theDirt Weekly: The average pot of water
January 7, 2023
Down and Dirty this week
Dear reader, I wish you a very happy New Year. I come to you again with no news and more philosophy. In fact, I paid almost no attention to the news over the holidays. Frankly, I was too busy to bother with it. And now that I’ve come up for air, I see that I haven’t missed much.
Oftentimes the news is so much worthless blah, blah. The news, like the concept of time and a ‘New Year’ itself, is only of imagined importance. A man-made construct over which we might chatter and sass if there is nothing better to do. Ask the cow the difference between December 31st and January 1st and she will respond with a blank, cud-chewing stare. Dear reader, she simply does not care. For her and all the other creatures not programmed by man’s imagined notions, there is little difference from 2022 to 2023. She has no books to close. No taxes to file. No resolutions to make. She cares only about the truly important: where she will obtain the next bit of grass and if I might have something delicious hiding in the bed of the truck. There is a lesson there, I think.
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Over my holiday the important turned out to be family, serving a client, and tending the ranch and herd. I am glad to say that most of the breathless news coming across the interwebs over the last few weeks meant very little to me personally. Sure, there were headlines that will no doubt move my life the same way that a flap of a butterfly’s wings eventually results in Texas tornados; but in the aggregate and on average, most news was so much hot air and inconsequential. I suspect that, on average, the same is true for you. Now to the point…
Average is just a number
Just like the idea of a new calendar year, average is just a number. Place your left foot into a pot of boiling water and your right foot into a pot of freezing water and the average is quite nice. But tell that to your feet who are alternately boiling or freezing. Both feet are likely to hop the pot and reject the idea of average altogether. When you think hard on it (perhaps overthink as Your Humble Author is wont to do), our economy is not an average at all. The real economy is an infinite series of choices of pots of widely varying temperatures. Average, it turns out, is a number that we hope represents reality. For each of us as individuals, the average might come close to the real. Or it might not be close at all depending upon the temperature of your own small pot.
In the real economy, in real markets, each of us must make decisions about which pots we will stick our feet into. Which makes me wonder: why do we even average and aggregate (a.k.a. combine together) economic and market data at all? Why is our national economic news and policy driven by averages, aggregates, averages of aggregates, and even aggregates of averages?
Well the easy answer is because it is easy. Also it’s really the best we can do. If the US economy is a sticky morass of 330 million competing wants and needs and their corresponding decisions and actions, individual figures quickly become an indecipherable web of impossible measurements. And for all the shade I throw at bureaucrats and our governments (they’re an easy target), I know that they still must govern. Big decisions must be made at big levels. And at those levels, if we do not average and aggregate, how else would we get a grasp of what is going on? Well, we wouldn’t. And we couldn’t? So aggregate we must. And average we will. And then we shall splash all those averages across the news like a panicked steer splashes feces across the walls of the cattle trailer.
Case in point: take price changes from housing, from groceries, from trade, also from some other stuff, and boil them all down to produce that average price change called Consumer Price Index (or CPI). Month to month and year to year, the CPI goes up and CPI goes down. But it doesn’t mean that all the components go up or down along with it. Housing is its own pot of water. Consumables like food are another pot. Each pot boils or freezes differently. The same goes for all of the other national numbers and statistics (unemployment, trade deficit, etc). Also market measurements like the Dow Jones Industrial Average, the S&P 500, the Case-Schiller Index, etc. They are each facades masking deeper and nuanced truths.
You know what? In the big-picture-macro-grand-scheme all of those averages and aggregates are probably good enough at least to make very basic, very slow, and very macro decisions by very big, very slow, and very macro leaders. Aggregates are probably useful in crafting things like Farm Bills or various national trade policies or one of them-there gazillion dollar Omni-Bus government spending bills I’ve heard so much about. And… and… dear reader, if it was only kept to a very general focus, all of those aggregates and averages might even be useful and relevant to those in the business of crafting monetary policy (and, therefore, interest rates).
That is, of course, until aggregate decisions based on aggregate averages begin to crush entire economies because big, slow-moving decision-makers are uber-focused on one set of lagging averages. Like labor and wages. But I digress…
What it all means for real estate and little ole me and you…
Ah, but the rub. And there’s always a rub. And in this case, and at least for little ole me and little ole you, the rub rubs in our favor. Because individually neither you nor I are an average. And separately we are not the aggregate. Nor are we are the big, slow-moving behemoths that must wait for the aggregates to collate and release prior to making decisions. Nay, dear reader, we are as quick and nimble as cats atop the Powell driven Omni-Bus. While we do not drive the bus and while we are all condemned to ride together upon it, we are still free to choose where we sit. We can move about at our leisure. Therefore if you are patient and smart and navigate the situation just as cool as a cucumber, you can and will do wonderful things in this averagely bad market. I shall explain.
While the wise investor (real estate or otherwise) should certainly be informed of the averages and of trends, while those figures should be in the background of all good decisions, the truth is that the pot into which one sticks one’s foot is likely to be very different than whatever average-aggregate is discussed in the news that particular day. To whit: nationally the discussion of real estate is dark. And rightly so. In the aggregate, interest rates have more than doubled in a few months causing markets to come to a screeching slow. Average prices are falling. A lot. That holds especially true in my state and region (Texas, Austin-Central Texas).
Yet, with my eye constantly on the news and my head ringing with aggregates and averages, I can say with certainty that individual sectors and neighborhoods and deals continue to surprise to the upside. Every now and again one gets whiff of a property that recently sold with multiple bids (still?). Every now and again one hears whispers that a property sold for above asking (in this market?). And from my own personal experience: one goes to a new-build neighborhood at the end of the year expecting the lonely and desperate sales rep to fall over themselves trying to foist upon you inventory needing to be moved - but they don’t. Contrary to average and expectation, sometimes the model home office is quite busy with retail (not investor) buyers snatching up houses. In this contra-average reality, the sales agents are just too busy to assist and anyways we won’t really have any new inventory until next year so please visit another time thank you very much. What gives?
Well… every pot sits at a different temperature, doesn’t it? Every individual situation is unique. The nation, the whole world, might be a raging dumpster fire of a mess but within you can still find not only opportunity but success. That new-build neighborhood I described above was, at least for the time being, doing just fine. And in spite of regional and national trends. Good for them. So we happily moved along and found a different pot with a temperature more to our liking. You know what? There are some GREAT DEALS OUT THERE! And we found a few of them. We found a pot simmering at a lovely temperature and our client jumped in with both feet.
And that’s really the thing about averages. Every individual case will vary from it. For those participating in real estate markets (perpetually like me or temporarily like most), the trick is to find exactly how far the pot deviates from average and act accordingly. This is the whole point of this essay (which is really just a note to my very own self that I happen to share with all of you): don’t let the average rule your thoughts. Take it in stride and focus on what you control. Also, play to your strengths and against the average. Be nimble. Be quick. Be the cat doing its own thing atop the slow-moving average omni-bus.
The curve must revert
Ummm… here is a shameless bit of hypocrisy after all the drivel I wrote above: I remind you, dear reader, that the range of imaginary average numbers called the interest rate yield curve must revert. But until it does, feel free to stick your foot into the very pleasant 6-month T-Bill pot and earn a risk-free 4.82 percent. See you next week.
While working on some family tree stuff for mom over the holidays, I really baked my own noodle thinking about numbers, exponentials, orders of magnitude, and the concept of infinity. It hit me that every generation doubles your direct line of ancestry, and I followed that rabbit down a deep hole. You have 2 parents, 4 grandparents, 8 great-grandparents, 16-great-great-grandparents and so on. If a generation is approximately 20 years and mankind has been around for approximately 400,000 years then that is about 20,000 generations. Folks, 2^20,000 power is a number you could theoretically write down but is too much for my little brain to even begin to fathom. That’s a lot of grandmas and grandpas that all got together over time and space to make little old me (and you). The point is that I can only go back so many generations on the family tree before numbers become unmanageable. Here’s a fun read if you want to dive deeper into thinking about how many grandparents you have: Power of Two. Of course, then consider that there have only ever been around 117 billion Homo sapiens ever to have lived and the numbers and logic say that we are all cousins in the grand scheme of things. Have fun with that thought.
I write all this to bring to mind the concept of ‘infinite’ which is easy to say but damned hard to truly grasp. If there are 8 billion people on this planet and they each have a choice that subsequently spins off several more choices by several other people in a geometric progression of chaos… and all of those choices affect the economy… well it doesn’t take long before numbers become infinite in scope and magnitude. So aggregates are truly the best we can do.
That is, of course, assuming that any of the low-level congressional functionaries who actually write those bills understand a damned thing about economics and markets and averages and aggregates and things like secondary and tertiary effects - which, generally speaking, on average, they do not. Hence inflation and inflation reduction acts.