Why The Real Estate Market Isn't a Free Market

The folks at Redfin got into real estate to make the industry more efficient. But if anything, the market has just gotten less and less efficient. And most of it isn’t the Realtors’ fault but the banks. Banks selling a home don’t trust one another’s credit. They reject appraisals for a price that a buyer is willing to pay. They’re slow to put homes on the market, but aggressive about pricing other sellers out of the market, even as buyers are frantic to strike before the tax credit expires.  The California economy is in the tank but we only have 4.2 months’ supply of listings.

I am not trying to talk the market up. (After years of saying that prices were too high, I was virtually crucified for saying, when no one else would, that prices in Southern California may be nearing a bottom; three months later, prices began to increase). And my point in writing this is not to blame the banks, who have good reason for an abundance of caution. My point is just to state the obvious:  the market has become distorted so much that it is ridiculous to pretend that it is a free market. It is instead an oligarchy, controlled by the government and the banks to limit price drops, which in turn frustrates consumers and limits price recoveries.

Human nature being what it is, there are some folks who have already figured out how to profit from this skewed-up system in interesting and not entirely ethical ways. Here are just three phenomena in the real estate market that only make sense if it isn’t really a market at all:

1. Banks are hoarding listings to avoid writing down their losses: individual home-owners who want to sell can’t compete with the banks on price, and so hold their properties off the market. As a result, banks have effectively become the sole supplier of homes for sale in many distressed areas. We routinely see bank-listed homes with 30, 50 sometimes more than 100 offers. And yet even as sales volume in California is up 35%prices are down 30% over last year, despite modest recent gains. Supply and demand have been slow to find a new balance because there is an enormous backlog of homes that could be sold, and most are not being put on the market. Banks have good reasons to withhold inventory: staff reductions, the need for repairs, concern about flooding the market. But another reason banks withhold inventory is that they can avoid acknowledging the  loss on their books until someone puts a new price on the listing. Dribbling out the inventory may prolong the banks’ survival, but it means a recovery will take longer, too. The major source of uncertainy in today’s market is that nobody knows how much of the inventory iceberg is under the water.

2. Real estate agents may be hoarding listings to save them for their own buyers, doubling their commissions: the shortage of listings in a market where asking prices have not significantly increased distorts the incentives for real estate agents, too. In multiple Redfin Forums posts,  several eagle-eyed consumers recently noticed that listing agents are accepting an offer on a listing literally one minute after it debuts on the the market. Then a month later, the listing agent returns the property to the market saying the previous sale fell through,  and again immediately acccepts a new offer before anyone else can strike. The second time around, the offer is from a buyer represented by the listing agent, so she stands to earn double the commission. The concern is that the listing agent is hiding a listing from other buyers until he or she can find her own buyer. The fact that we’re even having these skirmishes over inventory suggests that the market is not doing its work; normally when there is a shortage of supply and an excess of demand, prices increase and supply increases.

3. Banks refuse to accept what the market tells them is a fair price for a home: for a long time, banks have aggressively priced their own listings to create a bidding war between buyers that results in final prices hundreds of thousands of dollars over the asking price. That was strange enough, but now in the Inland Empire our partner agents are seeing banks refusing to take the highest offer, for fear that the home won’t appraise for the value offered by the buyer. Rather than risking that a loan will fail because of the appraisal, the banks take a lower offer from an all-cash buyer.  What this means is that the market establishes a price for the property and the banks on both sides of the deal — the one selling the property, and the other lending money to a would-be buyer — refuse to believe it. Now cash has always trumped other offers at nearly the same prices, but when we see a bank reject offers 10% or 20% higher it means that the credit markets are still hindering a recovery. Perhaps soon people will be offering two chickens and a goat for a house.

So what’s the solution? The government could require that banks receiving federal assistance put real estate up for sale within nine months of taking ownership, or at least mark the assets to market using the Case Shiller index where available; failing that, we should at least extend the home-buyer tax credit so that we don’t create demand exactly when the foreclosure moratorium reduced supply.

And banks themselves obviously need to require listing agents to keep a listing on the market for a minimum length of time — say three days — so the market can do its work. But as for banks that refuse to accept a price for fear it won’t be supported by the appraisal, we shouldn’t worry. We’ve all had enough of banks being pressured to make deals they’re not comfy with. If we get the inventory on the market when the buyers are ready to buy it, the market can start to do its work again.


  • http://blog.findwell.com Kevin Lisota

    Interesting phenomena in California and other distressed markets. I would point out, however, that for the most part we are not seeing this in the Seattle market. Certainly there is a marked increase in short sales and bank-owned properties in the our area, but not to the extent that creates the sort of market imbalance you describe here. Glenn, besides California, are you seeing this in other Redfin markets?

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    Good point Kevin.

    The phenomena are mostly in California, but I think banks have been slow to price and list distressed assets nationwide.

  • http://www.housesforsalelists.com NIck

    Agree with Kevin.

    Thanks for the post.

  • singliac


    You might want to knock on wood now.

  • http://www.agentcampus.com/ Why Get a Real Estate License?

    Predatory lenders are making things harder for everyone involved including agents.

  • http://www.housesforsalelists.com NIck

    This is how they make money

  • http://www.nealadler.com Neal Adler

    With regards to point number 2, this may be the case in a few instances but as an REO agent my clients I am required to place the listing in the MLS. At least here in California failing to do so is probably a violation of the business and professions code, a violation of the NAR code of ethics, and a potential law suit against the listing agent from the seller. There are a number of factors that are influencing the market here in California. Interest rates are up but, are still at historically low levels. There is still a pent up demand, especially at the lower price range. It is true many properties are sellling with multiple offers. Inventories are somewhat depleted. The moratorium on foreclosures is keeping the inventory low. The HVCC issue with regards to the appraisals is wreaking havoc, out of the area/inexperienced appraisers are causing problems with properties not appraising when the value is there due to incompetent and inexperienced appraisers. In the final analysis the items 1 and 3 may be true, but I seriously doubt that agents hoarding listings is significant enough to affect the market. I just don’t that ocurring that often.

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  • http://www.notorious-rob.com Rob Hahn

    Glenn –

    Love ya man, and your blog is definitely one of the best in our industry.

    But this post, I don’t get.

    Why is hoarding behavior “not a market”? That strikes me as rational behavior by the banks and by the agents as well. Isn’t avoiding acknowledging the loss market behavior? My 401(k) is totally tanking on paper; if I were to sell now, I’d have to recognize those losses. I’m choosing to hold on to it, and wait for recovery. Am I behaving in a non-market fashion somehow?

    Banks choosing all-cash offers 20% below another offer with risk of loan failure is non-market behavior how? You even point out that cash is king; why is a bank’s choosing to be risk averse an indication that the real estate market is “not a free market”?

    Then your solution is for government intervention? I’m not seeing how THAT is any sort of free market under any definition.

    If anything, isn’t the problem the numerous instances of government intervention, whether well-intentioned or not, such as the moratorium on foreclosures?

    What am I missing here?


  • http://www.bakersfield-ca-homes-for-sale.com/blog/ Brad-Bakersfield Homes

    This is pretty scary stuff. What happens when all these foreclosures hit the market?

  • http://www.san-francisco-ca-homes-for-sale-mls.com/ San Francisco Kid@San Francisco, CA Homes for sale

    Yeah, I am hearing reports all over about all these foreclosures hiding in the background. I hope its not as bad as some people think.

  • http://www.oakland-ca-homes-for-sale.com/blog/ Oakland Cowboy-Oakland, CA Homes for Sale

    In California there’s tons of foreclosures that haven’t even been processed yet. I sure hope the real estate market starts to recover before they all hit.

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  • http://www.denverdiscountproperties.com Mark Coble

    Wow! First of all, I’m digging this blog. My and my team are in Colorado and yes were seeing the bank holding properties ans still waiting for the release of many REO properties.

    Many of my rehab and fix and flippers are fighting over the properties and driving up the prices when they hit the market. Of course this is what the bank is looking for in the lower 1/3 of the market. Many of the high end Colorado homes especially the brand new ones are just sitting squeezing money out of every builder.

    I guess my question is how are the banks really going to cure this problem when they release these assets and keep market integrity.

    There has to be some ethical processes in place to protect as much as they can. I suppose in one angle the banks created this mess by offering such crazy loans programs of which they knew wasn’t right anyway…

    Love this blog guys!

  • http://www.tricontowers.com/en/ Real Estate Hanoi

    I agree with doubling with the price by the agents. This is also the reason why properties are expensive. Can't we do something about this? I heard, that there are many companies who are looking for a low-cost housing, but when will it happen if the culture in real estate sales is doubling the price for their commissions?

  • http://www.placercountyhomesandland.com Patrick Hake

    It's been a crazy couple of years in the market here, and up here in Northern Cali the banks still have the run of the show. I cannot even begin to imagine how many foreclosures are still waiting to be processed, but it's going to be bumpy for a while yet.

  • http://www.astutebuyersadvocates.com.au/ Buyers Agents

    definitely for money, no matter how they place rules – banks always find their way out and do it their way

  • http://epicprofessionals.com Real Estate Investing

    This is the reason why our economy lead to this. The greediness of the banks!

  • http://pulse.yahoo.com/_IFSE3XXUYFNPPHN4WW5TJM6WRI Neil

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