Apocalypse Now (Guest Post)

Here at Redfin, we don’t have much patience with bubble bloggers. We do not have a fixed position that all markets are over-inflated all the time. For example: since last year, we have stated repeatedly that foreclosures are likely to peak this summer, a position now corroborated by statistical data and our own experience: in Southern California, our agents and our customers have complained that screaming deals on distressed properties have been scarce since the spring.

But on Tuesday we published our monthly newsletter, arguing that the problem in the current market is weak demand. Then yesterday, we published a contrary point of view from DeeJayOh of Seattle Bubble, arguing that limited inventory was the reason there was limited demand: there has been very little good stuff to buy. And now last night I got another response to the newsletter, from a Seattle real estate agent at John L. Scott, who has lots of experience working with builders on huge new developments.

He argues that a huge wave of foreclosures is coming to the Seattle market, and that local banks — we blotted out their names — will be forced to cough up the foreclosures when they are taken over by the government. He also thinks that the drop in prices has so far been driven by fear and greed rather than distressed properties per se. It’s an opinionated piece, loaded with inside baseball and on-the-ground facts. I don’t agree with all of it — the failure of a local bank won’t cause foreclosures when really it is foreclosures from 2008 and 2009 that are now causing that bank to fail — and I think that fear-driven pricing is more prevalent in the exurbs where the writer lives.

But for all that, it’s a really good read.  The writer agreed to have his email published, but never answered the question about attribution. Guest poster, if you want attribution, please step forward!

Rates need to bump up a to create a fear of loss in the market place.  The focus will then shift from home prices to interest rates.

Fear and Greed Drive Down Prices
Every buyer seems to view each and every listing as distressed, when nationwide about 30% of homes are distressed. And foreclosures are crippling middle-income home-buyers that have had their equity removed.  This was in part due to the economy although from 2005 to 2008 there were also some risk takers in the $400K -$600K price-range.  But the point is these home owners now are tight.  Others like me, I’m upside down and we put $250,000 down in 2004.

I still made great money last year and can weather the storm.  I love our neighborhood and won’t move.  But we have had three homes listed and sold in the last six months that sold for  $125K under market value.

The first seller spoke to the original listing agent of the subdivision; that agent told him he needed to price his home to sell at $409,950 if he wanted to sell in this market.  There was a two-month-old sale 125 feet away that had just closed 60 days before for $539,000. The seller went ahead anyway, and got 5 offers in less than a week.  This was not a distressed sale. The listing agent just had a dismal view on the market or needed a quick buck.

That low sales price forced the hand of a second seller in our adjoining neighborhood, who felt his value was closer to $499,950. He was being relocated, and he used the relocation agent recommended by his company.  He listed the house for $425,000 and was pending in two weeks. Obviously a quick sale and under market value.

Our neighbor lost his job and had a friend who did short sales. The neighbor made a plea to the bank, and his friend bought the house somewhere in the $280,000 range. He put $10,000 into it and then listed and sold the home for $389,950.  His house is identical to the other homes listed; it is 400 sq ft smaller than ours which we paid $520K  for 5 years ago with $250k down.

The point being within a 7 to 9 month period and only until the last sale I mentioned, none were distressed homes.  We had comps at over $500,000.  But agents who were more focused on getting a rapid sale to stay afloat did a disservice to their clients and the entire neighborhood.  We now have 3 sales in 6 months the highest being $415,000, $409,000, and $389,000 or less.  From an appraisal standpoint everyone in both of the two subdivisions is completely screwed.

Two were move-down buyers and both sales had multiple offers and went pending in a week.

The other issue and maybe you have mentioned it previously, is that the local banks are completely and utterly screwed up.  They don’t have asset managers, they have out-of-work loan officers trying to be asset managers.  These guys can’t balance their own check books, let alone assess market value, or figure out how to position property.

The scary thing for Seattle is that [Bank A], a $3-billion bank, had $900 million in defaulted new construction loans. Excuse me?  When the heck did that balance sheet ever make sense? [Bank B, which has been taken over by the FDIC] was as bad.  [Bank C] and [Bank D] are going down in six months or less; they’re well over [Bank A's] load of non-performing new-construction loans. That doesn’t even include [Bank E], [Bank F], and the list of 20 others on the FDIC watch list.

To put it bluntly, there is not a shadow inventory of undisclosed real estate held by the banks and the FDIC, there is a frickin AVALANCHE.  [Big Bank A] and [Big Bank B] have not settled with the FDIC.  The amount of debt, distressed loans, and non-performing properties are enough to flood the market and crash Seattle.  You would see bank-owned properties topping 50% of all product on the market in our area if they brought them on.

For as many tech-savvy, business-savvy people who are in this state, as a whole we still react like we think we are some unique part of the world.  Read “Seattle magazine” March 2008. YIKES.


  • GustaveRadcliffe

    It is a little unfair when people characterize markets as “driven by fear” only when prices are going down. Fear is prevalent both when prices are headed down (fear that tomorrow the asset will be worth less than you paid for it) and when they are headed up (fear that tomorrow the asset might cost more than it does today).

    To that effect, who is to say that the sale prices referenced by the anonymous writer are examples of “below market value” transactions? Perhaps the sellers were extremely satisfied with the price, because of the fear they next month the price might have been even less.

    Fear is a powerful explanation for why prices diverge from fundamental value in all markets. Fear is why there almost always a difference between the fundamental value of something (the tangible assets on a company's balance sheet, or the material and labor consumed to produce a good) and the “market clearing price”, ie, the price at which sellers find an adequate population of ready and willing buyers.

    The stock market is probably the best example of this. A stock's price at any given moment is not the value of the company, it's the price at which sellers of shares are able to find a buyer. If you wanted to buy or sell a share of MSFT today, the price was $23.27. End of story.

    Using “market clearing price” as the definition of fair price, it sounds like the sellers in the anonymous writer's examples all received precisely the correct price for their house.

    What DeeJayOh points out is that, like the stock market, the real estate market also has changes in trading volume. People are free to disagree with the “market clearing price”, and to communicate that disagreement they choose not to participate in the market.

    This is exactly where the real estate market is today. Low volume, as pointed out by DeeJayOh and Glenn (low supply and demand) is driven by two things. On one hand there are the sellers who think the “market clearing price” is too low for a variety of reasons both psychological (too stubborn) and structural (too underwater on their mortgage). On the other are the buyers who think the “market clearing price” is too high for a variety of reasons both psychological (again, too stubborn) and structural (can't afford the mortgage, can't qualify for financing). These two parties will participate in a stare-off of historical proportions until something (foreclosure, birth of a child, promotion, layoff, etc.) causes them change their assessment of the market.

  • stesmo

    “I still made great money last year and can weather the storm. I love our neighborhood and won’t move. But we have had three homes listed and sold in the last six months that sold for $125K under market value.”

    They were not distress sales and they sold – that means the new market price for homes in your neighborhood is… $125K less than what you think it should be.

    They sold AT market value. Your value for those homes is not current.

    It's a shame some people bought their houses for more than what the market value is now, but that is only a problem for those that are trying to sell their house and not for you and others that are happy with their houses.

  • commonsense

    If the sales in the original poster's neighborhood were 20% below market value, investors would be snapping them up and reselling for a great, quick profit. The fact is, most people in most markets are too scared to make this optimistic assumption. There are plenty of reasons to believe these new lows are here to stay and perhaps not finished dropping. I assume that the original poster is not buying up the block – an opinion is far less risky than actually putting your money where your mouth is.

  • Will

    Market value is what a ready, willing, and able buyer will pay in today's market. The home that was priced for $409K received 5 offers – that tells me that it had adequate market exposure. If the 'true value' was $500K, one of the 5 would have ultimately offered that price. While some realtors are clearly in it only for a paycheck, most realtors will do a reasonable job exposing the home to the market – and then it fetches whatever it fetches.

  • Anonymous

    It's hard to imagine a listing agent so persuasive that he/she could convince the seller to forgo $75,000+ without the house sitting on the market for awhile. I question the authors assessment of market value.

    In addition, the trouble with comps is that they don't tell you anything about the property you're actually buying. From what I've witnessed in my neighborhood, buyers are caring a lot more about the particulars of a property than they did a few years ago. Homes that are well-maintained, extensively updated, and with lots that don't have any problems (critical area zoning, street noise, odd shape) are selling at only 10-15% below peak values. If the property has any drawbacks, it tends to sell in the range of 20+% below peak.

    • Seattleite4

      I don't question the author at all as this is exactly what I am going through right now. I am being strong armed into listing at well below market value or face being “dismissed” as a seller. I am listed with a well known real estate company and my listing is set to expire in about 5 days. I have been told that if I don't lower the price of my house to $499,000 then said company will no longer allow me to sell with them.
      A quote from one email: “There’s really no excuse for a roughly 10% discrepancy between the listing and the selling price, but this is what happens when too many listing agents (most of whom are desperate for any business at all) make the same mistake I made in overpricing their listings from the very start. Then new sellers see the other overpriced listings and then overprice their own as well. Unfortunately, the only numbers that matter to both Buyers and their lenders’ Appraisers are the actual Sold comps”
      So, if you question the market value, wouldn't you trust the market value and the sold comps that this company supplies? In my area the average selling price of a home is $173.00 which is lower than when I listed it 100 days ago so I have adjusted my price to $170.00 per square foot but this agent, who the company is backing on this decision, says I must drop it to $161.00 per square foot in order to keep it listed with them. These values are straight from the listing page of my house that this company is supplying me. These are their numbers!!
      You may question the property right? This property is a 3080 square foot home with brand new slab granite in the kitchen with a marble backsplash, glass tile accents and the master bath is fully updated with a double shower head and full tile throughout. I have a brand new roof, along with all new brushed nickel hardware & light fixtures throughout the house. The comps used to arrive at $173. Per square foot include one short sale that sold for $146 per square foot and one house outside of my city that was of lower value. I would say the other comps are good comparisons and the price per square foot is accurate with the highs and the lows averaged in.
      One of the comps used fits this writer’s description perfectly. This house (smaller square footage than mine and selling within that mentioned average) was listed at $488,000 dollars and within 7 days it was sold at $490,000. That means multiple offers. This demonstrates exactly what this author was describing.
      You should read these emails where I ask them to please reconsider extending my listing based on their own numbers and they repeatedly reply that on Monday, if I do not lower to $499,000 I will be free to go elsewhere. I am practically begging them to allow me to market my house through them. The emails are remarkable.
      I will let you know on Monday if I have been ousted!!

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