Redfin October Newsletter: 61% of September Offers Competitive

We sent our monthly market update out to 126,104 folks this afternoon, a 6% increase from last month. If you’d like to get the newsletter by email, just sign up.

Regards,
Glenn

Howdy Redfinnians!

The data’s in for October, so it’s time for our high-speed, comprehensive summary of real estate trends. And the news is very similar to last month: prices are up for the third straight month, competition is increasing and sales volume resumed its march upwards. On the other hand, foreclosure data is mixed but still scary while mortgage rates are beginning to rise.

And Redfin is doing well! We expect record revenues in October — normally our best month is July — and more profits. November also looks good, but after that we expect our holiday sales to be slow, as always: the number of new Redfin clients signing up to see homes has been declining all month.

To juice up our winter numbers, we’ve got a big new release of the website coming next Tuesday, probably our most important of the year, so come back next week to see what we have wrought. For now, let’s dive into the data.

Prices Increase for Third Straight Month

The Case-Shiller data came out this morning for August, and it shows sizable price increases across all the markets we serve except Seattle, which is still toodling along in the doldrums. Most markets have increased for three or even four months. The Shamu of month-over-month price increases was in the Bay Area, at 2.6%.

As usual, we present Case-Shiller’s seasonally adjusted numbers to correct for the summer gains and winter losses that happen every year. Here’s a graph of how prices have gone up and down, starting in January 2000 when Standard & Poor’s baselines the Case-Shiller index for all markets at 100:

Competing Offers on the Rise

In our own little world, Redfin has started tracking the percentage of offers we handle every month that compete with other offers. This data set acts as a leading indicator of whether prices will go up or down on properties that won’t close for another 45 days. When more than one buyer is bidding on a property it usually sells for more than the asking price; when there’s only one buyer, it usually sells for less than the asking price. Sixty-one percent of the offers we worked on in September ended up facing competition, up from 52% in August.

The Bay Area was the most competitive market, particularly for homes under $500,000, where 92% of the offers we handled in September faced competition from at least one other offer. In Southern California, the numbers are very similar. The size of the sample for each market averages around 75 offers.

But Research Firm Says Bottom is Still Five Months Off

It all looks pretty bullish, huh? Don’t get too excited! A research report published by First American CoreLogic — and touted by the Wall Street Journal — predicts that nationwide U.S. housing prices won’t bottom out until March 2010, based on the assumption that Congress won’t extend the $8,000 first-time home-buyer tax credit beyond the November 30 deadline. But now it seems that prospects for an extension of the federal credit are good. An additional credit for Californians is also being considered by that state’s Assembly.

The Number of Homes Sold in August Increases

And the volume of home sales continues to increase. After crying a river last month over the depressing effects of waning government subsidies, the National Association of Realtors now reports that existing U.S. homes sales in September increased 9.4% year over year, with inventory falling 7.5%. The strongest growth in sales volume was in the West at 13%, and the weakest was in the Northeast at 4.4%. In just one month, September sales volume in California increased 1.0%, with the median price increasing 0.8%. Meanwhile new housing starts increased nationwide in September just a bit, at 0.5%, but building permits fell 1.2%.

Foreclosure Data Mixed, But Still Scary

What has been preventing any type of serious price recovery has been the seemingly bottomless pit of foreclosures. And the problem may be getting worse. Nationwide, foreclosure filings increased 5% in July – September as compared to April – June. But the most recent data is a little better, showing a 4% decrease in September from the month prior. Bank re-possessions increased 21% in the third quarter as compared to the second. It seems like the banks are getting more aggressive about clearing their books of bad loans, either by re-negotiating the loans or foreclosing.

In California, mortgage default notices declined for the second straight quarter, by 10.3%. The median month that a California loan in default first originated has only moved forward one month, from June 2006 to July 2006 — the worst loans came in mid 2006 — so the pig is moving pretty slowly through the python. There’s still a lot of bad inventory out there, and it seems like traditional home-owners are scared to compete with the banks. Distressed homes accounted for 29% of September transactions.

Mortgage Rates Fairly Low, Probably Headed Up a Bit

But enough about prices. A bottoming of prices — whether temporary or long-term — only accounts for part of the increase in demand. The other big factor is interest rates. After drifting down for six weeks, interest rates ticked up last week, with the average for a 30-year fixed-rate loan reaching 5.34%, still lower than the 5.36% we reported last month. For folks who don’t plan on staying more than five years in a property, adjustable rate mortgages were very low (4.69% average rate); but watch out for those — we still worry you could get trapped in a loan when rates take off.

55% of Bankrate’s panel of mortgage experts think that rates will go up, mostly because the federal government is losing its appetite for the mortgage-backed securities that banks use to unload risk.

That’s it! Another month is in the books. Any questions, just drop me a line. We love to hear from you, and we’re always thankful for your support.

Happy Halloween!

Glenn

September Newsletter: Prices Up, Sales Down

We were up at the crack of dawn this morning writing our September newsletter with the latest Case-Shiller data hot off the presses. It went out to 118,717 folks, an 8.5% increase from last month. If you don’t get the newsletter, sign up or update your Redfin account to get it.

We also post it here to the blog so even more folks can read it.  Please leave a comment to let us know what you’d like to see next month.  For comparison, our August newsletter is here.  Enjoy!

Howdy Redfinnians,

All the real estate data is in for September, and the Redfin newsletter is here to put it all together!

The short story is that prices are up, rates are down and even foreclosures notices are, for the moment, slightly down; sales volume took its first dip in four months, though that may be due to August vacations and limited inventory in markets like California. The big questions are whether there will be a big drop when the first-time home-buyer credit expires and the banks clear out their 2009 books by foreclosing on a bunch of delinquent home-owners.

So there’s reason to worry prices could go down or up, but the leading indicators within Redfin are way up: demand has been up 10% in September over August, and our new iPhone app has been a big hit in the field, representing 10% of our overall traffic on weekends when home-buyers are out touring homes in force. Since our break-even month in June, we’ve kept the profits coming; our buyers’ agents are still the top producers in almost every market we serve, and we’re still hiring as many superstars as we can find.

Sleepless in Seattle (But Everywhere Else is Fine)

But enough fist-pumping. Let’s dig into the market data! Case Shiller, the index that economists use as the most reliable measure of home prices, reports this morning that July home prices increased 1.2% from June, and decreased 13.4% from July 2008. The biggest gains came in San Francisco, Chicago and San Diego. Most markets have been gaining for three or four months. Besides Las Vegas, Seattle was the only market to have declined month over month, by 0.3%.

As usual, we present the seasonally adjusted numbers to correct for the summer gains and winter losses that happen every year.

The Pit of Despair: Foreclosures Keep Coming

What’s tugging at the bottom of the housing market is the supply of foreclosed homes. New foreclosure filings decreased only 1% from July’s record highs. And without more employment, the supply of foreclosed homes is likely to increase again by year-end.

A ground-breaking article in The Wall Street Journal estimates that at least 2.7 million homes with delinquent loans have not yet been foreclosed. Of the mortgages overdue by 12+ months in July, 17% were still not in foreclosure, compared to 8% a year earlier. That may soon change: at least one big bank expects to complete the foreclosure process on many of these homes by year end; the banks are probably trying to clear their balance sheets before 2010. Already, 31% of existing home sales in August were foreclosure-related.

Sales Volume Slips a Bit

From July to August, the number of existing-home sales dropped 2.7%, though the August sales volume was still 3.4% higher than the previous year. Meanwhile after four months of solid gains, increases in sales activity on new homes slowed in August to 0.7% over the previous month.

Ov-er-rat-ed: The First-Time Home-Buyer Credit

Both the Realtors and the home-builder lobbies blame the August slowdown on the November 30 expiration of the $8,000 first-time home-buyer tax credit, but there was still plenty of time for August home-buyers to close before Thanksgiving, and the proportion of first-time home-buyers to veterans was unchanged nationwide from month to month. In our own business, we’ve seen only a modest increase in the proportion of our buyers who first-timers, from 55% historically to 61% in September.

Because Congress is becoming more skittish about spending, we are less certain than others the credit will be extended, and believe in any event that enough people are rushing to beat the deadline that there will be a lull in December. But the slight slackening in demand right now seems to have come too early to blame on the credit; it seems to have more to do with the fact that much of the good inventory has been bought up this season.

A Feeding Frenzy in Northern and Southern California

California is where supply and demand are most out of whack. August sales volume across California declined 12% since July but increased year over year for the 14^th straight month. Affordability is driving the demand: the average mortgage payment for new California home-buyers in August was 58% below what it was in the June 2006 peak, which reflects both the decline in home prices and mortgage rates.

In the Bay Area, sales volume softened in August compared to July, but we think this is an inventory problem more than a demand problem: there was a 15% month-over-month decline in the number of foreclosed bargains selling in the market, leading to buyer frustration with “multiple offers and all-cash deals” on the limited foreclosure inventory; San Francisco inventory levels are down 11.3% compared to last year. At Redfin, we are operating at very low or negative margins in California because so many of our buyers are getting outbid.

What’s Really Driving Demand: Mortgage Rates

In our view, the main drivers for the summer surge have been the stabilization of home prices and, more importantly, the decline in interest rates. Bankrate reports the average rate on a 30-year fixed-rate loan slipped over the past week from 5.38% to 5.36%, approaching the historic lows we saw earlier this year. Experts mostly agree that rates are likely to remain low over the next month, though long-term most economists believe rates will increase because of heavy counter-cyclical government spending.

WHEW!  That’s it. Any quibbles, just write back. Our goal is to be comprehensive, to earn your trust, to get it right.

Best, Glenn

Coming to Terms with Freakish Depth: Redfin Writes a Real Estate Glossary

Young companies like Redfin often view successful start-ups in the same way that a little brother looks up to his big bro: full of admiration, wonder, and a touch of envy. Most of all, they just want to learn as much as possible from those that did something right.

A few months ago, online jeweler Blue Nile co-founder Ben Elowitz gave Redfin’s Seattle office a brown-bag talk. Our brown-bag lunch series features presentations by entrepreneurs, VCs, real estate agents, journalists, and our own employees so we can all learn from each other, usually over tin foil bins of Indian food. Ben spoke about how Blue Nile built a trustworthy and successful brand in part by becoming an authority on diamond education and guidance. They did this by writing a diamond buying guide, expanding on the “4 C’s” of diamond evaluation, and producing a glossary of terms. We all sat up and realized that we need to be providing the same kind of comprehensive real estate education for our customers. We’ve got the best search site, the most experienced agents, and now we need to be the authoritative source for home buying and selling help content.

So here’s our first shot at a real estate glossary. We focused on depth since we figured a two-sentence definition doesn’t adequately help a first-time home buyer looking to get an FHA loan, wondering about what’s on a Purchase and Sale agreement, or curious about how a home appraisal can affect financing. We wanted to draw on the knowledge and experience of our agents and customers, so we didn’t license the content. Instead, we kept digging to present clear and honest definitions. Each term linked within the glossary has a special format: when you click on the link, a little pop-up gives you a bit of teaser content with a link to the term’s full definition if you’d like to learn more.

Creating the glossary was a collaborative effort across our engineering, real estate operations, and marketing teams. Many thanks to our web developer/official Redfin Class Clown Jason Brackins for designing and coding the interface, our agents, and Brian Thielicke, Matt Allen, and John Wheaton, three of our preferred mortgage lenders who provided great feedback as we produced draft after draft. And a special shout-out to Redfin customer extraordinaire @basiamontauk for reviewing our entire 20+ page doc! We can’t thank you enough for your support of Redfin.

Now we need your help. Every page has a feedback box where you can send us suggestions for new terms and how we could improve. Check out the glossary and let us know what you think!

Home Tour Tips from the Field: A Redfin Agent’s Guide

Redfin field agents take our customers on home tours, host open houses and attend inspections. As our mobile force on the ground, each sees on average 50 – 60 homes a week. Across all our markets, field agents toured a total of 5,795 homes in April. Exposure to that many properties gives them a great eye for evaluating what’s for sale and watching how their local market changes week to week.

Seattle field agent Kathi Kelly-Billings recently posted some great suggestions in our forums on how customers can get the most out of home tours. We’d like to share her tips:

Find Your Target Area Before You Tour

• Drive the area: closest freeway entrance? Nearest grocery store? Traffic patterns? Attend open houses to get a feel for prices/neighborhoods. Try all of this on a Sunday when there are a lot of open houses.
• Check the commute time: try the drive on a weekday, ask in our forums, or friends in the area.
• Research schools: Schooldigger and GreatSchools are great websites. Even if you don’t have kids, buying in a good district with good schools will help when you decide to sell.

Know What You Want & Don’t Want Before You Tour

• Make a list of all your needs, wants and no-ways: the list will expand as you get further into the process and then you won’t need one—you’ll just know. But it’s still a good starting point. Must have a large level lot? “Light and bright” very important? Would like a bonus room but not a necessity? Need a 4th bedroom for when granny comes to visit? Need space for a dog run?
• Are fixers worth your time? Many fixers are foreclosures and can come with a lot of problems. The price may seem like a bargain; but in the end, is it worth it? Here’s what we often see:
  o The roof needs replacing before the bank will consider financing.
  o Furnaces and appliances are often non-existent or broken.
  o Carpeting/flooring soiled past livability.
  o Mold, siding, plumbing, electrical and structural issues.
  o Most of these homes need at least $20-30K just be livable—not even considering aesthetic enhancements.

Also, dealing with banks and the tightening of FHA rules makes these processes difficult. Take some time to decide if repairs will fit in to your financial budget, time constraints and patience level.

• Newer/New Construction lots are often smaller: everything is new and shiny–appliances, plumbing/electrical systems, carpeting. The living spaces are bigger/more open than older homes. They probably won’t need a lot of upkeep in the next few years. But if you are looking for a backyard to throw a baseball or plant a large garden or perhaps, practice with your band, these places probably won’t have enough room.
• Older homes often have larger lots: but they may have older systems that need updating. Just think about what’s most important to you.

How to Visualize the Lot Size

Paying attention to lot sizes is a very easy way to whittle down your list before you tour, depending on your needs. So many times, I set foot in the door of a house with a touring customer and they say, “oh, this lot is too small–we need room for ____.”

If lot size is important to you, here are a few guidelines. Use the pictures to get a sense of the backyard’s size. (Unfortunately, wide-angle lenses can distort the pictures). Excuse the “baseball” comparisons…

• Under 4,000 Sq.Ft.: will probably be just 5 feet (on sides) and 15 feet in front and back, or smaller, depending on where the house is situated on the lot. If it has a picture with a good sized front yard and is under 4000 sf, this means the backyard will be very small. Great for non-gardeners or workaholics. Rule these out if you want to put in a swing set or have large BBQ parties.
• Under 6,000 Sq.Ft.: will have some yard but you probably can’t toss a baseball very hard. A small garden area is possible with small outside entertainment area.
• Under 8,000 Sq.Ft.: you could toss a baseball, but not if you are playing anything above Little League. Enjoying a nice sized garden is possible along with a large outside dining area.
• Over 12,000 Sq.Ft.: you could throw a baseball hard and hit a grand slam as well. Great tree-fort material, too.

Get In Touch With a Redfin Lead Agent Before You Tour

Experienced, top producers in their markets, Redfin lead agents handle on average 4 – 5 deals a month. Directly responsible for your success, they answer all of your questions, negotiate hard to get you the best deal and guide you through the whole process.

We’ve found that our first-time home buyers really benefit from connecting with a lead agent sooner rather than later in the process. Since over 50% of our customers are first-timers, more handholding is welcome and of course, expected.

The more you know what you want going into the process, the easier it becomes. And the better chance of getting the home you have always wanted.

Good luck in your search!

Kathi Kelly-Billings
Redfin Field Agent

REOs: What You Need to Know to Get a Great Deal

For many home-buyers, REOs are an opportunity for a bargain. Short for “Real Estate Owned,” REOs are bank-owned properties (also known as foreclosures). Already this year, 39% of Redfin’s offers in Southern California have been on these homes, while the entire East Bay market’s REO sales are up 103% year-over-year. Real estate news site Inman News recently published a report on bank-owned inventory reporting that “the foreclosure market ‘is the housing market’ in 2009.”

What does this mean for you the buyer? You can get a deal on an REO, but be prepared to pay for repairs and work with banks managing large inventories of these homes.

Lifecycle of a Foreclosed Home

1. The home-owner realizes he can’t pay his mortgage and may try to sell his home, in which case:
   • If the sale price is less than what he owes on the mortgage, it’s a short sale, subject to their lenders’ approval—check out our earlier post on short sales.
   • If the home doesn’t sell or the bank doesn’t approve the short sale, the bank forecloses on the property.
2. When the owner is 3 months behind on his payments, the property is foreclosed upon and the banks try to sell it at an auction for at least the amount of money owed on the loan. The NY Times recently posted an article on foreclosure auction frenzies.
3. If the property fails at auction, the bank takes ownership and their asset manager hires a real estate agent to list the home for sale in the MLS (Multiple Listing Service) database much like any home for sale.

If you’re looking to buy a distressed property, REOs are your best bet. With short sales and foreclosure auctions, there’s a lot more stress without much guarantee of actually buying a home. REOs have reached their final resting place in the banks hands, are listed in the MLS and ready to sell.

Searching for REOs on Redfin

To search for bank-owned properties on Redfin, click on Prices, Beds… next to the search box and check MLS-listed foreclosures and bank-listed foreclosures.

Redfin shows all the homes for sale, but only provides service for MLS-listed foreclosures. We don’t service bank-listed foreclosures not in the MLS (the ones with the purple house icon ). Another good resource is RealtyTrac, where you can search for all types of foreclosures for a fee of $45/month. Check out this post in our forums for more information.

Touring: Buyer Beware

As with any home you like, be sure to see a REO in person. On your tour, pay close attention because it’s up to you to spot issues with the home. The bank won’t be paying for any repairs. If you decide to make an offer, the bank isn’t required to give you disclosure documents that describe the condition of the home—they’re always included in California and Washington when you buy from an individual owner.

REOs are Priced to Sell

We found that on average, the REOs Redfin helped people buy in the last nine months in Southern California were 17% cheaper per square foot than non-REOs, 29% cheaper in the Seattle area, and 44% cheaper in the Bay Area. Note that this price differential reflects the fact that REOs are often sold in less desirable neighborhoods, while homes sold by individuals are often in nicer areas and sell for more. For more information, check out this recent USA Today article on the concentration of REOs by county across the US.

Redfin data man Arthur Patterson pulled these numbers from Redfin’s listing database from May 16, 2008 – February 15, 2009. We only include Southern California, San Francisco, and Seattle deals since our East Coast markets haven’t yet closed enough REO deals to make sound conclusions.

When to Offer More Than List Price

Banks set competitive prices to move their inventory, so there’s a good chance there will be multiple offers on the home. If the home is in good condition and priced well; expect to get caught up in a bidding war. In Southern California, regardless of the condition of the home, you can almost always expect more than 10 offers—Redfin agent Joyti Goundar has seen as many as 105! Forget about low-balling.

In the Bay Area, Redfin agent Miawand Bayan reports that:

There will be on average 3-7 competing offers on a property. If the REO is in great condition and priced well, you can expect to see as many as 10-20 offers. This means that you can’t come in at 80-85% of list and expect the bank to automatically accept your offer.

The “cleaner” the offer, the better. Banks won’t be open to any special arrangements regarding repairs in your negotiations; so be prepared to put your best foot forward. In terms of financing, banks are usually the most responsive to buyers with conventional mortgage loans and 10 – 20% down payments.

When to Negotiate

When an REO has been on the market for 30+ days, the banks may be more likely to negotiate below list prices. But, this could also mean that the home isn’t in great shape. And remember, the bank won’t be paying for repairs. Seattle agent Trevor Smith notes that sometimes it can be unclear how much banks are willing to negotiate—it often depends on how much internal pressure they’re under financially to get their loan money back. But, as foreclosed inventory continues to pile up in the coming months, banks may continue to lower prices as supply increases.

The table below shows the average sale price to list price ratio for Redfin’s REO deals compared to non-REOs for the past nine months. You can see the bidding war effect in Southern California as REO homes sell above list price.

Redfin Agents with REO Experience

If you have questions on what to offer on an REO property, Redfin agents will help you with local pricing guidance. To help you to find an agent with REO experience, we pulled data on the number of signed REO offers our west coast agents have worked on since January 1, 2009:

*In Seattle, the REO surge is just starting to hit. Special thanks to Redfin Seattle agent Allie Howard who urged us to write this post to educate customers about REOs and provided great insider information.

Preparing Your Offer

Each bank selling REOs has different policies for handling the offer process. Sometimes, the bank’s asset managers, who are responsible for selling the property, require that their own lenders issue the pre-approval letter that accompanies the offer. You can still switch lenders later, but there won’t be much time to get a second one on track. This could make it more difficult for you to get a different lender for the REO purchase.

Verbal, Instead of Written Negotiations

Once you submit your offer on the standard MLS Purchase and Sale Agreement form, almost all counter-negotiations will proceed verbally between you and your agent, the selling bank, and the listing agent; in a normal transaction, these counter-negotiations are typically done in writing.

Our agents report that they’ve been involved in negotiations that can take anywhere from a few days to a week depending on the responsiveness of the selling bank and their listing agent. Normally, these negotiations take less than 24 hours with an individual seller. But once you come to agreement, the process often goes faster since banks are eager to sell homes. We found that Redfin REO deals in the last nine months close on average one week faster compared to normal transactions in our West Coast markets.

Addendums

After an agreement is reached verbally, most banks will sign and return the original Purchase and Sale Agreement along with an addendum on their own forms. Addendums include:

• The “As-Is” clause—you’ll be buying at your own risk and the bank can’t stress that enough.
• Shorter Financing Contingency period—you’ll have around 15 days to get your loan approved once the offer is accepted and banks usually have a $100 a day penalty if this doesn’t happen on time.
• Shorter Inspection Contingency—you’ll get around 10 days to inspect the property and still be able to withdraw your offer.

Banks can easily take advantage of their position by crafting the addendum according to their own interests. For example, Redfin agent Rachelle King noticed that her client’s $10,000 closing credit failed to show up in the addendum. In this case, the bank addendum stated that any changes made would nullify the entire document. But, Rachelle took charge and got the bank to add the closing credit anyway.

Inspections

Sometimes, the bank will require you to do a formal inspection of the property before you put in an offer—an up-front cost of $400 – 500. But most often, you’ll proceed with the inspection once you agree on the deal. Since the inspection contingency period is often shorter with REO purchases, make sure to move quickly. If utilities like water and heat are shut off, you’ll need to shell out $100 – 200 to get the property de-winterized.

Appraisers will be more conservative than ever: they may raise issues with the home that could become conditions of your loan. Southern California Redfin agent Anna Nevares says “repairs oftentimes must be required by the lender in order for the bank to consider doing them. Even then, the buyer sometimes must complete the repair on their own, prior to close of escrow, with the bank’s permission, but at the buyer’s liability and risk of not closing escrow.” Repair costs are often in the thousands in Southern California: Joyti Goundar recently had a client who had to pay $6,000 for a termite inspection.

The following items are usually paid for by the home-owner in a normal transaction, but often get overlooked with REOs. Expect to pay extra for:

• Overdue utility bills
• Unpaid Home Owners Association dues
• Septic inspections
• Re-keying the locks and ordering new garage door openers
• Torn out cabinets
• Holes in the wall
• Dirty diapers in the well!? Yep, it’s true. Seattle agent Trevor Smith once closed on an REO where the disgruntled previous owners left a little surprise in the water supply.

The Bottom Line…

The process can be stressful, but stick it out and you can get a good deal on the home. Check out Redfin’s forums in Los Angeles/Orange County, San Francisco, San Diego, and Seattle for more recent REO discussion. What else do you think buyers need to know about REOs? We’d love to hear from you. We’ll compile what we learn into a set of best practices to help future buyers.

Other REO Blogs & Posts

Here are some links to some helpful REO blogs out there:

• Countrywide Foreclosures Blog a blog whose tag line is “Tracking the economic effects of the housing bubble (crash) as a result of years of loose monetary policy.”
• UniversalREO Blog a blog for REO professionals so you can get the agent’s perspective.
• Irvine Housing Blog has a REO category that tracks individual homes.
• My East Bay Agent

And here are some links to interesting blog posts and recent news on foreclosures:

• Seattle Bubble, Puget Sound Foreclosures Set New Records in January
• Charo Bhatt, REO vs Short Sales What You Need to Know Before You Buy
• Roost.com, Foreclosure, Short Sale and REO – What do these terms really mean?
• Barbara’s Blog, How to Buy an REO Bank Foreclosure at a Great Price
• Bobcats move into foreclosed home
• NY Times story on Cleveland foreclosures
• Even TV’s favorite family The Simpsons face foreclosure
  

  ---

  Posted by Lisa Taylor on March 9, 2009 6:18 PM

  Permalink  |  Comments (42)  |  del.icio.us  |  Digg