Broker to Congress: Don’t Extend the Credit (Just Keep Rates Low)

Here I am, back in Washington DC, past midnight, in a hotel room with my favorite rubber giraffe and a snoring baby. I just got into bed but can’t sleep because Congress looks like it might extend the first-time home-buyer tax credit. The new Chris Dodd-sponsored deal has bipartisan support and a deal is at hand.

And it’s a big mistake.

The National Association of Realtors, The National Association of Home-Builders and The National Association of Mortgage Brokers have poured everything they’ve got into the extension of this credit, sometimes arguing that it’s good for consumers, at other times cravenly acknowledging that it’s also a sop to a beleaguered industry. As a broker ourselves, and a consumer advocate, Redfin has every reason to agree with the NAR’s position.

But the truth is that the credit won’t make much difference for consumers. It solves the wrong problem. It spends  money we don’t have. And even if the credit is extended, enough home-buyers rallied for the original November 30 deadline that there will still be a December lull in demand.

It Won’t Make Much Difference
So first things first. The first-time home-buyer tax credit hasn’t been a major factor in the recovery. The Brookings Institute estimates that the credit increased demand among first-timers by only 15%, so that each incremental home sale has actually cost the government $43,000 or more. Our own experience suggest that this number is, if anything, low, as demand among first-timers has increased at Redfin only 11%. At least some of that increase is because, in the current market, 2^nd-time home-buyers can’t afford to sell their first home.

The National Association of Realtors’ arguments in favor of the credit don’t make sense. When August sales volume slipped ever so slightly, the NAR was quick to blame the dip not on the seasonal tendency for many would-be home-buyers to hit the beach, but on the expiration of a credit that was still four months off. Even as the NAR warned that first-time home-buyers had begun to abandon the market, the same press release noted the percentage of first-time home-buyers had remained unchanged from July to August. A month later, when it was at least remotely conceivable that a September deal might not close before the November 30 deadline, the NAR reported that sales volume increased; that press release argued all the same for the extension of the credit.

It Solves the Wrong Problem
And the problem isn’t that there aren’t enough buyers. Between 1994 and 2005, the percentage of Americans who owned homes rose by almost 10%. Even after two years of record rates of foreclosure, the U.S. home-ownership rate is at 67.4%, whereas it was at 64% before the bubble. The government can stave off a further decline by extending this one-time credit, but with unemployment above 10%, it may just encourage people to buy homes they later can’t afford.

This isn’t to say that Redfin begrudges the folks who have been able to take advantage of the credit so far; far from it. And we’re certainly not against home-ownership. Helping people get a home is, for us, very fulfilling; it is more fulfilling for me than anything I’ve ever done professionally.

But that doesn’t mean we tell every Tom, Dick and Harry to buy a home. We have a fiduciary obligation to advocate fiscal responsibility, even — as we emphasize to every new hire — to dissuade home-buyers from a rash purchase. In this era of responsibility that was supposed to have been inaugurated after the credit crunch, it seems inarguable that people shouldn’t buy a home unless they can afford it on their own.

The Problem is Inventory, Not Demand
And we worry that these one-time government incentives have already lost sight of that principle. The major destabilizing force in real estate today isn’t a dearth of buyers. Credit or no credit, buyers would still be out in force, primarily because prices and interest rates are relatively low. The problem is foreclosures, which don’t just affect the temporary gyrations of home prices but fundamentally lower the value of the underlying asset, American real  estate.

Trust us on this one. Redfin tours a hundred foreclosed homes a day and most are absolute dumps. Ask any home-buyer what she worries about, and it isn’t that nobody will want to buy a house. It’s that delinquent loans are still piling up three times faster than banks can handle them. Nobody wants to buy a house only to find that foreclosures at fire-sale prices have ripped the bottom out of the local market again. The #1 way to stabilize the housing market is to limit the number of foreclosures being sold, not to increase the number of people who buy them.

A First-Time Home-Buyer Credit and The Time Machine
To that end, we have an alternate proposal. We still want to help first-timers, particularly those who don’t have a lot of money. But why not offer a first-time home-buyer tax credit to the real victims of the bubble, first-time buyers from 2006? The credit could be limited to help re-finance the predatory loans which overwhelmingly occurred in a one-year span between 2005 and 2006.

“What about moral hazard?” the suddenly Scroogey capitalists will argue. We say that these home-buyers have been through enough hazard. We treat the buyers of 2006 as if they  deserve whatever misery the bank can inflict on them, yet we eagerly court a new generation with a fresh set of one-time incentives that will yield a new set of fees.

It seems particularly heartless that we in the real estate industry would focus all of our attention on new home-buyers, when the folks now facing foreclosure were our customers only a few years ago. Instead of making the system more efficient or compassionate, we just try to feed the bloated beast by keeping the number of transactions in the U.S. too high.

We Can’t Afford It
And we can’t afford to do this. The primary factor driving affordability is not an $8,000 one-time credit, but low interest rates. At some point, government spending drives interest rates up. If rates increase from 5.3% to 6.3%, the real cost of a typical home will be almost $100,000  higher, credit or no credit. More important, we will have closed the one exit that folks facing foreclosure have been able to avail themselves of, re-financing.

It’s scary to think what the world will look like if that happens: foreclosures will get much worse, and inventory will climb even as demand drops. In such a scenario, the market could suffer a second steep drop, and the government, having exhausted its credit, will have fewer levers to pull it back.

But for now it’s easier simply to feed the beast. Just this once, let’s not do it.

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

Prices Increase Everywhere Except Seattle

The Case-Shiller numbers just came out for August, with sizable increases in California, DC, Chicago and Boston. The only market that was down was Seattle.

We’ll send out a full report on market conditions later today.

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

Home-Buyers Getting Testy

Last Wednesday, Redfin set a record for home-tour requests. Usually, our home-tour requests peak in May, when people start looking for homes in earnest. And usually Wednesday is a slow day, at least compared to Friday. But here are the stats on home tours this year:

1st-tour requests: 1,686 projected for September vs 1,533 in August
Total tour requests: 5,286 projected for September vs 4,762 in August

Some of this is because Redfin has grown. Some of it is because the market has begun to revive, and the first-time home-buyer tax credit has gotten home-buyers rushing to beat the December 1 deadline for a closing. So we asked ourselves what’s going on?

Adam Wiener and Rob McGarty, who analyze Redfin’s real estate operations, report that offer submissions for the first half of this month are up 68% from the same time year, and that excludes all the new markets we opened. But they caution that the decline from the seasonal peak in July is not as steady as I’d assumed: offers last year spiked in the first two weeks of September, though not as much as they have this time. The spike at the beginning of the month  is probably because both buyers and sellers are back from their August vacations.

How much of the demand will disappear after the first-timer credit expires? Not quite as much as I’d thought. In the past two years, 55% of our offers have been in the first-timer price range, for homes under $500K — but that number in September has increased to only 61% of our offers. We looked at tours data to see if earlier on in the pipeline there was a preponderance of first-timers but the data was just noisy, with no real trends.

We also looked at Redfin Forums, to get a feel for whether buyers are getting frustrated by the competition, and there was certainly plenty of that: in the Bay Area, in Los Angeles,  and this gem in Washington DC.

But the most interesting commentary on the market came from Redfin’s Chris Glew, who sent me and Matt this note Thursday afternoon:

*~*~*~*~*

From: Chris Glew
Sent: Thursday, September 17, 2009 2:26 PM
To: Glenn Kelman; Matt Goyer

Glenn:

Over the last few days, I’ve been talking to our agents about what they’ve been seeing in their markets. One thing I’ve heard from most markets is that there are a lot of people looking to buy, but there’s very little good homes for sale. Buyers who’ve been looking since June or July have seen everything for sale in their target neighborhoods & price ranges. When a well-priced home in good condition comes on the market, buyers are ready to pounce and nice listings go under contract quickly:

Marshall Park told me “if it’s on the market over 30 days, it’s over priced or doesn’t show well.”

Mark Reitman is working with a buyer looking at homes on the North Shore priced ~$600K who’s been prepared to bid on three different homes but each one sold before they could submit an offer (all three went under contract in less than a week).

Jim Holt says, “It feels like summer with all the activity.” 19 of the 21 offers (90%) Jim submitted in August were on homes with multiple offers. He says almost everything is selling for more than you would expect and sellers are concerned deals won’t appraise out so they’ll often counter with no appraisal contingency. Jim is working with a buyer who’s made 4 offers in the last 4 weeks on $525K – $625K homes in Daly City & Pacifica. All four offers were rejected and the homes all sold above list. One was listed at ~$530K, received close to 20 offers and sold for ~$650K.

Adam Welling says that in Cambridge & Somerville there’s a lot of activity across the board: SFHs & condos, $300K to $700K. It’s not the tax credit, it’s that everyone is trying to buy before prices and mortgage interest rates start going up.

I hope this helps.

*~*~*~*~*

So it sounds like demand is up, but there aren’t many high-quality homes to buy, in part beccause builders haven’t added much new inventory anywhere either except a bit in Seattle and the Bay Area and in part because home-sellers still don’t want to compete with all the foreclosure inventory on the market or about to enter the market. The increase in demand notwithstanding, we aren’t worried about prices increasing — there’s enough inventory waiting in the wings that prices can’t increase too much — but we do worry about the expiration of the tax credit and — far more importantly — an increase in interest rates.

So we’re starting to believe that there really is some pent-up demand, beyond that created by the tax credit, but we’re not sure it will survive the first big jump in rates. What’s your take?

Redfin’s July Newsletter…

Redfin sends out a monthly newsletter that digests all the real estate news from 20 – 30 sources into one portrait of what’s going on in real estate. All the folks who register on our site have the option to get the newsletter, and of course anyone can unsubscribe.

By popular demand, we’re now publishing the newsletter on our blog; if you want to get it hot off the presses, register for a new Redfin account, or update an existing account to ask for the updates.

And yeah, I know, the newsletter is way too long. And it doesn’t include any marketing messages or calls to action; partly we don’t have the brains to do this, and partly we don’t have the stomach.

Regards, Glenn

Howdy Redfinnians!

Spread the word: Redfin’s profitable! And then hold that thought! Because we have to talk about the topsy-turvy, what-da-heck-is-going-on real estate market first…

Prices Are Up for the Month, Sort Of, But Down Over Last Year
Case Shiller, the index that economists use as the most reliable measure of home prices, reports this morning that May home prices increased .45% over April; this is the first increase since July 2006. Once we adjust for seasonality – home prices tend to increase in the summer – the gain becomes a loss nationwide of .2% . But even after this adjustment, the Bay Area (+.7%), DC (+.7%), Chicago (+.5%) and Boston (+.3%) still gained month-over-month. Year-over-year, prices are down 17%.

The table below shows the month when each market peaked, the size of the drop from the market’s peak, the change since May 2008, and the change since April 2009. We also show the month in the past when prices were last at this level (“equivalent month”):

What about the number of sales? Sales of new single-family homes increased 11% in June over May; the strongest increases were again in California and DC; existing home sales were also up month over month, but flat year over year.

The Top-End of the Market Softens
Generally, demand for entry-level homes has been strong this season — the Federal Housing Finance Authority, which calculates price changes based on the conforming loans favored by entry-level buyers, just reported a .9% price increase from April to May, seasonally adjusted. But the top end is starting to move. With jumbo loans scarce, the prices of the big mansions have finally started to drop everywhere except the Bay Area — Redfin has recently seen a sharp increase in million-dollar transactions, especially in Seattle. This change in the mix of home-buyers is one reason median prices jumped by as much as 6.4% in places like Southern California in June — people started buying nicer houses, not just paying more for the same house.

Inventory Declines to 9.4 Months
Inventory has generally decreased, drastically in West Coast markets, where our agents often describe buyers as frantic. In California, we’ve taken clients on tours in late June where a dozen people are lined up to get into the property; sometimes we take three clients through the same houses on the same day. 84% of our Bay Area offers in June involved a bidding war. Nationally, the supply of existing homes for sale fell to 9.4 months; a sellers’ market usually has six months of supply or less. In LA, the number of homes for sale fell by a whopping 54% from May to June.

And the whole market is seeing an increasing percentage of home purchases by investors; in part this reflects sellers’ preference for cash buyers in the wake of new appraisal rules that have gummed up loans but it also may represent the return of smart money.

But More Inventory is Coming: 9% Increase in Foreclosure Filings
More inventory is on the way via foreclosures. Nationally, foreclosure filings increased 9% in the first half of 2009 over the previous six months, and nearly 15% over the same period last year. While California mortgage defaults decreased for the first time in a year, many banks are staffing up for more foreclosures by September. What this means is that prices won’t rise with demand: the real estate market is like a grocery-store cereal aisle, where every time someone buys a new box of cereal, the banks put another on the shelf.

There’s also a significant backlog of individual home-owners who want to sell, but know they can’t compete against foreclosures. Here at Redfin, we think prices won’t significantly increase for at least 18 months due to this inventory backlog and continued unemployment; then again, price drops now seem pretty unlikely in most markets.

Mortgage Rates Creeping Up, But Still Very Low
What’s spurring buyers these days are mortgage rates. Rates dropped slightly over the past month, and have over the past year been at historical lows — but they did tick up slightly this week. The national average on a 30-year fixed-rate loan is now at 5.44%. Bankrate’s panel of experts guesses that rates will continue trending up over the next 30 – 45 days. If rates increase a full point to mid-2008 levels, the cost to a home-buyer would be roughly equivalent to a 10% increase in home prices.

Redfin Is Profitable
Meanwhile, life at Redfin is very busy and just super fun too. We notched our first profit this past June, and expect to make more money all summer. When representing home-buyers, our agents are the top-two producers in the Boston area, the top-two in DC, the top-four in Seattle; we’re also at the top of the list in Chicago. And even though we’ve been busy, our customer satisfaction remains at 97%; the company is speaking at next week’s big Inman conference on measuring customer satisfaction and using it as the basis for agent pay.

Our big summer party – the Naked Truth — turned into a mob scene, with 500 people joining a panel of bigshot CEOs, editors and VCs to discuss different ways consumer websites can make money. And we launched a new version of Redfin with better neighborhood stats and free text-search for listings’ marketing remarks – check out Seattle lofts or historic buildings in Washington DC or Chicago homes with a pool. Up next are some super secret Internet gizmos that we’ve been working on for months.

Alrighty, that’s a wrap on another monster newsletter! Any questions? Just write me back; I almost always answer. And thank you, thank you, thank you for all your emails and tweets of support. We live for fanmail.

Case Shiller: Prices Are Up (But Not Everywhere, Not if You Adjust for Seasonality)

Big news real estate aficionados! Case Shiller, the Standard & Poor’s index that economists treat as the most reliable measure of home prices, reports this morning that May 2009 home prices increased .45% over April; this is the first such increase since July 2006.

Once we adjust for seasonality – home prices tend to increase in the summer – the gain becomes a loss nationwide of .2% . But even after this adjustment, the Bay Area (.7%), DC (.7%), Chicago (.5%) and Boston (.3%) still gained month-over-month. Year-over-year, prices nationwide are down 17%.

As usual, we’ve prepared a little table that shows the month when each market peaked, the month in the past when prices were last at this level (”the equivalent month”), the size of the drop from the market’s peak, the change since May 2008, and the change since April 2009:

Small price increases are being seen not only in the existing homes tracked by Case Shiller, but also in the sales of new single-family homes which increased 11% in June; again the strongest increases were in California and Washington DC.

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.

Takeaways From Inman Connect NYC

Wow, what a week last week in New York. From the Real Estate Bar Camp on Tuesday to two and half full days of Inman Connect + parties it was an exhausting trip.

Now that I’ve recovered and survived three full days of meetings here at Redfin here’s my quick take on things:

1. Transparency is key: Gary Vaynerchuk’s talk on personal branding and transparency was the highlight of the trip for me. It really resonated with me and got me really excited for what we want to do with Redfin marketing going forward.
2. The economy may get worse. There were lots of speakers talking about the economy and the current state of the real estate market. From Andrew Ross Sorkin (New York Times) to Robert Shiller (professor of economics at Yale) the overwhelming opinion was that we haven’t seen the worst yet. What has me puzzled is that I came back to work to find we’re hitting new highs in website traffic and every week are setting new records for home tour requests.
3. Redfin is leading the way. In his welcome address Brad Inman had a Top 10 List “A Roadmap to Recovery” with several points where we’re trying to lead the way and many others we want the industry to get behind:
   • We’re overhauling commission: our agents our paid on customer satisfaction not commission (#1)
   • We’re trying to be more efficient: we refund 50% of our commission back to the customer (#3)
   • We’re providing better “micro data”: from our neighborhood pages to our blogs we’re trying to give our users more data for the areas they want to live in. (#6)

   And there are other fronts we’re leading the way on that people aren’t yet talking about like surveying customers after every interaction.

4. Growing disconnect between brokerages and their agents. The big brokerages are cutting costs while their agents need more help than ever. I talked to one agent who worked for what I thought was a very progressive brokerage but she says they don’t understand social media at all. I talked to a few other agents who went so far as to leave their big brokerages to start their own. It sounds like agents need a website where they can easily compare, contrast and rate brokerages so they can easily figure out who gets it and who doesn’t.
5. Agents love Twitter. Watching what everyone was Twittering on #icny changed the conference for me. It made it easy to connect with new people, track down where the parties were and find out what people thought of the speakers in real time.
6. Lots of great people. I met TONS of great people still very enthusiastic about real estate: Stacey (OC agent), Jeff (XBroker), the guys from Dwellicious, House Chick, Kirsten (Seattle agent), Rob (Onboard), Andy (East Bay agent), Walkscore guys, Ginger (Marin agent), Heather (Virginia agent), Mike (Altos Research), Jay (Phoenix agent), Wellcomemat guys and on and on.
7. Agents can party hard. I was blown away how crazy hard everyone partied three nights in a row but would still be at the conference looking good at 9 AM no matter how much they drank.

See some of you at Seattle RE Bar Camp and the rest at Inman in the summer.

Matt’s Wrap Up of RE BarCamp NY

Wow, busy day! Today I was at Real Estate BarCamp New York — a precursor to Inman Connect.

What’s BarCamp?

BarCamp is an ad-hoc gathering born from the desire for people to share and learn in an open environment. It is an intense event with discussions, demos and interaction from participants.

What’d we talk about?

Marketing With Stats

The guys from Altos Research led a discussion about marketing using real estate stats (inventory, days on market, etc.).

This is nothing new for Redfin. This past summer we added neighborhood pages with MLS powered graphs and tables that are updated nightly. Our Sweet Digs blogs cover the Case-Shiller updates and publish posts based on local MLS data for each market we serve. We still have a lot to learn about what customers want from marketing stats. For instance, Altos charts trends based on price quartiles so you can see how the low priced segment of the market differs from the top. Should we do that too?

During the discussion, Blog by the Bay (Altos data) and House Chick (MLS data) were mentioned as good examples of blogs using stats.

Always Be Testing

Kelley from House Chick talked about using Google Web Optimizer (GWO) (see screenshots of how she uses GWO) over the past few months. I liked her statement that, “people who visit your site are voluntary participants with a task in mind. It’s up to you to keep them or lose them.” Several people in the crowd asked about using GWO to test content and themes for their blogs. I think it’d be a better use of their time to use GWO to maximize the calls to actions (newsletter sign-ups or contact form submissions) on their own sites.

Lifestyle Search

Onboard has something brewing they’re calling “Lifestyle Search.” Onboard’s CTO, Liam and marketing VP, Rob led a discussion about the evolution of real estate search. Liam thinks that great search is when a real estate user asks the wrong question, then gets a great answer in return. According to Liam, a great website can figure out what a user really meant to ask. We compared the current state of real estate search to being something akin to Match.com: you need to know what you’re looking for (price, beds, etc). To make real estate search more like eHarmony, a home search would take into consideration your age, whether you had kids, what kind of life style you wanted. I can’t wait to get a demo of what they’re announcing at Inman tomorrow.

Future of Buyers Agency/Brokerage

I hadn’t met Michael Daly until minutes before we led a discussion about the future of buyers agency/brokerage. Unfortunately Tony who introduced us over email wasn’t able to make it. The group started small but grew during the hour. We talked about agent compensation (salaried vs. commission-based), leading a good broker movement, forming a consumer advocacy group, the government’s role in regulation, should single agent-dual agency be prohibited and much more. Unfortunately, we produced no clear answers, but there was definitely a number of agents and brokers passionate about being customer advocates throughout the buying process.

Educating Agents

I missed the beginning of the educating agents talk led by Rob, but when I joined it started to morph into a discussion of how to improve agent’s image, the role of the brokerage, and the seven year buying cycle.

It’s my impression that the way real estate brokerages are structured is changing. Why? It sounds like big brokerage brands are focused on getting warm bodies in seats to pay seat fees while cutting costs. Agents on the ground feel like they’re not getting any value from these brokerages. The smart ones are striking out on their own, keeping more of the commission for themselves. These agents have more control of their brand and offer better service to their clients.

At Redfin, I think we’re ahead of the curve of building a better brokerage brand with careful hiring, delivering consistent customer service, publishing agent profiles (complete with transaction and customer review data), and compensating our agents based on customer satisfaction instead of commissions.

In New York?

You can find me on Twitter or txt me at 206-618-1600.