“Expect home price appreciation to “fall further,” Mark Fleming, chief economist at First American and author of the report said, “as the hot sellers’ market of early 2022 turns in favor of buyers.” (Marketwatch, October 22, 2022)
There’s a home one minute walk from me that recently sold for $1.2M after 5 months on the market. A couple of weeks before they listed their house this past Spring, I had closed on my new house, reasonably identical, for $1.4M.
Seeing their house close for 11% below original asking and others’ thoughts about a buyer’s market, I had feelings of guilt that I had been made a fool. During the buying process, my agent had told me of another home, slightly larger, that just sold for 1.6M a few days prior. My price was supposed to have been a steal. But…
If I had waited six months, I’d be in a buyer’s market and look at the savings I could have had. I’ve screwed myself and my family for years.
I went deeper to understand the individual economics, and it turns out this is wrong. As I write this, mortgage rates today are around 7%. Someone who buys a house (standard 20% down, 30 year term) for $1.1M today is going to pay about the same in monthly costs that I did even though their price is 23% less (the difference in down payment is ~$60K). (Use Bankrate to see this for yourself)
Anyone who pays more than $1.1M is technically paying more than me for their house. To really see if I made a big mistake, I have to see if similar homes drop below $1.1M in the near future.
This isn’t what we’re taught however. The articles above, and even the agent who sold my house (more on that below), the story is prices drop = buyer’s market, prices rise = seller’s market.
What’s being missed is the actual cost to buyers and what rising costs mean to sellers.
For both buyers and sellers, agents should be comparing house prices based on costs, almost in deflationary / inflationary terms. Your targeted X monthly spend would buy you a home at $1.1M today, $1.5M 6 months ago, and $1.7M 12 months ago.
When I listed my previous house, my agent was very optimistic it would sell for over $1.2M. This was right at the beginning of the Ukraine/USA conflict and rising interest rates. Almost immediately, we (and everyone else in the local market) were dropping prices. It ended up selling 4.5 months later for just $870K. This was an incredibly deflating experience. My agent told me interest rates are rising, this is becoming a buyer’s market, etc.
Looking back on this, what she should have said is, when we went to market the typical buyer with $X spend would be able to afford $1.2M. What that spend looks like at this moment is only $1.1M. Should we change the price to match this?
Instead, it was more like, people think this is high, they can’t afford the same level of house, no one is selling in this market, we should lower. It was vague and reactionary.
If I had been given that information, it would have been very clear what to do, and to which target I needed to reach the same type of buyer.
To show you this, using the $870K price point:
7% = $5300/month
6% = $4838
5% = $4400
4% = $3983
Paying $1.2M at 4% rates (around the time we started to sell) would be $5219/month; buying my former house now for $870K would have been around the same monthly cost as buying it for $1.2M 6 months ago.
Does this imply a buyer’s market? I argue that this is neither a buyers nor sellers market.
If I had known what was about to happen (war, economy, inflation, interest rates) around the time I was make the decision to sell, I would not have put the house on the market. I ended up suffering an expectation loss of over $300K, nearly 30%. For new sellers, who already see these rising rates, why should they sell?
In other words, if I were to sell my new home right now I am totally screwed. We’ve seen that a buyer purchasing for $1.1M right now would have been able to afford $1.4M six months ago. I can’t expect more than 1.1M for it. I can’t afford to lose money on the transaction, so I hold off and wait. Even if I got a better job that required me to move, this impact of interest rates might make it impossible for me to do so in the coming years.
Over the long term, more sellers will hold off because they can’t get a worthwhile price, even though buyers will actually be paying the same amount in monthly costs. No one wins, buyers nor sellers.
The interest rate is a friction that prevents transactions and mobility around the nation. A hot real estate market is hot for both buyers and sellers. When sellers can benefit from selling, they’re more likely to do so. It doesn’t work for just one party, at least when it comes to mortgages.
Sellers need to understand changes in actual buyer cost and the affect on their selling price. Buyers need to understand their cost and how this relates to price in the market over time. (Is a house price rise of 20% fair? That depends on what the cost was at those moments in time)
As of today, according to DraftExpress (a reputable source on pre-NBA talent), Jaylen Brown would be the 4th pick (or is the 4th best prospect, however you want to read it) in this summer’s draft. Ivan Rabb is 14th. Both would be considered “lottery picks”, draft picks for teams that do not make the NBA playoffs, just as Chris Porter could have been so long ago. …
If their draft positions hold, Rabb and Brown would get closer to $3M and $7M, respectively. …
Taking money now is the smart thing, if it is guaranteed. For any player’s long term development, he has to be in a good team situation in which he can grow (compare San Antonio Spurs vs Brooklyn Nets) – this is something a player has much less control over and thus, has much more risk. The money is guaranteed while the opportunity to play, be liked by a coaching staff, is not. …
Other than having your draft position go down, costing you literally millions of dollars, if you get booted to the second round as Chris Porter, you will not have a guaranteed contract, or a contract at all. …
If a player stayed in school in order to complete his college degree and then dropped out of the first round, I would say he wasted the point of going to college. Jaylen Brown, Ivan Rabb, get in the draft now and go to summer school in the future.
Last night, former Cal Bear Ivan Rabb was picked in the second round by the Memphis Grizzlies, 35th overall. That likely means no guaranteed money, no guaranteed roster spot, and extensive time in the D League.
Rabb went from the projected late lottery as a freshman with guaranteed money and a chance to play to now having nothing.
And for those who look down upon the one (year) and done athlete, how do you feel about someone who lost millions of dollars by doing the “right thing”?
This isn’t much different from the example of Chris Porter over 15 years ago. Last year, I recommended: “Jaylen Brown, Ivan Rabb, get in the draft now and go to summer school in the future.”
Occasionally I hear Jim Barnett and Bob Fitzgerald, the Warriors’ TV announcers, talk about how players who stay in college for additional years do not lose much from doing so – that not only do such players get better and become more mature from the experience, they also end up making the same amount of money (or perhaps more) from elongated careers.
As a Cal Bear, this makes me think of the upcoming decisions of super freshman Ivan Rabb and Jaylen Brown. Sorry Jim and Bob, I disagree with you because of former Warrior Chris Porter.
Porter is expected to be a late lottery pick in the June NBA draft. He could have been a lottery pick had he come out after an All-American junior season last year.
Chris Porter lost potential lifetime financial security by staying in school
Over 15 years ago, Chris Porter was a hot NBA prospect, projected to be a lottery pick after his junior year. He was featured on the cover of Sports Illustrated. A year later, after giving scouts a full year to focus on his weaknesses, he was drafted by the Warriors at the 55th overall pick (I was very excited by this pick, as I remember).
Let’s break this down for Rabb and Brown. As of today, according to DraftExpress (a reputable source on pre-NBA talent), Jaylen Brown would be the 4th pick (or is the 4th best prospect, however you want to read it) in this summer’s draft. Ivan Rabb is 14th. Both would be considered “lottery picks”, draft picks for teams that do not make the NBA playoffs, just as Chris Porter could have been so long ago.
So why should both Rabb and Brown leave for the NBA?
In a worst case scenario, any 1st round draft pick gets two years of guaranteed money upon signing. As of this year, the amount for the lowest 1st round draft pick (30th) is approximately $1.9 million dollars. Even if a rookie has a terrible agent (see: Ricky Williams / Master P), he would still more than likely get at least $1.5 million. (I am going to leave any net present value arguments out of this entire discussion, as well as taxes, agent fees, etc.)
If their draft positions hold, Rabb and Brown would get closer to $3M and $7M, respectively.
Minimum $1.5M dollars and a (virtually) guaranteed spot at worst case on a NBA basketball team for two years is nothing to scoff at, especially if you did not grow up in a fairly affluent family. I went to Business School at Kellogg (Northwestern). If I were offered this deal today, I would absolutely take the $1.5M now, despite having a good amount of work experience and knowing I can do other things. Thus to paint 20 year olds (who are probably unable able to do other things at this state in their lives) as silly for taking the money is a bit ridiculous.
Yes, it sounds great to believe in your talent, that the money will always be there, but that’s actually the dumb move.
Taking money now is the smart thing, if it is guaranteed. For any player’s long term development, he has to be in a good team situation in which he can grow (compare San Antonio Spurs vs Brooklyn Nets) – this is something a player has much less control over and thus, has much more risk. The money is guaranteed while the opportunity to play, be liked by a coaching staff, is not.
What are the opportunity costs for staying?
Other than having your draft position go down, costing you literally millions of dollars, if you get booted to the second round as Chris Porter, you will not have a guaranteed contract, or a contract at all. Let’s ignore the chance for life-changing injury too, which could happen but is rare.
In other words, if your stock falls for whatever reason and you fall out of the 1st round, you will AT BEST be making just 3.3% of what you would have made, IN THE WORST CASE, as the lowest chosen first round draft pick.
This is a huge drop. Yes, someone could make good money (six figures to low seven figures) internationally, but if you are just starting your career and feel you are an NBA player, you will probably try the DLeague first.
A key thing to note here is not just the relative different of the 96.7% drop in salary, it’s the absolute drop. If you had this disparity with Kobe Bryant’s pay, you would still be making $750K per year, a ton of money for 99% of Americans. But this is $25K, and you won’t be flying first class, staying in nice hotels. This is bus life, a hard way to earn $25K (roughly equivalent to making $13/hr at a full time job for a year).
If a player stayed in school in order to complete his college degree and then dropped out of the first round, I would say he wasted the point of going to college. Jaylen Brown, Ivan Rabb, get in the draft now and go to summer school in the future.
If you want a more current example of how delaying can matter, look at Skal Labissiere from Kentucky. If he could have entered the draft a year ago, he might have gone #1 overall. After a poor freshman season, however, he might now be picked towards the end of the lottery, a $4.5 difference in guaranteed money.
Is there another way?
In my opinion, college basketball (the talent level) suffers from elite players leaving early. It is harder for non-traditional powerhouse teams to create momentum off of strong seasons (if Rabb and Brown leave, the Bears program is very weak for next year). Players are unable to mature in a more natural (college) setting and have to develop their games in the constant pressure of the professional ranks among men 5-15 years older. In addition, unless they play for a terrible team, elite players will likely see more reps and minutes playing for a college team.This lack of elite players over consecutive years is also part of the college game’s ratings decline.
Solution: Let players enter the draft but continue to play in college.
How this would work:
College Players can enter the draft anytime in their college career.
If drafted in the 1st round, a player could stay in school up to their 4th year after their high school graduation year (you cannot stay in school forever).
Contracts are guaranteed (as they are today) for 1st rounders, while contracts for 2nd rounders can be offered guaranteed (optional by the team, as today). Contracts take effect once the player decides to leave school.
1st round picks do not have to sign their contracts, but their rights would stay with the drafting team until the end of their 4th year after high school graduation. Rights to 2nd round picks would only stay with the drafting team until the next year’s draft (a bit like the college baseball draft).
Players who want to maintain college eligibility cannot leave school and take time off to prepare for the draft process. Instead, teams can visit with them during specific break (spring break, summer break) periods. This will limit the number of workouts (and injuries) possible, but interviews should be fine. Schools like Kentucky would likely hold on-campus “Pro Days” as in the NFL, which admittedly could favor powerhouse schools in college recruiting.
Players give up their college eligibility completely by leaving school and going through the normal pre-draft preparations – this would be no different from today.
Teams can cut players with no salary cap hit (the year the player enters the NBA) in case a player seriously regresses (or for whatever reason), but the player still gets fully paid.
For NBA Teams
Teams no longer have to pay to develop players (ex. Jermaine O’Neal) and then see them leave once they are physically and mentally ready to contribute to a team. Thus, teams pay more for actual expected contribution than potential.
Insurance can cover players who (perhaps this can be paid in half by the player, through his contract, and the team) have a career-ending injury during college after being drafted.
Per Net Present Value, it is always better to have a financial obligation later than sooner.
Non-ready players take fewer jobs away from NBA veterans.
For College Teams and the NCAA
Teams can hold on to players longer, and coaches would no longer be in this weird “I want you to stay, but I swear it’s for your own good, not for mine” position.
Having players for multiple years helps sustain programs.
Consistency and multi-year player resonance creates better television ratings and attention, i.e. business revenue.
For Players
Significantly less risk. If you have a good potential draft position, get drafted and get guaranteed money when you leave. If you’re hot, strike. If you’re not, keep working.
Make progress on a degree (what college is for), become more mature, and improve your skills so you don’t flunk out (see: Anthony Bennett) once you do reach the NBA.
Some other notes about why this makes sense. First, we can look internationally. Teams like the Spurs have signed professional international players for years, knowing they are unlikely to come to the NBA right away. In that time, these players develop further and come to the NBA ready to contribute. These aren’t necessarily older players either – many European players (Tony Parker, Ricky Rubio, Kristaps Porzingis) turn professional as teenagers, before their college-age years.
In addition, with the NCAA’s supposed focus on amateurism, under this plan, players will not get paid anything until they leave for school. This is like getting a job offer when you are still in college, which is pretty common. MBA students often finalize their jobs up 10 months in advance of the actual start date.
I think these changes will not prevent players who can play in the NBA right away (ex. Karl-Anthony Towns) from jumping, nor should it. However, it can help the many players who have the talent, but not quite the skill set, with Brown and Rabb as examples. Jaylen Brown cannot shoot or handle the ball particularly well, and yet his physical talent makes him a great NBA prospect. An additional year or two would allow him to become a great player and make more progress on his academic ambitions without financial risk (aside from if his family needed money to survive right now).
This is a solution that helps everyone – both NBA and NCAA teams, younger players in college, older players in the NBA, and the NCAA as a business. Fans get to watch their NBA teams’ young talent in college and become more devoted and hopeful for their futures while enjoying their favorite college players for multiple years.
I Spit Hot Fire 