Post-Hangover, the First Signs of Life (July Roundup)

Every month, Redfin publishes two newsletters on real estate prices. One, usually published on the last Tuesday of every month, is a Redfin Roundup, which synthesizes data collected by economists, government agencies and others to provide a complete portrait of what happened in the market over the past month. The other is Redfin Insider, usually published on the 11th or 12th of each month, which analyzes our own databases to identify — well ahead of anyone else — the major trends in listing inventory and prices as well as sales activity and consumer traffic.  To receive these newsletters by email, just sign up! We also post newsletters to our national and local blogs. Here is the July Roundup.

Howdy Redfinnians!

It’s time for the monthly round-up of everything that moved in the real estate market! The short story is that the real estate market is stagnant, mostly because home-buyers can’t get credit, and sellers can’t get enough money for their house to pay off the bank.

The Case-Shiller index published on Tuesday showed home prices increasing across the board in May 2010:

Metro Area MoM Change YoY Change Date of Max Change from Max Prices Last at This
Level in…
Consec. Mos.
of Increase
Phoenix 1.4% 6.3% Jun-06 -51.2% Sep-01 2
LA 2.4% 9.6% Sep-06 -36.2% Dec-03 2
San Diego 1.8% 12.9% Nov-05 -34.8% May-03 13
Bay Area 4.0% 20.0% May-06 -34.9% Aug-02 3
DC 3.8% 8.8% May-06 -27.5% Apr-04 2
Atlanta 3.9% 2.3% Jul-07 -21.0% Mar-01 2
Chicago 1.8% -0.4% Sep-06 -27.7% Jun-02 2
Boston 3.0% 6.5% Sep-05 -14.5% Aug-03 2
New York 0.6% -0.1% Jun-06 -21.0% Apr-04 1
Portland 3.0% 0.8% Jul-07 -20.7% May-05 2
Seattle 2.2% -1.7% Jul-07 -23.7% Apr-05 3
20 City 2.1% 5.1% Jul-06 -29.1% Sep-03 2

We particularly worry that California prices are over-heating: annual increases of 13% in San Diego and 20% in the Bay Area don’t seem sustainable.

But a lot has changed since May, which Case-Shiller hasn’t accounted for yet. Due to a hangover from the federal tax credit that required purchases to be in contract by April 30, sales volume for existing homes declined 5.1% in June, and we believe prices in most markets are now stagnant or declining.

New Home Sales Bounce 24%

We argued last month the hangover will last all year, but there has been some positive news: the number of new contracts signed by home-builders bounced from an apocalyptic low in May, to increase by 24% in June. Since new-construction contracts take months to close, this increase is an early indicator that demand isn’t in free-fall. That said, we’d feel even better about it if the Commerce Department didn’t have a habit of lowering each month’s estimate in a subsequent re-statement.

A Lull in Closings, But Early-Stage Demand at Redfin Stronger Than Ever

In our business, the number of customers signing offers is down 40% from one frenzied week during the tax-credit peak, but up 6% compared to the last four weeks. What’s surprising is that the number of folks touring properties is at historic highs — normally this late in the summer, early-stage activity begins to decline. The buyers we’re working with now are in no rush, so demand will take a while to recover.

Many of our more languid buyers complain that the quality of listings on the market just isn’t that great, mostly leftovers from whatever didn’t sell this spring. We’re certainly seeing sellers making more concessions at the inspection, so long as the buyer gets a contractor to provide a reliable estimate on repair costs. But we’re also putting more listings on the market than ever, also unusual this late in the season.

Foreclosures Continue to Decline: Have Banks Lost Their Nerve?

Another reason listing quality will improve is that foreclosures, while still high by any historical standard, have begun to decline, with a 3% drop in foreclosure filings from May to June. This data is also mixed, with increases in some states as others decline, and conflicting claims from different data providers about the nationwide trend. What we have noticed is that even when there is a foreclosure filing, banks aren’t always going through with it, instead encouraging troubled borrowers to sell their own home in a short sale. In Seattle for example, June foreclosure filings increased, but much faster than foreclosure auctions. We’ve also noticed anecdotally that the historically miniscule number of borrowers who worked out a payment plan with lenders has modestly increased.

It will take us years to work through the supply of foreclosed homes — and years for sellers who want to sell to see prices that will allow them to pay off their mortgage — this will slow a recovery, but long-term we think we’re beyond the hemorrhagic increases in distressed inventory that drove the big price drops in the market.

Buyers Can’t Get Credit

The problem now is fewer buyers. Unemployment is nearly 10%. And even though money is cheap, most people can’t get it. It will be years before folks who’ve gone through a foreclosure or short-sale will be able to borrow again, and lenders are punishing borrowers with a credit score below 740. Cash investors are responsible for more activity than usual, exploiting what is essentially a credit arbitrage opportunity in the low-end market, getting bargains because many of their would-be competitors don’t qualify for a loan.

Interest Rates Still Low

A lot of buyers will have to jump into the market before we see any major price increases. Many folks in the real estate industry believe that nobody will get off the dime until mortgage interest rates take their first nasty jump. Last week, rates reached historic lows of 4.56%:

And that’s a wrap on another newsletter. Leave a comment below and let us know what you think!

Best, Glenn

Glenn Kelman | CEO, Redfin
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  • RelotoLA

    Your report is right on! My husband and I are relocating for a job promotion in California from Seattle. We have stellar credit and can get a loan for a home down in CA, but no one is touring our home in Seattle….combine this with the very few listings we like in California = frustration. We are not underwater in our home in Seattle (thankfully) and would prefer to sell since we will be out of state, but will most likely end up renting our home (rental market in Seattle is still hot).

    • GlennKelman

      Congrats on the job promotion! What data do you look at to evaluate the rental market?

      • Webertfamily

        we have friends in Magnolia that have rented out 4 bedroom homes in less than 1 week. Most families moving to Magnolia have at least 1-2 kids and want 4 bedrooms.

  • nwlocal

    Sounds like a similar story we're hearing with friends and coworkers in Seattle, the decision to either put the home on the market now, as there seems to be the possibility for an uptick in Sept., Oct., or to rent, wait a year or more to sell.
    Is your Seattle home listed with Redfin? BTW today I happened to see two sets of separate buyers, lookers in two different neighborhoods. Haven't seen that for some time.

    • GlennKelman

      Glad you asked nwlocal! In fact I am selling a home via Redfin…

    • RelotoLA

      Company only lets us list with specific realtors for relocation package and Redfin is not included ~ this is an area Redfin should try to get into. I see people looking just no one ready to buy unless relocating to Seattle just like what we are doing in Cali.

  • Jostrickley

    I concur with Redfin's take. I am in no rush to buy, and the quality and number of homes is pretty dismal. We are back to where we were before the spring. I'm renting and enjoying the freedom it gives me. What would entice me back in to buy is healthy price declines. Many buyers seem to anticipate this, and if there are enough of them, it will add to home price deflation over the coming months, or longer.

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