Are All the Homes for Sale in Foreclosure? I Don’t Think So…

The National Association of Realtors released data today showing that the November 2008 median home price dropped 13% from the November 2007 median price, even as mortgage rates plummeted to their lowest levels in the 37 years since anyone has been keeping track, to an average last week of 4.96% for 30-year, fixed-rate mortgages.

Since the price drop-data is for November while mortgage rates declined in December, it may be that the market just needs time to respond. But one analyst called the price drop “breath-taking” and “god-awful.” The WSJ quoted an economist as saying that “the housing industry is in the process of reducing capacity to dangerously low levels.” A second economist said that, “outside of distressed properties, the [California] market is nonexistent almost.”

This made us wonder whether it’s really true, in California or elsewhere, that most of the homes for sale are foreclosures being liquidated by banks.

Since Redfin’s database includes virtually all the homes for sale (basically everything except what’s on Craigslist), including bank-owned listings as well as for-sale-by-owner (FSBO) listings, we can measure what percentage of homes for sale are bank-owned. And we can do this with unusual precision because we map all the data down to the level of a city, neighborhood or postal code.

Here’s what we found for nine of the largest cities we cover, sorted from the highest concentration of listings in foreclosure to the lowest, as of December 22, 2008. We measure the ratio of for-sale-by-owner listings as a percentage of the total homes for sale in each city, and then do the same for foreclosures.

And it’s true that in major California cities south of the Silicon Valley peninsula, about 1 in 4 homes for sale have been foreclosed, and others are being sold by sellers trying to avoid foreclosure (short sales). But the number of short sales may soon be decreasing, as banks are now soliciting short sellers to modify their loans at the new low rates so folks can keep their home.

I used to worry that the low rate of foreclosure in Seattle and San Francisco was a disaster waiting to happen. Prices will fall through the floor in those markets if the percentage of listings being sold by banks increases in either place to 20% or 25%.

But because the downturn in Seattle and San Francisco prices started a little late, and mortgage rates fell soon thereafter — unemployment, not increasing mortgage payments, will be the main driver for foreclosures here — maybe Seattle and San Francisco can avoid the huge pile-up of distressed inventory that is dragging down the market in Southern California.

What do you think? Why do Seattle and San Francisco have such low foreclosure rates? And will this continue?

(Photocredit: Ironside on Flickr)

“It’s Only Going to Get Better for Me”

This is the first in a series of real-time, agent-off-the-record blog posts on what Redfin agents and market managers are seeing in different markets. We promise to tell it like it is even when the way it is is pretty bad… 

Time was, the problem with real estate was too many listings, at unrealistic prices. But with home-owners anxious to sell before the holiday season, we recently saw the average cumulative price drop exceed 10%. And with almost no new listings entering the market, across the markets we cover the number of homes for sale has actually decreased, by about 3% since August. In some places, transaction volumes increased.

But the problem now is with buyers, some of whom simply don’t have the money anymore to afford a house.

Plenty of Offers, Very Few Deals
“It was a weird week,” said Seattle agent Allie Howard. “Things were looking good, then deals started going in reverse.” By the end of it all, only four of the 15 offers she prepared were still under contract, about half the usual success rate.

In five or six cases, the buyers backed out.

Bay Area agent Jim Holt had one client beat out four other offers on a $750,000 home then ask for a $50,000 discount (they settled on a $5,000 discount). “I saw people go from ‘gung-ho’ to ‘never mind,’ all in just a few days.” Another client of Jim’s who was out-bid  shrugged and said, “It’s only going to get better for me.”

As Boston market manager Alex Coon noted, one problem has been just coming up with the down-payment, which for most folks means selling already-battered stocks. But Alex also saw buyers who had already crossed the Rubicon hurrying to complete deals before their financing fell apart. “These cycles work themselves out,” Alex said. “But short-term, consumer confidence is shot.”

Cash is King
The credit crunch has given financially strong buyers lots of leverage negotiating deals with sellers nervous about financing. “If you have a 20% down-payment,” Allie said, “you can really call the shots.”

And across the board our agents saw a flood of new incentives being offered by builders and banks, either in the form of increased commissions to the buyer’s agent (4% instead of the usual 3%) or offers to subsidize a mortgage. In San Francisco especially, a lot of the incentives were focused on October deals. “We’re talking about big buy-downs,” Allie said, “I saw one worth $20,000 just last week.”

OK, So What Do You Think?
Of course, this is only what we’ve seen. If you have hair-raising tales of deals getting done or deals going south, or if your plans have changed or remained the same, just leave a comment!

Shocker: The Average Size of a Price Drop is 10.7%

Just before going home on Friday night, Redfin’s Jeff Yee just ran a query against all the active listings in our entire database, which includes listings from brokers, banks and owners selling their own home in Seattle, San Francisco, San Jose, Los Angeles, Orange County, San Diego, Chicago, Boston and Washington, D.C. areas (see links for local statistics on price reductions).

What he found: 38% of currently active listings have undergone a price reduction at some point since going on the market. But it was the average magnitude of the drop from the original list price that shocked everyone here: 10.7%.

The data-set hasn’t been scrubbed for outliers, and it doesn’t account for price drops where the seller pulled his listing from the market and quickly re-listed at a different price. But it still provides a quick portrait of a market where discounting has begun to spur more activity among buyers.

A Seattle broker mentioned this morning that he sees sellers racing to find a buyer before Halloween, which may explain why we’re now seeing such big drops. What’s happening in your market?

Thanks to Matt Goyer on Twitter for the tip.

Why I Chose To Be A Redfin Agent

As an agent with a traditional brokerage I was continually surprised at how much of my job was selling myself instead of selling real estate. Suddenly everyone became a potential and desperately needed paycheck (a great way to alienate friends by the way). Since clients come to Redfin, we don’t have to beg for business and I get to do what I’m best at: selling real estate, advising buyers and sellers, negotiating contracts, and closing deals. I no longer need to waste time, money, or paper sending out mailings that just get thrown away. As a traditional commission-based agent I needed the full commission in order to cover my astronomical marketing expenses and to make up for the many, many hours of driving around buyers that sometimes ended up going elsewhere to buy (ouch!).

The traditional brokerage office atmosphere was dominated by competition and secrecy. Now I’m part of an office where all the agents work cooperatively, pooling resources to better serve clients instead of one where agents work by themselves, for themselves.

One of the greatest benefits of working as a Redfin agent is the security of having a regular paycheck and fantastic medical benefits. Not having to deal with the stress of wondering when my next commission check will come in (or IF it will come in) is priceless. I get a competitive salary with bonuses based on customer satisfaction. Granted, the system isn’t perfect because it can be difficult to gauge accurately customer satisfaction and how it relates to my performance. I have had the painful and seemingly unfair experience of losing bonus money after working with all my heart and soul.

I know, I know, you’re wondering if a Redfin agent makes more or less than a traditional agent. Well…it depends on how successful of a commission-based agent you are. If you are in or near the top one percent, you will likely take a pay cut. However, for most agents, you are very likely to make more at Redfin. As a Redfin agent, I no longer stress about when the next check will come in, how much of it will go to cover broker fees, marketing expenses, and individual medical insurance premiums (ahhhhh). Having said that, many agents here have taken a pay cut because they really believe in the mission and success of this company, plus many of us have stock options.

The biggest dilemma for me in making the leap was if I was willing to give up total control of my schedule. It was hard to move over to a corporate environment and let someone else tell me what hours to work. Because the industry doesn’t traditionally follow a 9-6pm Monday through Friday schedule, I sometimes find myself working a solid 8 or 9 hour day and then going home to continued evening and weekend negotiations.

In the end the deal-sealer was the internal company motto: “Do the right thing.” It is really refreshing and exciting to work for someone who puts doing the right thing above making money. I am not suggesting that all traditional agents are unscrupulous money hungry fiends, in fact I know many who are some of the most genuine and ethical people I know; but sometimes when your livelihood is on the line, doing what pays the bills comes before doing the right thing and I will never have to do that as long as I work at Redfin. Having been here and seen how this business can be so different, I could never go back. How ‘bout you? Have I converted anyone?

DoJ: Competition and Innovation are Good, Even in Real Estate

Yesterday, the Department of Justice published a website that focuses on the importance to consumers of competition in real estate. There’s a good summary on the InmanNews blog. They found that that commissions have risen along with home prices, which is no surprise to anyone who’s been in the market. But the data are interesting, and the DoJ also adds specific information on regulations by state.

The DoJ estimates that the median commission paid by consumers so far in 2007 is $11,302. This includes both buyers’ and sellers’ commissions. (The buyers’ agent is usually paid half of the sellers’ agent’s commission, so while buyers’ agents may charge no direct fee, they are still receiving up to 3% of the total costs paid by a buyer at closing.)

As a point of comparison, we looked at commissions paid by Redfin customers who bought in 2007. We focused on buyers’ commissions only, where we have the most data. Redfin’s average commission was $15,071, and because we refund 2/3 of our commission back to the buyer, $10,194 of that went back to consumers. By market, Redfin’s refund to buyers breaks down as follows:

This tells us a couple of things:

1. Redfin buyers are buying expensive homes. Assuming a total commission of 6%, which is typical in our markets, our buyers paid a little over $500,000 for their homes. That’s much higher than the median home price of $218,184, but Redfin is also in some of the most expensive housing markets in the country.
2. Of course, where house prices are high, consumers pay much more than the median for commissions. Again assuming a 6% commission, total commissions (both buyers’ and sellers’) would have been over $30,000 on average for these homes, much higher than the $11,302 that concerned the DoJ.

Redfin buyers are successfully searching our MLS listings to find properties on their own, then working with our local agents to negotiate and close the deal. They’re buying expensive houses and saving a lot of money. And the DoJ would seem to think that’s a good thing.

What, Me Worry? Redfin in a Buyer’s Market…

This is shaping up to be the winter of our discontent. High real estate prices were once a threat to the middle class; now low real estate prices are a threat to the middle class.

Reporting last Friday that new homes sales’ hit a seven-year low, USA Today’s Noelle Knox quotes an economist as saying “this is just hideous.” The same day, House Intelligence’s Jonathan Smoke notes that transaction volumes would seem healthy if we could just forget the past five years.

Inman’s Glenn Roberts brings word that discount listing brokerage Foxtons may be filing for bankruptcy. TechCrunch highlights Realtors at each others’ throats. The Wall Street Journal somehow predicts the demise of an entire real estate-mad state. Yet online real estate startups have nonetheless banked $62 million of venture capital in the past four months.

So, are we worried? OF COURSE WE ARE (but hey, we always are). After increasing revenues nearly seven-fold over the first seven months of the year, our top-line is taking its first dip in 2007. It’s too early to tell if it’s the same seasonal lull we saw last year or Apocalypse Now.

Since we pay our agents a salary and a customer satisfaction bonus, real estate’s ups and downs can affect us more than a commission-driven brokerage. So like others in the industry, we probably always wish more people were buying houses.

And yet compared to other brokerages, Redfin’s business may thrive in the coming storm. After all, we’re at the beginning of one of the greatest buyer’s markets in U.S. real estate history, and Redfin is predominantly a service for home buyers.

As inventory piles up in every market, the voodoo promised by traditional agents offering private previews of their buddies’ listings doesn’t matter much to buyers anymore; consumers know that finding a home to buy has gotten easier, even as buyer’s agent commissions have increased.

What does seem to matter to buyers in a market like this are simple services performed very well: the zeal and skill to negotiate for the best home price, an area where Redfin and its clients have outperformed the market; as well as a commitment to making the whole process as well-informed, hassle-free and cost-effective as possible, where we believe our technology can empower customers to feel in control of a transaction they once found bewildering.

So while fewer people overall may be buying a house these days, we expect more of those people to buy through Redfin. And while tougher market conditions may be crunching margins at pure discounters (which we are not), Redfin can thrive as an online broker, using technology to lower our per-transaction costs and improve our service.

Over the longer haul too, the market hasn’t changed the fundamental dynamics driving our business: a generation of home-buyers that grew up with the Internet want data, not a sales pitch, and they feel most comfortable with a real estate agent who gets paid more when they are happy with the service they received, not when they buy a more-expensive house.

This doesn’t mean we can’t screw it all up. We may fail to build the world’s best MLS-powered search site, which is how we first develop a relationship with our customers. Or, as we grow, we may struggle in our mission to use a combination of technology and personal service to generate the best results for our clients, which is the ultimate arbiter of our success.

Startups are risky that way. But it’s comforting to believe that our fate lies not in our stars but in ourselves. If you have an opinion on how the real estate downturn will affect Redfin, leave a comment and let us know.

Pricing Advice: Make the Last 3 Digits -500

There are very few people with Matt Bell’s zeal for negotiating. He is 6′5”, with a large, slow smile that seems to bespeak an unused capacity for terrific violence, and he is faultlessly congenial. The best way to summarize our friendship is to say that he taught me to shotgun a beer for the first time at the age of 34. I wasn’t very good at it.

Working together at Plumtree, we once took an elevator to the penthouse floor of a massive bank’s headquarters to ask for a $4 million deal. We rode in silence, hands in our pockets for the first 40 floors. When the elevator was about to ding, I opened my mouth to say, “I hate asking for money.” Before I could, Matt said, “Let’s make it $5 million.”

It turned out to be the largest deal in Plumtree’s history, triumphantly negotiated by the bank back to $4 million, and it helped Matt buy the house that he just sold through Redfin. While he was still haggling last week over the cost of roof repairs, we went to lunch, and Matt began speculating on the list price most likely to result in the highest offer. It is the kind of conversation that makes me wonder if my friend is from another planet.

“Does a price that ends in -000, like $490,000 seem casual? Is $499,999 too blue-light special?” I stared into my salad. Little did I know that Redfin’s mad scientist, Mose Andre, was working on that very problem, crunching statistics on the data-set we pulled to calculate the Redfin Advantage.

To do the analysis, Mose took all the houses that sold in King County, Washington last year and grouped them by the last three digits of their list price. For example, one group would consist of all the houses whose list price ended with “-500,” like $499,500, $387,500, $831,500, and $1,230,500. The four most popular endings for list prices of houses in 2006 were “-000,” “-500,” “-900,” and “-950.” Less than 7% of properties were listed at prices that did not end in those four numbers.

Then we threw out new construction, which tends to sell at list price even if other incentives are involved; we also threw out some records where we couldn’t easily tell if it was new construction or not.

And then for each group we calculated the ratio of list price to final price. And it turns out that certain list prices did in fact tend to result in a higher premium over the list price.

The ending that resulted in the highest final price as compared to list turned out to be “-500,” as in $499,500 or $530,500. And the difference was significant: listing for $500 less than an -000 ending seemed to result in a final price that was $3,000 more.

Maybe rounding a list price to a nice, even “-000″ is like putting a big “negotiate me” sticker on a house’s back. Or, as Matt speculated, “A -500 ending sounds like you really thought about it, but it’s not a nickel-and-diming gimmick like -999.”

The column labeled “$ Over -000 Price” compares the final/list ratio for each ending using the -000 final/list ratio as a baseline since it was the lowest; we came up with a dollar difference by using a hypothetical final price of $600,000. The data for condos is also interesting, although there was only one price ending besides -000 that was popular enough to report on, -950. As you might have guessed, it was better than a price ending in -000:

The “$ Over -000 Ending” was calculated using the “-000″ final/list as a baseline, just as before, but assuming a $400,000 average price for condominiums.

Even though it makes me feel like a mutual fund to say it, Mose wants everyone to know that these numbers reflect what happened in 2006, not necessarily what will happen in 2007. Had we world enough and time, as well as more data, he says we would compare listing prices in which the first three digits were constant, and the last three varied. Mose is still a little traumatized by all the trouble our last report on MLS data created, which wasn’t even his fault… but he signed off his e-mail to me tonight by asking “why is this stuff so fun?”

An Unusually Strong Response to Seattle Sweet Digs!

The reviews are in! Redfin’s Seattle real estate experts are winning accolades across the blogosphere for their eyewitness reviews of listings from all over town. A blogger in Arizona who describes herself as living with her husband and her father (”we argue about everything and watch Star Trek with dinner”) reports “I go to this blog and it makes me want to forget everything important to me in life, move to Seattle, and spend inordinate amounts of money on a tiny piece of property.”

The famous Megan, at Not Martha (one of Time Magazine’s coolest websites of 2006), sent us a boatload of traffic just by describing herself as “happily” “attached” (actually I think she was happy about something besides being attached) to the Seattle blog.

It’s nice to hear, not only because some real estate agents have told our bloggers to drop dead, but also because the team works so hard to find cool houses and write interesting things about them.

There’s a lot more we’ll do in the next few months to make the blog more visible (besides shamelessly plugging it here) and easy to use. For a start, we’ve started publishing a summary of all the posts alongside a review of the day’s most popular property in our newsletter.

Here’s a picture of the team:

Some of our favorite posts include:
–> Amy Helen Johnson on the charms of living in the Smith Tower as well as a perceptive post on a recent drop in inventory.
–> Anna McClain on the “Beverly Hillbillies-style entryway” of a house that looks like a “La Quinta” on Bainbridge.
–> Polly Meyer asks, would you move for the food? And proceeds to list her favorite restaurants all over south Seattle.
–> Bahn Lee notices a startling resemblance between a Kirkland living room and the Incredibles’ living room.
–> Jessi Princiotto complains that a Clyde Hill mansion would be more interesting if it had “a hedge maze.”
–> Laura Reiter notes of another south Seattle house that “the pink and lime combination give one the impression of living inside a watermelon.”
–> Elizabeth Chapman is relieved to find a West Seattle staircase that “can be navigated without a Sherpa.”

Redfin Strikes Again: Sweet Digs on Steroids

Every day over the past six months, Redfin’s Seattle and San Francisco blogs have reviewed the most popular, the most interesting, the most expensive and the most depressing houses for sale in Seattle and San Francisco.

We initially called this “House Porn,” which my twin brother Wes described as “one of the only truly interesting things you’ve ever done,” then changed the name to Sweet Digs. Wes stopped reading in disgust, but today there are thousands of subscribers.

Now Redfin is invading Seattle neighborhoods with a small army of real estate bloggers. Our goal: every day, eyewitness reviews of listings from all over town. You can sign up spamlessly to get these reviews by e-mail. We’re putting a lot of energy into our local real estate blogs because it’s consistent with our mission to use the Web to bring more candor to real estate, and also so we can save you the trouble of driving around Seattle to check out new listings.

If it works, we’ll expand to other cities, like San Jose, Oakland and San Francisco.

Our Seattle editor is Marie Hagman, whom we first met during a focus group about how to improve Redfin’s Web site. The moment we realized she’d be the perfect real estate editor was when she said that she often has to browse listings in California, because there aren’t enough in Seattle. Another charming thing about her is that, for the year that we have known her, she has been looking to buy a house that meets her standards.

Then we had to find a few good real estate mavens. So last month we advertised on Craigslist for bloggers (the only rule was that no one selling real estate could apply). Three hundred sent in their writing samples, and we chose seven of the most clever writers out of the bunch, every single one as much of a real estate freak as we are. I am not sure why, but I have rarely been as proud and excited of a new team as I am of this one.

We hope you enjoy the new version of Sweet Digs. If you don’t, or if you have any thoughts on how we could make it better, just drop me (glenn dot kelman at redfin dot com) or Marie (marie dot hagman at redfin dot com) a line; or better, leave a comment!

Surowiecki Strikes Again: Why Median Home Prices Don’t Tell The Whole Story

Contrarian super-brain James Surowiecki, author of the Wisdom of Crowds and a weekly New Yorker column on the economy, wrote last Thursday about how why the conventional wisdom that real estate prices never actually go down is wrong.

His argument is that the median housing prices on which newspapers report don’t take into account:
–> inflation (already noted by the NYT) (inflation adjusted prices dropped eight percent between 1979 and 1991);
–> the incentives builders offer home-buyers, which are effectively discounts;
–> that new houses get bigger and nicer every year.
Surowiecki cites Yale economist Robert Schiller who created an index of hundred year-old houses and how their prices have changed over the century, sometimes going down, sometimes going up. This provides a more accurate and sobering portrait of the real estate market.

Surowiecki ends his column by noting that that you can sleep in a house but not in other other investments, like a stock. This points up a few other criteria to consider when trying to decide whether to buy a house:
–> The commissions on houses, which are higher than on stocks;
–> Taxes and repair costs and, on the positive side,
–> The benefit of government-sponsored mortgages (most people can’t buy stocks on margin the way they can buy houses via a mortgage, and the interest on mortgages is tax-deductible).
–>What you’d have to pay in rent if you didn’t own a house.

The article is a delight to read, mostly because Surowiecki is such a good writer — effortlessly popularizing big, complicated ideas every week. I’ve spent the past few years concocting schemes to meet Surowiecki so we could pitch a few STUPENDOUS ideas for his column.

The most recent effort was on a blustery evening last winter when I walked into the lobby of the Conde Nast building, claiming I had an appointment. The security guards had already noticed me trundling around Times Square for half an hour with a wheelie and briefcase in tow, trying to get the guts to lie to their faces.

They asked me to stand to one side while they made call after call, each more dubious than the last. After five minutes I said, “Forget about it.” They insisted. Other people, respectable people, in suits much better than My Good Suit, were being whisked inside. No city makes you feel like a hick — or when you are trying not to be a hick, like an impostor — like New York.

Then finally a security guard put the phone down and announced that “Mr. Surowiecki doesn’t even work in this building.” An army of comforting thoughts and rationalizations was at that moment routed and took full flight. Ten minutes later, on the subway headed for the airport, it was a relief to be surrounded by people who didn’t despise me.

The sad part is that I had been in the hallowed halls of the New Yorker before, attending a workshop. On the elevator ride down, I met a Conde Nast employee and asked the only question that came to mind: “How’s the food here?” “Gourmet & Bon Appetit are in this building too,” he said, then paused. “It’s awesome.” I wanted to ask if he meant the food in particular, or just everything, but already knew.