Circle of Competence Issue #32

Quote of the week: "Someone with B+ intelligence in several fields likely has a better grasp of how the world works than someone with A+ intelligence in one field but an ignorance of that field just being one piece of a complicated puzzle." - Morgan Housel

FOOD FOR THOUGHT

This week, my wife and I began our search for a personal home. Even though I am a licensed broker (#293256) and have been through the process multiple times with single family investment properties, going through the buying process for a personal residence can be, in my opinion, far more emotional and far less calculating. This week, I decided to share my thoughts about the psychology of the whole experience. We visited 12 houses this week, 8 on the first day, and 4 on the second. On the first day, we wanted to make an offer on 3 properties (not at once, but in order of preference), but before we could even finish - they had gone under contract (a term which means both buyer and seller has signed a binding contract for those who aren't familiar with the terminology) - the first psychological bias of FOMO set in! So we scheduled a few more houses to visit, and on the very last one, we had that instant 'emotional connection' (investor alert: if you ever get this feeling about an investment - DANGEROUS) and wanted to make an offer on the spot. It had been on the market for less than 24 hours. We finished our offer, cut our due diligence and earnest money deposit checks (terms for money up front that shows the seller that you are SERIOUS about buying their property), and submitted it. Within 2 hours, the listing broker (broker representing the seller) called our broker back and said there were multiple offers and called for our 'highest and best' (a broker term which means we need to 1) rescind our offer, 2) keep our offer as is, or 3) up the offer).

This is when the emotions ran wild. We were emotionally sucked into the rabbit hole and knew that the location was perfect, the property was great, and our heads were practically swimming in serotonin. At this point, I took a step back and realized that I had a choice to make - did I want to keep the calculating hat of an investor on or take it off and be a normal home buyer? I decided that if we wanted the property, I had to take the investor hat off and up the offer to a fair, full market price, but only to the extent that we were comfortable with our personal financial situation. Please, for those investors out there, don't judge me too harshly. I did not make an emotional decision, but rather a decision not to value the property on an investment basis. I made the decision to offer a price based on what we could handle from a personal financial position and what the sales comps supported.

Throughout the process, I've kept some general mental notes on the current housing market: - In the triangle area of North Carolina (Raleigh-Durham-Chapel Hill), it is typical to have a high due diligence fee, which is a non-refundable option fee to 'lock up the property' for a time while you perform your inspections. It is not atypical to have over $2,000 of non-refundable money as a fee which means that if you back out of a deal before the option time period is up, you do not receive this fee back! So people are risking quite a chunk of money to lock these properties up.

- Multiple offer situations. As far as I can tell, pretty much every single property that is even halfway desirable is getting multiple offers, which creates a bidding war where listing brokers call for 'highest and best offers'. There are many more buyers for each seller, vs. back in 2009-2015 when the balance was in the buyer's favor.

- Low days on market. Days on market is a typical 'temperature gauge' for real estate markets to show how fast properties are moving. Generally, the faster properties go under contract, the higher the demand relative to supply. It is pretty well known nationally that housing market inventories are low relative to historic levels and thus there is more demand than available supply, leading to price increases. Currently in the Chapel Hill, NC market, there are neighborhoods that have average days on market of less than 5 days.

- My wife and I are our own little family, but we do not have kids. We don't have job situations that are requiring us to find something quickly and move immediately. But we are competing against families and buyers who have kids they want to be in certain schools and who have jobs that require them to move immediately. This is probably as big of a factor for competitive bid processes as the structural reasons above.

The housing market is cyclical and sensitive to interest rates, but is also sensitive to supply levels which are extremely low. Current rates are still fairly low on a historical basis and thus buyers are still able to get solid fixed 30 year rates and afford a lot more house. Both the fact of low inventories and low interest rates are structural reasons for the increasing prices. Times are good, money is flowing, and credit is easy. But like all markets, this too will cycle.

In conclusion, I didn't anticipate how hard it would be to 1) take off the investor's hat while buying a personal residence and 2) how easy it would be to get emotionally involved with a piece of property! Whether we get this property or not, I have learned many valuable lessons thus far from an investment and psychological perspective. After getting into the home buying process and experiencing the emotions that accompany it, I completely understand why Buffett and Munger live by the rule of absolutely no sealed bid or open cry auctions for investments. The 'lollapalooza effect' of emotional attachment, social proof, fear of missing out (and the list could go on and on) is simply too overwhelming for a flesh and blood sinner to resist.

DEPARTMENT OF GENERAL FINANCE

- Fannie Mae & Freddie Mac, investor sentiment, & the housing market (John Huber, Base Hit Investing)

- Masayoshi Son's SoftBank and $100B fund (Bloomberg)

- Adventur.es fall 2018 investor letter (Brent Beshore)

- Shane Parrish on the winner-take-all business mental model (Farnam Street)

- Could the economy expand for up to 8 years? One analyst thinks so. (CFA Institute)

- Morgan Housel on varying types of 'smarts'

- Forbes' interview with Jeff Bezos (Forbes)

- Private credit demystified (Absolute Return Partners, investor letter)

- How Jim Chanos uses his tools of the trade to take on Elon Musk (Institutional Investor)

DEPARTMENT OF TECHNOLOGY

- The inside story on Brian Acton, WhatsApp Founder, and why he decided to leave Facebook (Forbes)