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.


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…


  • Thor

    Here’s a pretty darn similar quote, does that get a shirt?

    Oh Lord, give me chastity, but do not give it yet.
    Saint Augustine

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  • Noam Lovinsky

    “Give me chastity and continence, but not yet.”
    – St. Augustine

  • Glenn Kelman

    Please e-mail me your addresses and we’ll hook you up.

  • Thor

    Thanks! But your email isn’t apparent – I just sent my address to redfin feedback, hope that works

  • Glenn Kelman

    Hey there, sorry about that Thor. We’ve connected directly with Thor and Noam, and handsome Redfin t-shirts will soon be headed their way…

  • Juan

    I say let capitalism run it’s course. All these people wailing for a bailout – would they have donated money for the common good had they made a profit? Why should they expect a bailout now that they are at a loss?

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  • Adrian Salgado

    Juan, I echo your sentiments.

  • Phil

    Bailout is such a nasty word.

    How about some means for borrowers and lenders to step away from the precipice together? In some areas, a high density of foreclosures could risk the depopulation of entire neighborhoods and, inevitably, the needless destruction of millions of dollars of housing stock.

    Empty houses are bad news for everyone, including the lender who ends up owning the property. A free market economy is not a suicide cult.

    BTW, most “free market” advocates ignore the fact that the US real estate market including the 30 year mortgage was largely created by government action in 1930s. The idea that our residential real estate market is somehow a creation of Adam Smith’s invisible hand is simply a fiction.

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