When will housing prices recover? A national look.

Crystal Ball with HouseThis post is partly a follow on to Ardell’s earlier New Bottom Call post and comments on where our greater Seattle / Bellevue area home prices might go over the next few years.

When people ask me “How soon are home prices around here going to recover?”, I have been saying that I don’t think they will ‘recover’ for at least 3 to 4 years.

The question usually comes from someone who wants to sell, but is having a hard time dealing with the fact that the value of their home is down about 20% from the peak in summer 2007 – especially if that is when they bought it. Of course if they had bought it in early 2002, the value would have run up about 85% before it peaked, but it is truly much harder to take a loss than it is to take a gain 🙂

The next most common person asking the question is a buyer who is trying to decide if he or she is going to make money or lose money on their investment in a home. Recent history would certainly give one cause to pause on that question.

Of course there have been all kinds of predictions about which way the housing market is headed, and many of those predictions are colored by what is going on in the writer’s home market. But recently a friend sent me a very interesting analytical presentation of what is going on in the market, which included a map graphic showing what that analyst thought would happen. The chart was prepared by Moody’s Analytics, a big player who has a huge interest in figuring out what is most likely to happen, so I thought it was worth sharing with you. Here’s the chart, which is page 13 from the presentation linked at the end of this post.


This is a pretty fascinating chart. Note that some areas near us are predicted to recover to their previous highs within the next 2 to 3 years. And for some of the hardest hit areas, full price recovery may take 20 years.  Factor some inflation against that and I’m not sure it is a recovery.

In our own Greater Seattle / Bellevue area, it looks like their prediction is recovery to 2007 price levels in the 4 to 5 year timeframe at best. Still, all in all it doesn’t sound too shabby – that would be about 5% a year from here, or more like 3%/yr if it stretched out to the long side. My guess is that this recovery rate would be back-end loaded – lower (near zero) appreciation rates near term, and higher rates later on as the national economy really gets rolling again. We’ve got a lot of unemplyment to work off before that happens.

The whole presentation is linked here in the 2010 – Housing Recuperates presentation from Moody’s Fall 2009 Economic Outlook Conference. In the chart on mortgage default rates on page 10, the left axis is CLTV – Current Loan to Value Ratio; the chart is a little hard to understand unless you have that information set in your decoder ring.

Don’t get too hung up on month-to-month fluctuations in reported median prices.  As Ardell’s chart clearly shows, even with a county wide mass of data, the reported median can jiggle up or down a few percent.  Our median for the 16 months shown is about $380,000 +/-5%, or swinging about $20,000 on either side in any given month.  In January we had a nice 5% blip up in the condominium median price, but for February it was right back down where it had been most of the time for the past year.

The Unintended Consequences of Growth Management

A recent interview with Cato Institute Senior Fellow Randal O’Toole brings to light another significant factor in our greater Seattle housing market’s recent run up and fall down – the effect of our state growth management and local urban planning regulations on the price of housing and the creation of the shortage mentality in buyers during that period.  

Here is a link to the article, courtesy of Realty Times: http://realtytimes.com/rtpages/20091105_restrictive.htm

In essence, the Cato Institute study found that the bubble wasn’t really national, it was mostly confined to about a dozen states, all of whom were practicing some form of what urban planners call ‘growth management’ – basically pushing the bulk of housing growth into limited urban areas (sure sounds familiar). The effect of that practice was to boost the price of land inside the urban area, and make housing more expensive – and incidentally increase the tax revenues and job growth of cities in preference to counties – hmm.  That same restriction also allowed the cities to impose more and more permitting restrictions that caused more expense and longer lead times for developers – and thereby both restricted supply and raised prices to consumers even further.

My favorite example of some of these practices is the number of brand new houses built in Kirkland in the past few years that have a detached garage with a qualified accessory dwelling unit above it.  How many buyers qualified to buy a $1.5 Million house would want a detached garage, let alone a large ADU they have no intention of renting to a stranger on their property?  But it sure helps the city of Kirkland meet their growth management requirement for additional ‘housing’ units.

There’s a lot more more interesting analysis and discussion in the article – well worth reading.

Big Brokerages – how do they really work, and what’s changing?

We started getting into this a bit on my Disappointment Index post, but I think its worth a post and thread of its own. David Losh’s comment “Every Brokerage wants you to do it yourself so they can get rid of all the dead wood they have hanging around in the office. Real Estate is a numbers game. The more agents, the more money. With an online Brokerage all you need is a technical support staff” kind of triggered my decision. Read his whole comment; there is some interesting insight in there.

Is the business really changing? And do the different generations – Boomers, Gen X, Gen Y have different preferences that would favor one business model over another?

In 2006 we had a lot of discussion about new business models and the rise of the Internet, including an MIT Enterprise Forum program on the topic, and a post here on RCG by Robert Gray Smith. So now it is three years later, Redfin has declared its first profit (congratulations, Glenn), we are no longer in a bull market for real estate, transaction volumes are way down, and everybody is three years older and wiser 🙂 Has anything really changed in the real estate business? The core of the business is still appears to be the big traditional brokerages – RE/MAX, Coldwell Banker, Windermere and John L. Scott – some are national, some are regional; some offices are franchises, some are company owned. Some people will want to add others to the list, from Skyline to Realty Executives to …

My view of the big brokerages (I happen to be affiliated with RE/MAX, and formerly with John L. Scott) is they fundamentally are not in the real estate business; they are in the real estate services business. Their client is not the buyer or seller, it is their affiliated real estate agents. As a residential real estate agent in the state of Washington, I am licensed to facilitate the buying and selling of residential and condominium homes, under the direction of a licensed broker. In the traditional model, I am not an employee of that broker, I am a sub-licensee and an independent business person. My activities are not directed by the broker, I do not get benefits, and my earnings show up on a 1099.

For the privilege of being affiliated with that broker (i.e. sub-licensed, or ‘hanging my license’ there) I pay a fee – actually lots of fees. There are transaction fees and E&O fees and B&O fees and legal reserve fees and desk fees and non-desk fees and membership fees and advertising fees and website fees and commission splits. In general the big brokerages expect to collect about $20,000 to $25,000 per year from each agent; that is how they make their money. So I am their real client, and they are in the business of selling me real estate services. They certainly want me to be successful, and able to pay their fees. They will claim that being affiliated with their brand will help me attract more business, and they spend big money on institutional advertising, particularly their website. It is not clear how much of the advertising effort is aimed at attracting buyers and sellers to their agents, vs how much is aimed at attracting agents to their brand and fee services – the more agents, the more fee revenue for the broker, almost regardless of sales volume. They often say I will get a share of the institutional leads they get from their web site – but in practice for me, so far, no value. In fact, I have to do my own business development and establish my own reputation with things like newletters, seminars and blogs (and taking good care of my clients), and I have had to build my own web site to get what I consider to be a credible web presence. I am for all intents and purposes an independent business person who contracts for certain support services. The traditional model.

An alternate model is for the broker to hire the agents as employees. Then they are W-2 employees, probably get benefits, the company probably generates most of the leads – for example with a good website and some buyer/seller incentive programs, the agents probably do more transactions, and probably get a lower percentage of each transaction commission in exchange for the lead flow. But those agents will show higher in the transaction rankings, because they are basically on an assembly line instead of spending a lot of time doing their own marketing and business development. I think this is basically the Redfin model, but happy to have someone who knows it better chime in.

A third model that was tried by Redfin initially in 2006 was a model of generating the leads through the website, referring them out to a set of selected agents (sub-licensed to other brokers), and collecting a substantial referral fee if that agent was able to convert the lead into a transaction. During this time I was Redfin’s lead referral agent for the Eastside. That model did not generate enough revenue to support the Redfin business model, and it was abandoned in favor of the agent emplyee model above in mid-2007. During that period I served some wonderful clients who came to me from Redfin, and I am still in touch with them, but I agree that the “wanna see a house? – we’ll get an agent to show it to you” model didn’t have a very high success rate for either the referral agents or Redfin.

So how much do we really think the business is changing? Do we think the big brokerages would really like to migrate to the Redfin model? There is an implication that the Redfin model is a short-term relationship transaction model and that the traditional brokerage model is a personal referral and longer-term relationship model. Which model to consumers prefer? And does it vary by generations?

This seems worth exploring.

How About a ‘Disappointment Index’ for Real Estate

Tim just posted an interesting set of stats on Redfin, titled Biggest Discounts, and one of them particularly caught my eye.  His primary topic was the difference between Final Listing Price and Sold Price and how that varies by area.  But what caught my eye was the final chart that showed discounts from Original Listing Price to Final Sale Price.  This hit right on a topic I have been thinking about for some time, that I had mentally labeled the Disappointment Index.  In a very real sense, it represents the difference between what a Seller hoped to get for their home, and what they actually got after perhaps many months and many price reductions. 

Presumably a Seller, in consultation with their agent, has consciously decided what they want to ask, and get, for the property, and has some expectation that that might happen. So to the extent that they start with that expectation, then a subsequent completed sale for less is a disappointment.  And a 15% disappointment on a $500,000 house would be a big disappointment  – $75,000 not showing up in your bank account would be a very big disappointment indeed.

So here’s the question: why are these discounts so big? 

Are the agents not able to estimate market value and expected selling price any better than that?  Or are the Sellers not listening to their agents and overriding them? 

At what point does the listing agent walk away and let the Seller find a more compliant agent to list the house at a visibly above-market price?  Or does the agent take the listing and hope to work it down over a span of time, perhaps several months.  

Maybe this Disappointment Index is higher right now because both Sellers and agents are having trouble adjusting to current prices levels that are significantly lower than a year or so ago.  But it certainly does impede sales by leading to longer times on market, and lower buyer confidence in what the price really should be.

Are We Facing A Housing Shortage?

In looking at the latest Northwest MLS statistics for King County, it would be tempting to say that our housing market is recovering.  But it is an odd mix of data.  Single family home sales volumes are up (even better than last year), inventory is down sharply from last year, prices seem to be starting to rise again, and average days-on-market is dropping.  That all sounds pretty good.  (larger residential stats charts)

Residential stats 750

(Note that the Northwest Multiple Listing Service neither prepares nor is responsible for these charts – the interpretation is my own.) 

But condominium sales are still slow (though rising some), inventory is staying high, and median prices are not rising.  That doesn’t sound quite as good.  (larger condo stats chart)

Condominium stats 750

What are we to make of this seemingly conflicting data?

 What it looks like to me is that we are in the early stages of a housing shortage.  While Seattle and the west side have been built out for decades, Bellevue and the east side communities have been absorbing most of the region’s growth for the past 50 years or so.  But we passed the Growth Management Act in 1990, and then we added the Critical Areas Ordinances.  As a result, it has become harder and harder to get permits for housing developments of any significant size.  In fact it appears that over the last 10 years or so it has become far easier to get a permit for a 100-unit condominium high-rise than for a 100-home residential development.  The rate of application for new building permits “fell off a cliff

The Buyers are out, and trying to buy, but…

Buyers are out, and trying to buy, but they don’t seem to be quite as successful as some of the more breathless news reports would lead you to believe.  I have always liked the Pending Sales statistics from NWMLS because they represent the most recent monthly snapshot of new contracts on listed properties – i.e. a Buyer and a Seller have made a deal.  But recently a lot of those ‘deals’ have not closed, the Seller has not gotten his or her money, and the Buyer has not gotten possession of the property. It appears that a lot of these current transactions, which are indicating a high level of Buyer’s intent to purchase, are falling out or being delayed for long periods.

Here is a chart built from NWMLS published statistics of Pending vs Sold data – the chart is built by taking a two-month moving average of Pending (previous month) vs Sold (current month) data. Note that this post expands on an earlier post by Ardell in her Sunday Night Stats.

Let’s call this chart the Fall-Out Ratio – we may want to keep an eye on it.

(Required disclaimer: Statistics not compiled or published by the Northwest Multiple Listing Service)reilingteamcom-fall-out-ratio-0906

Historically the fall-out rate has been well under 10%, but then in early 2008 the fall-out rate started climbing like a rocket. Recall that we had the mortgage market meltdown in late 2007, and lenders started dramatically tightening their lending practices. Then we had the larger financial and business crash in late 2008, and more people started losing their jobs – and the other 90% got nervous. It was also in late 2008 that we started seeing a lot more short sales in our Seattle/Bellevue area. Recall that in a short sale, the insolvent seller is trying to avoid foreclosure by selling the property and getting the lender to accept less than is owed on it. That lender approval process is often slow and uncertain, and it certainly is contributing to this rise in the Fall-Out Ratio. Short sales may be 20% or more of our current sales activity, and those delays may also be a major contributor to why the average Days-on-Market measure isn’t dropping in concert with Months Supply. Other contributors to the fall-out rate would include failure to reach agreement on inspection, and failure of financing. I’m sure we’ll get a lot more insight on causes from the comments by our great RCG contributors.

The Third Bubble …

It has often been said that we have even more of a bubble in real estate agents than we have in real estate prices. In fact we have had three concurrent bubbles – house prices, number of purchases, and number of agents. Unfortunately for the members of the residential real estate sales profession, we are making a lot more ‘progress’ on reducing the first two bubbles than we are on the third bubble.

Last week I went through an exercise of trying to track the growth and reported decline of the number of licensed agents in King County, including metro Seattle and Bellevue, who are members of the Northwest Multiple Listing Service. I had heard that the NWMLS had expected about 25% fallout in 2008. As I got into it, it looked like taking the transaction volumes and median prices at the same time might produce some interesting insights into agent incomes and the desirability of the profession. ( I admit that I considered an alternate title for this post: ‘The Grass Is Not Always Greener…’)

So here’s what I found, using year-end data from published NWMLS statistical reports, but doing my own analysis (and making my own errors – please let me know if you find some or think I missed a point of interpretation).

First are three charts to show the Three Bubbles of King County Real Estate:

Second is to show how the growth in number of agents has affected the average number of transactions per agent. A couple of notes on methodology here. For transactions per agent, I split each transaction into two sides, and then just divided the total transaction sides by the number of agents. For the 2009 estimate, I took the business volume for the first four months, through April, and factored it up by the same ratio as the last 8 month of 2008 were to the first 4 months of that year. We’ll get another check on it shortly with the May 2009 data.

(Required disclaimer: Statistics not compiled or published by the Northwest multiple Listing Service)


Note how the average number of transactions per agent have been dropping dramatically as the total number of agents rises and the total number of transactions falls. Total number of agents is only down about 10% so far. Some people expected a far faster fallout rate, including NWMLS in one talk I heard, but the inhibiting question is probably ‘Where would they go for an alternate job in this economy?’ A related article from Inman News appeared in the Times last Sunday – Less Experienced Hands Leaving the Business.

And third is to show how the combination of all three factors plays out in average agent earnings. For nominal earnings, I assumed 2.5% commission on each transaction side – we don’t always get 3%, and we often have to give up a bit here or there to keep everyone happy and on track. The data behind the charts is stored here.


So for the average agent (and I recognize that most clients would prefer to deal with an above average agent), earnings have dropped from a decent professional income to a pretty marginal income. Last year (2008) it was a little over $30,000 – about $15/hr if you work full time, and this year looks worse. How about $10/hr?

I guess the grass really isn’t always greener…

Some Short Sale Statistics in West Bellevue

I had occasion last week to do some digging for short sale listings in West Bellevue – the NWMLS area 520, west of I-405 and north of I-90 including  Beaux Arts, Enatai, Medina, Clyde Hill, plus Hunts Point, and Yarrow Point on the north side of Hwy 520.

I wondered whether the new NWMLS listing fields to indicate short sale or bank-owned/REO would help – they didn’t; it only showed 3 hits.  So just for fun I went back and did it the drudge way.  There were 313 active listings for single family homes.  I scanned through the agent summaries for each looking for “subject to lienholder approval” or some similar phrase.   I found 32 listings that were short sale, about 10% of the total, and 5 that were bank owned, less than 2% of the total.  So 1) as we knew, there are a lot of short sales going on, and 2) there is very little use so far of the new fields.  So add this to the previous good post that Jillayne  did before the new fields were added by the MLS.

Some other interesting observations out of this little study – this is a relatively high-priced area: 68% of the listings are over $1 million.  But 67% of the short sales are under $1 million.

And last of all, since Sunday, 4 of those shorts have gone under contract – sounds like a pretty good absorption rate; I’ll track them for a while and post an update later.

Lies, Damn Lies, Statistics…. and Headlines

Sometimes our favorite statistics mislead us.  I was most recently reminded of that when I was reading one of Ardell’s North King County Stats post – Ardell does a great job on these stats, and sales volume and median price tell a lot of the story.  But there is another dimension we need to keep an eye on, and that is the change in mix over time – particularly the change in the ratio of number of higher price homes sold to number of lower-price homes sold.  That change in mix can make the same set of statistics generate a variety of very exciting, or depressing, headlines.

Here’s an example: if over a year or so the number of sales of high-priced homes drops a lot, and the number of sales of low-priced homes doesn’t drop as much, then both the median and the average prices are affected dramatically.  If we are concerned that our home prices are dropping, we watch that median number like a hawk – we’ve been trained that ‘median’ is better than ‘average’ for telling what’s really going on.

Suppose we build an example set of data where the mix of home sales has changed dramatically over the course of a year or so, and the total number of homes sold has dropped in half, but the value of individual homes has dropped only 10%.  As it turns out, there are lots of ways to cut the data, and some of them yield more exciting statistics than others.  We all know the old saying “Bad news sells newspapers

Rich Barton of Zillow talks at Northwest Entrepreneur Network on Friday

Just a quick note to let you know that Rich Barton of Zillow and Expedia will be talking at the Northwest Entrepreneur Network on Friday morning. Here’s the link for anyone who wants to check it out: http://www.nwen.org/calendar/regbreakfast.htm

Note that you have to get up before breakfast for these meetings 🙂

See you there.