I started examining NAR's latest ad last week, and I'd like to continue to examine their campaign. We're looking at the tools of propaganda they use (the same tools every advertisement uses), and the facts behind their claims. One of the lessons we can pull from this ad is simply how propaganda works and how we can use it to become more effective salespeople.
So let's move on to the second bullet point found on NAR's national ad.
LARGE INVENTORY WON'T LASTNAR tries to appeal to our fear. They warn you, the consumer, that the inventory of houses "won't last". Obviously, the command that you need to go out and buy a house right now goes unspoken. A similar tactic was used over the last couple of years when Realtors tried to convince us that real estate was climbing fast and if we didn't get in right away we'd be priced out forever. Note that the following sentences do help justify the "large inventory" but there is absolutely no evidence included which supports the idea that the supply "won't last".
There are currently 3.75 million homes for sale. We have had a record inventory of homes on the market in recent months offering consumers the greatest choice in decades.
At this point I'd like that take a quick look at the theme of their overall campaign, "It's a Good Time to Buy or Sell a House". Now most college educated folk might recognize that it's rarely a good time to buy AND sell anything. So you'll note that almost every point they make is aimed towards buyers. For example, when they mentioned that there is a record number of houses available right now, that's not much encouragement for the sellers that they want to encourage.
Now the reason they seem more interested in attracting buyers than sellers is simply that right now there seems to be a shortage of buyers. If that's the case, they simply should have stuck to the message "It's a Great Time to Buy a House!". That would have been more direct (they are looking for buyers anyways), and would have lent a lot more credibility to their ad (right now their claims that it's a great time to both buy AND sell suggests that they are fools).
One important lesson that we can learn from this is that we need to tailor our message to our clients, lest we come out looking like fools. If we are trying to pitch a property as a "great investment", it'd help to have number prepared to support your claims, and research to support your numbers. Otherwise you could end up looking like a fool.
So they claim that it's a good time to buy AND sell, but in this bullet they clearly indicate that the selling is tough right now. The record number of homes is directly tied to the simple fact that homes aren't selling well, and staying on the market longer. Competition for buyers hasn't been this fierce in a decade. So if it's not a good time to sell, it must be a good time to buy, right?
In economics there's a theory on efficient markets. Essentially the belief is that in a healthy mass market there's always one buyer for each seller. If there are too many buyers, the price of the good rises until enough buyers lose interest to maintain the ratio. If there's too many sellers, the price keeps dropping until they are so cheap that buyer's renter the system.
From the view of real estate this means that, in practice, if there are too many buyers (think back to 2004), they will bid each other up until many are priced out. This is exactly what happened during the boom. If there are too many sellers, however, they will undercut each other until the price is low enough that the buyers will purchase.
Now if efficient market theory is applicable (as it seems to be with stocks), we would see a very close relationship between the number of people selling (the green line) and the number of buyers (as represented by the number of successful sales shown by the red line). As fewer houses are for sale, prices increase and few buyers buy. On the other hand, as more houses are for sale, then prices drop and more buyers enter the market.
We can clearly see that strong correlation between the number bought and the number for sale during the boom period on the above graph, with both the green line and the red line peaking and bottoming out at the same time between 2001 and the end of 2005. However in 2006 we see the number of active listings skyrocket, while the buyers are shying away. With that many active listings we should see home prices being slashed to compete for buyers (thus drawing in new buyers), but that's not happening. As I wrote last month selling is often ruled by emotions, not reason. The result is a market where sellers won't bargain, and so no new buyers enter the over-priced market.
This is an example as to why there is such a time as a market that is bad for both buyers and sellers.