Right Now, It’s All About the Inventory (August 2011 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 by the 12th of each month, which analyzes our own databases to identify 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! Here’s the August Roundup:

Howdy Redfinnians!

Here’s our August round-up of all the big real estate news! After falling to inflation-adjusted levels last seen in 1999 and 2000, prices are stable again, rising in most markets since April. Nationwide, prices increased 1.1%:

Case-Shiller Price Index Data for June 2011

Even adjusting for the summer surge, prices were still flat. So this is exactly the bottom in pricing that in February we predicted would begin in April, and it is fairly uniform across the West:

Case-Shiller Home-Price Index, Western Markets, Last Five Years

Prices have been less volatile in the East and the Midwest, and DC continues to be America’s strongest market:

Case-Shiller Home-Price Index, Eastern Markets, Last Five Years

A Cold Winter Ahead for Home-Buyers

Now the question is, with all the economic uncertainty in the Mad-Max aftermath of the debt crisis, will it last? Once the stock market lost a trillion dollars on August 5, we reported that the number of customers making offers that weekend actually increased. Strong demand held up another week, but then slipped last week by 18%.

About half of this is seasonal — the last bit of August is always slow because of vacations and the back-to-school rush — and the rest we think is genuinely due to economic uncertainty. We don’t think of this as a calamitous drop, and it’s hard to take one week as a trend, but it’s bad news.

But The Reason Prices Are Steady is Because of Limited Supply

The truth is that demand has been weak since the tax credit expired in the summer of 2010. The reason prices have stabilized is because of supply: there aren’t many buyers out there, but there are even fewer sellers.

Nationwide, the number of homes for sale has declined 14.1% since last summer. Our buyers constantly complain about the lack of inventory, and many just give up in frustration. A good deal is hard to find.

The first sellers to pull out of the market were the ones who drove prices this far down in the first place: the banks. More people are falling behind on their mortgages, but foreclosure activity just hit a 44-month low.

The drop in foreclosures is partially because the government made it harder for banks to take people’s houses, and the rest is because the banks decided they couldn’t sell those houses for much anyway.

Shadow Inventory Is Probably Smaller Than Most People Think

So now we see the banks sending delinquent homeowners one notice of default after another without ever actually foreclosing. This tells us that the shadow inventory that has taken on titanic proportions in the popular imagination is smaller than most pundits claim. And the regular human beings we talk to about listing their home for sale are often now deciding to wait a year for better prices too.

We don’t see the market getting swamped with new inventory while prices are low, but we do think that all the would-be sellers will jump into the game once demand strengthens, preventing prices from rising much either. This is why we think prices will stay low for a long time, but not drop significantly further. We’re on the bottom and that’s where we’ll stay.

Low Sales Volume is Mostly the Result of Low Inventory

When inventory is this low, sales are low too, down 3.5% in July, and down even more among foreclosures. The press often reports falling sales and rising prices as a conundrum but both are the result of there being very little to buy.

That’s it for August! If you have any comments or questions about a particular area, leave a comment below and we’ll hook you up with the best Redfin agent to pitch in with more local insights. We won’t bother you later, either. It’s our job, so ask away. Have a great August, and thanks for your support!

My Critic, Steve Jobs

I have sometimes been a critic of Steve Jobs: for outsourcing manufacturing, overlooking charities, diverting idealists, sidestepping the web or simply demanding the best.

But long before that, Steve Jobs was a critic of me. I hear him whenever I do something mediocre or make a business decision that has no soul. I hear him whenever I wonder if my life’s work has really been worthwhile.

He made all of us believe we could be artists. He convinced us that ideas and craftsmanship are important. He said building a company is better than selling one. We wanted to be a part of something, and he wanted it to stand apart. He insisted that labor must be love, and that love comes before money.

I still remember exactly where I was, standing in a Dolores Street apartment with a cereal bowl in my hand, when he came on TV to say a competitor had no poetry. It made me think poetry had a place in business and that in turn made me think I had a place in business, too.

But beyond sharing his ideals, I have had to come to the disconcerting, depressing realization that I have very little in common with Steve Jobs. No one can hope to have his design instinct, vision and charisma. I long ago had to give up on growing up to be like him.

And now I even have to stop wondering what Steve Jobs will come up with next, as he has left his public life as CEO of Apple.

But his voice hasn’t left me. It says yes when the world says no. It says to make things as I want them to be. It says keep trying. And that is what, at last, I have to say to him: keep trying, Steve, keep trying.

Get Back in the Game

Everything I’ve read about the American economy argues that our most serious problem is the number of able-bodied men and women who in previous generations would be working but now haven’t worked in years.

Such articles evoke the ghetto’s despair, the laid-off factory worker, the aging salaryman left behind by a digital economy.

But my immediate experience is with a different group of people : the 42-year-old engineers and entrepreneurs who retired from Microsoft, Google and Apple at the top of their game; the 28 year-old Facebook and Zynga millionaires already intent on doing deals, not making products.

Who could blame them? A high-growth company can rip the bones from your back. The people who built those companies have earned the right to do whatever they want. They’re reinventing philanthropy, and investing in thousands of new businesses.

But I can’t help but feel that if all the people getting lunch at the Bellevue Club or a coffee at Buck’s just got back in the game as operators and engineers, you could open a second Silicon Valley from the result. The glow from its economic activity could be seen from outer space.

We could use another Valley right now. The entrepreneurs working from the age of 22 – 32 are enough to make everyone in high-technology wealthy, but modernizing the whole economy is a lifelong project. What if the so-called greatest generation, which turned an agrarian country into an industrial powerhouse, had retired early? In our competition with China and India, America’s digital transformation seems to me like a challenge on the same scale.

That transformation begins with the people who know how to start and build high-growth companies. These are our economy’s unicorns, the mystical magical, rare wild creatures who can create jobs.

They are creatures like Adam Doppelt. Adam made plenty of money on Urbanspoon and, undoubtedly, Cubeduel, but is already back at it again with his VRBO-killer, Dwellable. He keeps doing his own startups because he’s worried one day no one else in high technology will hire him. Last I saw him, Adam’s parting question to me was, “Have you ever met a 65-year-old startup engineer?”

The commercial Internet is only 16 years old, so that question is just now dawning on many of us. But consider my ideal of commercial success when growing up, Michael Reidy. I initially met him on the deck of his house, which overlooked a 9-hole golf course. I was friends with his 14-year-old son, Conan Reidy.

Mr. Reidy was the first businessman I ever saw, and probably the first Republican too. Conan introduced me to him as if it were an audience with the pope. I stared at him as if he were a zoo animal.

It was a Sunday, and Mr. Reidy was working from a lawn chair. The deck may have been carpeted with an astroturf putting green, or I may be imagining this detail. Printed spreadsheets drifted like tumbleweeds by my feet. I looked up to see that he had a high-ball in his hand. I asked what he was doing.

“Trying… to get… this goddamn economy…  MOVING AGAIN!” he said. Jimmy Carter had implored America’s business leaders to start new ventures, and Mr. Reidy said that he had to heed the call. He had already made enough money to kick back in Coeur d’Alene, but was up to his eyeballs again in a venture to build a chain of Hoagie’s Corners.

Long after he didn’t have to anymore, he kept on risking, building, trying. Last I heard, he’s now “doing windmills in Phoenix.”

Online Message Boards & Communities: “Think of It Like a Nightclub”

Bridget Frey, Redfin’s newest engineering director, recently joined us from Lithium, the software provider for our for-consumers-and-by-consumers online discussion site, Redfin Forums. Bridget hosted a brown-bag talk at Redfin yesterday about how to build online communities like Redfin Forums, and especially about how to get the most out of a software-provider like Lithium.

We aren’t sure whether to pursue every one of Bridget ideas, but we’ll probably go with a few of them straight away! The brown-bag program is usually open to the public. Past speakers have included former Delta CEO Jerry Grinstein, former aQuantive CEO Brian McAndrews, iLike co-founder Hadi Partovi, Picnik co-founder Jonathan Sposato and many others. Here’s what Bridget had to say…

People participate in communities for many reasons but the fundamental question is what’s in it for me. Think of it like a nightclub.

It shouldn’t be a silo; it can’t be separate from the brand, from the website. Our forums at Redfin are sort of a silo; people in the communities aren’t featured elsewhere on the site.

Sephora is a good example of a website that draws on data from Lithium’s forums, with a branded forum called “beauty advice.”

This discussion is featured on a main page of the Sephora site. Sephora also features the top contributors, changing the selection criteria for top contributors all the time so that contributors stay motivated. Top contributors on Sephora get a profile page that lets them choose their ten-favorite products. You’re not just a log-in, you’re a real person & you get to express your personality.

To host its discussions, Sephora started with a Facebook page, but this had a few problems:

• it’s hard to have a discussion on Facebook,
• it’s not easily integrated with Sephora.com,
• different users at Sephora all have to use one Sephora log-in,
• the search-engine ranking benefit accrues to Facebook not Sephora.com.

To solve these problems, Sephora integrated Lithium discussions so that a Facebook post shows up in the discussion forum or vice-versa.

What Do You Do on Forums?

You can do a lot of different things with online discussions.

You can host an idea exchange about, for example, features to add to a website, in which the Kudos or like or +1 button is a vote for the feature proposed. In its own forum, Litihum has 350 features for its products suggested by customers. Even if an idea isn’t acted on, and contributors get frustrated, it is good overall for Lithium.

Lithium discussions also allow you to upload photos and videos, a Lithium feature that we haven’t turned on but probably just should; real estate is very visual.

You can also create a knowledge-base, in which the posts are organized by topic and the content is edited and updated rather than simply discussed. It’s like a wiki, but it has workflow with security, so you can decide who gets to author and edit articles. The content can be worked on by a small group of people, then commented on by others. Forums posts can be nominated to be incorporated as a knowledge-base article.

You can also encourage folks to post discussions to Twitter and Facebook. People are more likely to share discussions they’ve actually contributed to rather than, say, real estate listings. You can also allow for private messages to a contributor.

Who’s in Charge? Moderation Tactics

You have to tame the trolls.

Lithium-powered forums have  an analytics suite that shows how much traffic the forums are driving and who is contributing… we can thank the biggest contributors, or address problems they’re complaining about. You can monitor who leaves, and who is up and coming.

You can see the average response time for a question, so you can try to be more responsive.

Lithium also helps us monitor our social media buzz. Mentions spiked from zero to one yesterday!

Moderation is also important. You can search for key terms like a competitor’s terms. You can require some users to go through a moderation workflow before posting.

After the presentation everyone started talking and asking questions. We were all excited about what we could be doing better with discussions! Maybe you are too. What would you like to see Redfin do with its Forums?

Food, Shelter, iPad

The party, we are told, is over. Or maybe it isn’t. Or maybe it is.

A week ago, Redfin was racking our brains over how we could possibly spend more money to drive higher revenue growth. When capital is plentiful, profits become less important to any business. You make hay while the sun shines. You experiment in costly ways with marketing campaigns, changes to the service, speculative new projects. If you need more money, you can get it. The advice of our investors at Redfin as recently as last Friday was, overwhelmingly, to stay aggressive.

That was then, this is now. After a week of terrifying stock-market swings, we still have plenty of money and the moxie to invest it. We’ll still be aggressive. But we’d be foolish not to pause for a moment to rubber-neck at the carnage on Wall Street, thinking carefully before embarking on a strategy that might require us to raise more capital.

Other companies are in the same boat. Already, nine public offerings were canceled or delayed this week. Regardless of whether the markets are up today or tomorrow, market volatility spooks banks from under-writing risky deals, and that in turn gives venture capitalists pause before tying up money at crazy prices in a private company.

But even if prices moderate a bit, that doesn’t mean we’re headed for a bust. Technology companies aren’t inert assets that go up and down on the tides of speculation like a chunk of wood or, say, U.S. real estate. They can rise or fall in value on their own, depending on their ability to get customers to pay more or less for online services & gizmos.

And my guess is that customers will continue to want to pay more for online services and gizmos, even in hard times. Just take for example the iPad. Launched in March 2010 with U.S. unemployment near 10%, the iPad was the ultimate extravagance. No one needs an iPad and anyone who does could easily buy alternative tablets for half the price. Yet iPad sales are through the roof. What this tells us is that when consumers pare back, their list of absolute essentials now consists of food, shelter, Internet.

And this is why, in talking to folks at all sorts of high-tech startups, you hear the same story of rising sales, even as worldwide consumer spending sags. Even in a recession, the only problem most consumers have with the Internet is that they can’t get enough of it.

The crucial difference between the current wave of startups and the one we saw in 1999 is how much better we now are at making money, not just noise, from this Internet traffic. On almost every front, today’s high-tech startups have become ferociously disciplined about profits, because we were born into the fire of a recession and learned to grow in a recession:

• through viral websites that can grow without advertising;
• via exquisitely calibrated email campaigns that hit you every day, not every month;
• through a massive investment in data analysis to identify profitable customers;
• with virtual currency, in-app purchases, subscriptions, online stores and micro-payments; and
• through a belated realization that the best way to make money is to ask your users directly for it, as Redfin, Zynga, Gilt, Groupon, Flickr and a whole new wave of e-commerce sites now do.

That’s why Zulily scored a $700-million valuation yesterday, and why the company richly deserved it. Online business and high-tech companies may grow more cautiously in this new environment — but they’ll still grow. And the sky may fall on Wall Street, but that’s only because they’ve got nothing but hope to hold it up. When big storms come, it’s better to be a builder than a speculator.

Redfin Goes Deep With iPhone App Upgrade

Big news! If a little red number just popped up beside your iPhone’s App Store icon, it’s because Redfin just upgraded its top-rated iPhone app!

The new app is like chocolate ice cream — deeper and richer! — especially for the real-estate aficionados who log-in as Redfin customers. The local Multiple Listing Services we rely on for most of our listing data require the log-in, but for a long time we just assumed that mobile users were casual browsers, who couldn’t be bothered to register for better information.

Wrong.

When we shipped Redfin for Android last month, we offered juicy details about a home to registered users, and registrations shot through the roof. Android users visited more often than iPhone users, and registered at about triple the rate.

So we scrambled to upgrade the iPhone app, calling on intern Seth Goldenberg to make it beautiful. First, Seth delivered a complete history of a property’s pricing, so that iPhone users can see when a listing’s price has risen or fallen, and also when the listing has been taken off market and then re-listed so as to seem new:

Good stuff.

Registered users can now also see Agent Insights, the notes our own agents take about a home when touring it in person. In core Redfin areas, we’ve toured as many as 30% of active listings, and our notes from the tour can tell you when to race over to a listing and when it isn’t worth the trip:

Very good stuff. We just also made the whole app a little prettier, with simple buttons for the most popular actions people want to take while touring the property in person, including taking photos and notes that they can upload to the Redfin website:

It’s a proud day for Redfin, for Seth, and for the whole team who helped to design and test the app! Here’s Seth celebrating the release with a well-deserved cold one:

I love the way he took a swig right as he hit the button. That’s the way to do it!

On Monday, the Stock Market Lost $1 Trillion. And More People Bought Homes.

The New York Times called over the weekend, for a front-page story about how consumers are reacting to Standard & Poor’s downgrading of U.S. debt and a bear run on the stock market.

I was alone with my kids who were going bananas all around me. The story was going to print in ten minutes, and my laptop was out of batteries. I remembered the last crisis in 2008, when our phone rang off the hook with customers walking away from pending sales and $30,000 in earnest money — and thought “here we go again.”

Then I said, “demand is falling off a cliff even as we speak.”

I hung up and plugged in my laptop. Because we store every tour request, offer, listing consultation and agent query in our customer database, I could quite easily determine, in real-time, if demand was falling off a cliff.  And the thing was, it wasn’t.

I knew that it would, but it hadn’t yet. I sat there for a beat wondering what to do, then called the reporter back and said I was wrong. I felt very silly. He was very gracious about it, and called the New York desk to pull my quote from the story.

I came into work this week just waiting for the other shoe to drop. But it hasn’t. For the first time ever, Standard & Poor’s downgraded U.S. debt on Friday night. The stock market lost $1 trillion in value Monday, the largest drop since the financial crisis.

But if you compare Saturday – Monday of this week to the same days of the week over the last eight weeks you find that signed offers actually increased 7%, with a nice strong kick on Monday. Nothing apparently phases the American consumer anymore.

The number of new customers contacting us for the first time decreased 4%. But the truth is we expect new customers and signed offers to decrease even more this time of year, just because the summer home-buying season is winding down. Every year, the number of customers making offers peaks in late May or June, and closings peak 45 days later in July.

I called a few Redfin agents to understand what home-buyers who are writing contracts and touring properties could be thinking.

Febe Cude said that her customers fell into two groups. One group of folks, mostly at the beginning of their home search, needed to sell stocks for their down-payment and had now called off the search entirely. But the second group is moving ahead. “On Friday, they were thinking of ways out, but now with interest rates falling, they’re feeling comfortable again.”

Trevor Smith described the same reaction, saying that buyers who normally might have changed plans decided they had to stay the course because rates are so low. Kenny Whiteside described his customers as scared, angry and anxious. Some are stepping back, he said, but some are stepping in, rushing to complete deals before their financing falls apart. A few have landlords kicking them out of their rental in favor of family members, so they have nowhere else to go.

We aren’t sure what will happen next. But the damage report we expected to get on Monday here at Redfin wasn’t a damage report at all, which we thought was noteworthy in and of itself. (Many thanks to Pete Ziemkiewicz for pulling the numbers.)

The Only Thing Silicon Valley Really Needs from the Government

With America’s economy in crisis, Silicon Valley has emerged as a new authority on how to create jobs. Mary Meeker at Kleiner Perkins has analyzed the U.S. government as if it were a high-tech business, arguing convincingly for a reduction in spending, while mostly restricting her comments on revenue increases to the less-helpful claim that not enough poor people are paying taxes at all.

Many in Silicon Valley share the point of view of my friend Prasanna Srikhanta, a software engineer at Clarium Capital, who yesterday quoted admiringly from the debt-crisis book, Endgame:

We will need 15 to 18 million new jobs in the next five years, just to get back to where we were only a few years ago. Without the creation of whole new industries, that is not going to happen. Nearly 20 percent of Americans are not paying anything close to the amount of taxes they paid a few years ago, and at least 10 million are now collecting some kind of unemployment benefits or welfare. The jobs we need will not come from government transfer payments. As we saw earlier, they can only come from private businesses. And in reality, as we discussed in previous chapters, it is business start-ups that are needed, as that is where the real growth in net new jobs are. And that means investment. But if we allocate our investment money to government bonds, if we tax the capital needed by entrepreneurs who invest in and start businesses, we delay that return to growth.

Their message is clear: the government has diverted capital from private enterprise. Taxes are too high. The government is too large.

Maybe they are right. Maybe these are America’s big problems. But these certainly aren’t the problems faced by Silicon Valley today.

For starters, the problem in Silicon Valley isn’t a lack of capital. With Russian investors promising to fund an entire class of startups sight unseen and Sequoia Capital telling its whole portfolio to raise money now, there is, by common consensus, more capital than we need. Sometimes it is hard to look into the seeds of time and say which grain will grow and which will not, but many, many grains are getting plenty of water and sun. And since interest rates on government debt are at historic lows,  the government is hardly competing for resources with entrepreneurs.

The problem isn’t muffled incentives either. You can’t throw a rock in Silicon Valley without hitting a would-be entrepreneur crazed to make her first million. Tax breaks already ensure that venture capitalists and entrepreneurs alike pay taxes on million-dollar paydays at a lower rate than the average middle-class family. If taxes were higher, the 24 year-olds starting companies today wouldn’t even realize it, much less be deterred.

The problem isn’t cumbersome regulations, which hardly affect companies with less than 100 employees. Most startups are a regulatory free-fire zone, in which engineers and sales-people are not entitled to overtime pay or other workforce protections. Entrepreneurs can hire or fire whomever we want with impunity, even when we are like Kurtz in the lawless world of “Apocalypse Now,” completely isolated and deranged.

The problem — the only problem, so overwhelming that it is shocking to me that entrepreneurs complain about any other — is human capital. There simply aren’t enough software engineers, mathematicians, writers, designers for most technology companies to fulfill their potential. With U.S. unemployment above 9%, Redfin has still had some positions open for more than a year. We have a dozen projects that could become multi-million dollar businesses, but no one to lead them.

The short-term solution is to import talent, ensuring that the U.S. is the obvious destination for the world’s smartest, most ambitious people. No one in Ghana or Brazil believes that she can pick up and start a business in China. But that is still the American promise, that you can come to America and become a king of our economy in a single generation.

We also need to retain talent in the sciences, by funding basic research. There are many people in labs creating the next Internet or a new cure for cancer, who have no clue how to commercialize their research or write a business plan that could attract funding; too many abandon research because government grant money has become so hard to come by.

But the long-term solution is that the U.S. must lead the world in education, in math, science and writing — not in business, marketing, or sales. We have to get better at designing and making stuff, and the stuff we have to make isn’t steel or toys or timber, the kinds of things that a post-war generation with a high-school education could easily manufacture.

The stuff we have to make now is the hard stuff, the stuff you need a degree in physics or computer science to make: solar panels, social networks, mobile-phone applications. The reason there is a widening gap between rich and poor in America, why there’s a Silicon Valley boom and a main-street bust, isn’t mainly because of  plutocratic government policies, but because there’s an education gap. Technology creates more and more leverage for educated people, who make more and more money.

So as a society, we need to invest more than we did 50 years ago in our human capital. This is not spending, which is just money you’ll never get back. This is an investment, in which we can all expect a return. There are conservative and liberal approaches to this investment. The conservatives believe we need to bust up the teachers’ unions so we can get more value for our money, and allow for more innovation with magnet schools and vouchers. The liberals believe that simply paying enough to attract and retain talented teachers is the answer. They’re both right.

The truth is the government’s relationship to Silicon Valley is like the parent of a gifted college student, hovering around, asking how to help and mostly being told “just leave me alone.” The parent can’t do much at this point in the student’s life, except to be the one blamed for everything wrong in the world.

But what the parent did many years ago really matters, and this is also true of the government. Redfin hires plenty of people who went to Andover for high school and Harvard for college; not enough of these people exist. Most of us went to public schools all the way through, and the ones who did often work the hardest and make the most of our opportunities. If the government hadn’t educated those people, we’d be up the creek.

We should stop talking about Obama’s or Bush’s or Clinton’s jobs-creation policy. The government can’t create jobs quickly. It can print money or not print money. It can police corruption and fraud. Its main functions, taxing and spending, have marginal effects on current economic activity. The rest of what the government does is all long term.

Current economic activity comes from people who know how to make the stuff that other people want, which has such immediate and obvious rewards that it requires no incentives whatsoever. We just need to make a collective, long-term commitment to create more people who can make stuff. That’s Silicon Valley’s problem, and that’s our only problem. We can take political positions on other people’s problems but they’re just that.