Real Estate Season

Birds are singing, flowers are blooming, the sun has decided to make a more regular appearance…so what does that mean?

It’s real estate season!

Probably not what you were expecting me to say, but since we’re on the subject, let’s talk about it…

Relal esltate sealson [ree-uhl, reel ih-steyt see-zuhn]: adjective

1. A term used to refer to the time of year, primarily March through early August, when the greatest number of home purchases and sales occur. 

Now what we’ve established what real estate season is, let’s talk about what that means for you as a potential homebuyer or seller.

Buyers: First of all, as we enter real estate season, your choice of homes is likely to dramatically increase. The weather is getting nice, the school year is coming to a close, and you may have a tax return coming that could be a potentially used as a down payment.

According to Bankrate.com, the greatest number of home moves occur during the summer. As a potential homebuyer, this can be either an advantage or a disadvantage.  Due to the fact that there are so many more homes for sale during “real estate season,” your choices will drastically increase. This gives you a better chance of really finding a home you like. Unfortunately, there are also a lot of other potential homebuyers looking for homes as well, so if you find something you like, you may need to act quickly so you don’t miss out.

Sellers: For the same reasons mentioned above, real estate season is a great time to put your home on the market. Similarly, there are both potential advantages and disadvantages to selling a home during this time of year.  Due to an increased number of potential buyers, you may have more offers on your home, so you may be able to afford to be a little more picky about which offer you accept. But you also take the risk of being too picky, and not selling your home.

Do everything you can to put your home in “selling condition” (more on that later!) so that it stands out. Do a few things to increase your home’s curb appeal. Highlight the things about your home that would make it appealing to potential buyers. Does it have a great view? Make sure that’s not obstructed. Gourmet kitchen? Clean it up and really make it sparkle.  (“Freshly baked”—but not overpowering, smells don’t hurt either!) Swimming pool or Jacuzzi? Make sure they’re clean and at their best!

Regardless of whether you’re a potential homebuyer, or a potential home seller, know that this time of year holds some great opportunities. Take advantage of them!

The Big Mac Index

My goal for this blog, as the tagline says is to make “economic principles understandable to regular people.” And what’s more understandable than a Big Mac? Unless you’re a vegetarian…in which case, um…sorry.

In any case, in Economists’ long quest to make economic principles relevant, they’ve come up with something called the Big Mac Index, to measure what’s known as purchasing power parity. I dare you to say that ten times fast.

Basically, that’s a complicated sounding term that just means that you should be able to buy an identical good in two countries for the same price when the price is expressed in the same currency.

In Big Mac terms, if you were to travel to another country, you should be able to purchase a Big Mac for roughly the equivalent of whatever a Big Mac costs in the US.

So why does this even matter?

Big Mac Index

Well, the theory behind the index is that if you can’t purchase a Big Mac in another country for roughly the equivalent of the price that you can purchase it for in the US, the foreign currency is either overvalued or undervalued.

The implications of an overvalued or undervalued currency are a post for another time, but here’s a quick explanation. When a currency is overvalued, you’re paying too much for a Big Mac (or any good you buy!). If a currency is undervalued, you’re paying too little for a Big Mac.

The advantage to overvaluing a currency is that people who have that overvalued currency can buy goods from other countries very cheaply.

So, for example, we see that according to the Big Mac Index, Switzerland’s currency, the Franc, is overvalued. A Big Mac costs the equivalent of $6.81. If someone exchanged their Swiss Franc’s for United States Dollars, they could buy the equivalent of about 1.5 Big Macs. If they wanted to get an even better deal, they would exchange their Franc’s for an undervalued currency like India’s Rupee, and purchase just over 4 Big Macs. Sounds like a pretty good deal, eh? We’ll talk about the downsides of an overvalued currency later.

On the other hand, in a country with an undervalued currency, goods can be sold to other countries very cheaply. According to the Big Mac Index, India and China have undervalued currencies...those also happen to be two countries that the USA buys a lot of cheap goods from.

Anyway, back to the original point. The Big Mac Index may sound a little silly, but it’s a useful tool for gauging your purchasing power in other countries. 

Equality of Opportunity vs. Equality of Outcome

You may or may not have heard arguments over the concepts of equality of opportunity versus equality of outcome. Many of these arguments stem over the role of government—what is the government’s job—to provide equality of opportunity, or equality of outcome? (And no, the government cannot provide both—the two are mutually exclusive, but more on that later).

First, we need to understand what the terms equality of outcome and equality of opportunity mean.

Simply put, equality of outcome that the general living conditions, wealth, etc. of everyone in a society are similar. This involves redistribution of wealth from wealthier individuals to poorer individuals. So, everyone ends up basically the same.

In stark contrast, equality of opportunity means that everyone should be treated roughly the same. For example, job seekers are hired based on being the most qualified for a position, and are not discriminated against. You’ve probably heard the term “equal opportunity employer,”—well, that stems from this concept.

As you can see, the two are mutually exclusive—they cannot exist together.

The argument lies in one’s view of fairness, which can be looked at in terms of proportionality—so what does that mean?

Generally speaking, those with a more liberal political leaning view proportionality in terms of outcomes, and view disproportionate wealth accumulation as unfair.

Those who are more politically conservative view proportionality in terms of effort, where wealth acquired in a way that is proportional to effort is fair.

Many political and social ideologies have arisen because of these concepts—most notably, communism, socialism, and capitalism. We’ll discuss those another time, but for now, as you listen to presidential hopefuls, perhaps you’ll have a better understanding of some of their stances on economic and social issues. 

Case Shiller Housing Index....a crash course.

You may have heard the Case-Shiller Housing Index mentioned on the news. But what exactly is it, and why should you care? 

Contrary to its name, but Case-Shiller Housing Index is actually several indexes, including the national home price index, the 10-city composite index, the 20-city composite index, and twenty individual metro area indexes for the cities included in the 20-city composite index.

Aren’t you glad we cleared that up? [insert eye roll here]

Alright, let’s break it down.

National home price index—this is a quarterly index [published in February, May, August, and November], which covers the nine major census divisions, as pictured below.

Nine Major US Census Divisions

                   

10-city composite index—this includes Washington, DC, San Francisco, San Diego, Miami, Los Angeles, Las Vegas, Denver, Chicago, and Boston.

20-city composite index—this includes all the cities in the 10-city composite index, plus Atlanta, Cleveland, Charlotte, Dallas, Detroit, Minneapolis, Portland, Seattle, Tampa, and Phoenix.

All of these indexes except the national index are published on the last Tuesday of each month. There is a two-month lag with each publication, so, for example, the August publication only includes information through June.

Each index measures changes in the price of single-family homes, by comparing the difference between the most recent sale price and previous sale prices. 

The purpose of the index is to show whether home prices are going up or down, and by how much. Here’s why the Case-Shiller housing index is relevant to you—if you’re trying to sell your home, but the index shows that housing prices are going up, you might want to wait to sell. If you’re buying, you might want to hurry up so you can get a good deal. If the index shows housing prices going down, you’ll want to hurry and sell so you can get the highest sale price possible, and if you’re buying, you might want to wait for a better deal.

But what if you aren’t in the market to buy or sell a house? Is the index still relevant? Yes, because the Case-Shiller housing index is an indicator of how the economy is performing overall. For example, the index shows whether or not people are confident enough in the economy to make an expensive purchase. Much of the way the economy performs is a result of the way people expect it to perform, because generally people’s actions follow their expectations. But that’s another post…