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.

Help for First-Time Home Buyers

In case you missed it, there was an excellent article by Lisa Chiu in last Sunday’s Seattle Times detailing the WA State Mortgage Credit Certificate (MCC) Program for first-time home buyers. This program helps first-time home buyers get a chip in the game by giving them a federal tax credit of 20% of the interest expense from a new mortgage. For example, if the interest portion of the mortage payments on your new home are $12,000 the first year, your credit via the MCC program comes to $2,400, or $200/month directly off of the taxes taken out of your paycheck. There are some income limits on the program, which max out at about $105K/year for a small family in King County, (checkout the website for the full list) but the icing on the cake is that the credit is good for the life of the loan. The fee is just $495 and you can sign up for the program when you talk to potential lenders prior to closing on your offer. If you want to get started on your home search but want to talk to a lender about eligibility first, the program has a helpful list of lenders you can work with or you can drop our Redfin Direct team a line at support@redfin.com or a call at 877-973-3346. They’d be happy to help you get to the right person.

Technorati tags: Seattle real estate

The Top-Three Most Expensive Zip Codes

Just the other day, Forbes published a list of the most expensive zip codes to live in, based on median property prices:
–> 11962, Sagaponack, New York (Suffolk): $2,787,500
–> 92067, Rancho Santa Fe, California (San Diego): $2,445,000
–> 92662, Newport Beach, California (Orange County): $2,397,500
Only one area outside of California and New York, in Miami, cracked the top ten. The top Washington state zip code was in Medina, at #60 ($1.235 million).

From Ballard to Reno is a Long Way

Our CTO, Brian Marsh, shredded some logs to figure out the most popular neighborhoods searched for by name over the past four weeks on Redfin:
1. Ballard (once the “center of the world’s largest shingle industry”): 47,124 searches by name
2. Bellevue: 46,290 searches by name
3. Redmond: 36,867 searches by name

It took less than 30 days for 723 people to spell Bellevue “Bellvue;” 16 people spelled Georgetown “Gorgetown.” 294 people searched for the country of Spain (but only 83 for Canada), 162 for the state of Georgia, 145 for Hawaii (all me, in a single rainy afternoon). At the bottom of the list, as it so often is, was Reno, which had two searches.

There were no searches for “couldn’t afford Vegas” or “heartbreak” or “had to sell my car to get home.”

PS: folks who signed up for the new Sweet Digs newsletter: we’ll try to get our first one out Monday. We put up a sign-up before we actually had worked up a pretty template. Sorry for the delay.
PPS: Redfin has been in the news! Here, and here, and here. Hats off to John Cook and Jessica Swesey for being such speed freaks.
PPS: Thanks to everyone who told us to fix the way property detail pages popped up from the map. We got it wrong, and you set us straight. A patch went out a few hours after we got the first complaint.

Sales are Down, But Listings Are Down

The Seattle Times’s Elizabeth Rhodes published on Friday an excellent analysis of why prices have continued to increase in Seattle even as sales have decreased: the number of listings has declined as quickly as sales have. Since it seems like almost every house in Seattle has turned over at least once in the past couple of years, it could just be that people are tired of moving. The median home price in Seattle has increased from $392,950 in February to $405,000 in March.

Interestingly, Redfin Direct offers have been higher than the median. The median Redfin Direct offer has been for $475,000; the average has been $566,000. This is consistent with what E-Trade discovered about its customers: that electronic brokers, unlike discounters, attract more highly educated, higher-income buyers.