Give Me Price Discovery, But Not Yet

Slate’s Daniel Gross complained last Friday that recent proposals to declare a temporary moratorium on foreclosures will only slow the process of price discovery, which is how the market figures out what an asset is worth.

Whether we like it or not, Gross argues, housing prices still need to come down. A foreclosure is the market’s only way to force the issue.

And as anyone who has seen “Trading Places” can tell you, in most markets, price discovery can take a few minutes. In real estate, it takes years. Sellers, Gross says, get stuck on a price. Builders hold the line so that other residents in their development don’t feel like suckers. Commissions and moving costs, he notes, decrease liquidity.

Gross has argued elsewhere that bubbles are good for the American economy; without such irrational exuberance we wouldn’t have the telegraph, the Internet, or railroads. But in the bubble’s aftermath, he says, it’s just as important to murder as to create.

And when nobody faces the music, you get a Japanese-style recession, with prices stagnant for years. This is why Gross says that a foreclosure moratorium would perhaps be good for social harmony but bad for our economy.

One symptom of incomplete price discovery is wide disagreement between home buyers and sellers on price. Sellers are remembering what they could have gotten six months before, and buyers are forecasting what they could still save six months later.

This surfaces in our business as low close rates, which have dropped 50% since late fall. To generate the same amount of revenue, we have to do a lot more work. We spend most of our day trying to explain to buyers and sellers what we see happening in the market.

Predictably, we think the solution to the price discovery problem is more information. Informed consumers are one of the basic prerequisites for an efficient market. In the bubble, consumers bought houses without realizing the properties had sold for half the price two years before, using adjustable-rate mortgages they didn’t understand. Now in the bust, they are even more anxious.

And I’m sure Adam Smith would say it’s their own fault. Consumers should read the fine print. But the real estate and mortgage industries haven’t always made it easy for consumers to do that.

Today, many of the MLS cooperatives for sharing listings regulate brokers’ ability to publish price history, valuation estimates and tax records. And at least one California MLS has pressured Redfin not to support the “bubble bloggers,” who — working anonymously, occasionally at their own peril — often challenge conventional wisdom on market conditions. Extremely intelligent people struggle to compare the cost of different mortgages. Most disclosures are made at the discretion of the real estate broker or the mortgage broker, which is one reason why there’s still nothing like Yahoo! Finance for real estate.

And home-buyers need information more than stock-pickers. Buying a home isn’t like playing the stock market, which is still the sport of America’s other half; buying a home is supposed to be what all Amercians strive to do, regardless of whether they have personal finance expertise.

So while we have come to embrace the idea that cooperation among brokers is necessary to ensure the information we share is high quality, we still think the industry needs to get over itself about sharing all of that information with consumers. The most forward-looking MLSs — including the one here in Seattle — have already begun this process, and many others will follow their lead. If we as brokers aren’t the source of information about price discovery, someone else will be.

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Bonus link, from a Friend of Redfin, on Florida prison system’s drunken orgies. Also check a review of online real estate sites which puts Redfin at the top of the charts. And a free Redfin t-shirt to anyone who can guess where the title for today’s post came from…