, I’m sorry to be coy. But the simple question has no simple answer. It never does. BUT! I do think that now COULD be a very good time to buy - especially a a very specific type of real estate. If you are a residential buyer in my region then there are deals to be had. Especially when it comes to new builds.
The reason for this is that Big Home Builders treat their homes just like the local Big Box Store treats their lawnmowers: they are inventory. Nothing more, nothing less. The Big Builders are not emotionally attached to their product. Their houses are just that - a product. Not a home. Not a place where children had birthdays and in which precious memories were made. Big Builders are businesses and have no sense of long term ownership or possession. There is no ego involved. Only numbers. In fact, they not only WANT to move their inventory, but they NEED to. In an era of depressed demand, this gives the Wise Investor plenty of leeway and leverage with the Big Home Builders - not unlike buying last season’s excess inventory of lawnmowers from the Big Box Store during the off-season6.
Side note: on the resale side (residential and land), I do see a few sellers awakening to reality. One might, maybe find a good deal in the resale space. But residential sellers are waking slowly. Very slowly. And begrudgingly. And the resale market is still so thin that the prospective buyer continues to battle the stubborn emotions of Average Joe the seller who (for the most part) has no impetus to sell outside of a desire to move up in house or move out of town. Distress that would necessitate aggressive price action is in short supply for most Average Joe Sellers. Conversely Big Builder has units to move and numbers to make… this quarter! Right now they are willing to make a deal. That will probably be more true as we march closer to the end of the quarter.
Moving markets, market moves, & market bottoms -or- how to not catch a falling knife
In considering the question of whether now is a good time to buy (or not), the Wise Investor will also consider market movements and flows. The old investing rule says that one should never try to catch a falling knife. Which is to say one should not try to time the market nor call a bottom. But there is another saying that the trend is your friend. Here is what we know: prices are trending down, so are mortgage rates, and, as of very lately, buyer activity picking up.
Which begs the question: are we at a housing market bottom? The answer, dear reader, can only be that we will know for certain several years from now and looking backwards. Right now it’s all guesses and conjecture. My sense (feeling) is that we are NOT at a bottom. Nor are we close to a bottom. But any further discussion necessitates predictions and all that habit’s nasty predilections toward certainty. What we should be doing instead is considering the wide range of possible.
We must especially look the gnarly-risky-probable directly in the eye. And the most dangerous probable-possible that I can conceive is the real estate market in my area tanking 30-40%. Perhaps all the way back to January 2021 levels. And those are the guides I use as a margin of safety. If you are in my area and looking to buy and can swing a 30% discount then I think that is a deal well worth considering. And, dear reader, believe it or not, those deals are out there. Although it takes some knowledge, some study, some conviction, and some elbow grease to find them.
A note on staring ugly in the eye
Dear reader, no buy or sell decision is complete without a look at the gnarly risks. In other words, an appropriate analysis takes a hard and gloomy look at all the various bad that might happen. Could interest rates be 20% in 10 years (and the RE market through the floor)? Sure they could. Is it possible that you lose your job and are now stuck with a mortgage that you cannot pay? Yep. And on and on you must go imagining all the bad things that could happen. The point of this exercise is NOT to induce fear and paralyze you into inaction. Quite the opposite, the Wise Investor knows that the point of peering into the abyss is to reduce future fear and panic (and rash action) by preparing for the bad things that will inevitably occur - then you buy insurance and manage risks.
Another reason we stare ugly directly in the eye is because there are some risks that are so large and the downside potential so big that it requires you to say no to an otherwise good investment. For example, are you a massage therapist employed by a large tech company right now? If you are then I would NOT buy real estate if that is your only source of income. Mostly risks are areas of concern to be evaluated and managed (e.g. short term disability insurance for a construction contractor). But every last real estate owner or wannabe real estate owner, no matter the asset class or size, from Average Jane the homeowner to Mega Mike Millionaire the Class A apartment complex owner, absolutely must factor big fat hairy risks into their own, personal purchase equation.
So is now a good time to buy? I dunno. I can’t answer that question. Nor can all the Kings horses and all the King’s men. The only person who can truly answer the question is you, the buyer. Because you are the only one who will answer the door when risk comes to call.
Coda: Never ask the barber if you need a haircut
There is an old saying about never asking the barber if you need a haircut. Because, uhhh, the barber will always say yes. Nor should you ask the real estate agent if now is a good time to buy real estate. Because the answer is yes. (Or, in the case of Your Humble Author, a solid maybe.) It’s all about incentives really. The barber wants his fee just like the Realtor wants that sweet, sweet commission check. Of course I don’t think this about myself; I recall very specifically telling people that the Spring of 2022 was a terrible time to buy real estate (but a great time to sell). But then I would say that, wouldn’t I?
Dear reader, I confess: I like this market. I like where it is headed. I like the simmering fear on full blast on all channels. I like it because it is scary and risky. I like it because I fancy myself a Wise Investor, and I believe that money is made when there is blood in the streets. I like it because markets where everything just goes up are kinda boring. I like it because it requires thought and strategy and tactics and planning, and I conceit to the idea that I might be good at these. I like it for the same reason that I like seeing last year’s inventory of lawnmowers marked down by 50%: because it’s January, it’s Texas, because summer will be here again soon, and because my wife is not the only one who loves a great deal.
Other things that are important but about which I did not write:
Texas Manufactured Housing Association: From the 88th [Texas Legislature] - Filing, Filing, and More Filing: This is a fantastic round up of a lot of the bills filed that might be worrisome or notable
Realtor.com December 2022 Housing Report
In conclusion, I remind you that the curve must revert
That said, there are some confounding factors out there. Concepts like substitution where different things are close enough as to be substitutes for one another: think chicken for beef - they are both meat. Also elasticity which measures how much prices for certain goods change given a change in supply or demand: the demand for gasoline changes very little if prices increase; conversely if beef prices increase too much then people just switch to pork or chicken. These concepts and others make the price-supply-demand relationship less than exact and tricky to predict.
The French have a flair for words describing the undesirable. In fact, the word desire is itself of French-latin origin. Anyways…
FOMO = Fear of Missing Out
The Texas Triangle is that area defined by the shape formed by connecting San Antonio, DFW, and Houston.
Fun fact: one doesn’t just buy a parcel of land, one also buys the neighbors.
These same home builders are also offering extremely attractive incentives: for example 3.75% ARM 10/6 (the mortgage rate will adjust to market rates in 10 years and then every 6 months thereafter). Is an adjustable rate mortgage a risk? Hell yes it is. But 10 years is a long time to work through it.