by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
I have the heart of a trader. If you read Mortgage Rates Report, you know that I’m fascinated with the forces that make markets move up, down or not at all. One of the things I’ve noticed, since I started writing on Bloodhound Blog, is that the real estate industry is:
- very much protective of its sellers (often to the detriment of the buyers)
- unwilling to operate in a transparent marketplace.
That lopsided opacity was the real reason for the eventual implosion of the real estate market. We hid market information from the buyers while the Baby Boomers moved through the home ownership life cycle. A huge generation, yearning for “The American Dream of Homeownership”, assured strong demand for houses in the post-World War Two housing boom. Banks were all too happy to hand out money, even when forced to lend by the Government. Lew Ranieri saw a 25-year boom ahead and found a way to create a shadow banking system that could “bury bad loans”. Any agent dealing with a short sale understands the problem of buried loans because she’s heard:
“Well, we aren’t quite sure WHO owns this loan”
Kind of sounds like the forensic audit of Bernie Madoff’s books, doesn’t it? That’s what you hear when the jig is up on a Ponzi scheme: confusion, wagon-circling, and practiced deflection. It eventually catches up with the schemers. I’m firmly in the camp that no matter how many incentives we offer to stave off the inevitable forced sales, or to provide a middle-class tax cut, or to bribe the next generation of buyers, the simple fact remains that we have more houses than we need in this country…and the people just ain’t buying like they used to.
It’s partly the National Association of REALTORs fault. They’ve hoarded supply data and intentionally suppressed demand data since inception. Suppressing the demand data resulted in a valuation system that relied on false positives (comparable sales) as a standard that contributed to the Ponzi-like atmosphere in the real estate market. Think about it. When we ask agents about rising demand, they point to dwindling supply as a measure of it. That deflects the question.
It’s party the appraisers fault, too. They allowed themselves to be the lap-dogs of the NAR without ever addressing the demand-side of the equation. Ask an appraiser about demand, he’ll point to the “absorption rate” which, as I’ve said, is a measure of available supply.
Let me give you an example of the unholy alliance between NAR and independent fee appraisers:
Have you ever been to the Port of Long Beach, CA? This is what it looked like last Fall. The linked article shows that there are literally thousands of Mercedes and Toyotas, waiting to be warehoused rather than shipped to dealerships. Can you imagine if the Kelley Blue Book guy came out to “appraise” the new Mercedes, to set the market?
C’mon boys! Let’s get these vehicles into the sheds! We can’t let the Kelley guy see the results of the poor demand. Floyd? Can you get those last three bills-of sale for the Kelley guy? He needs to set a value for this model.
That’s how appraisers valued property until last year; they ignored current listings and went off historical data. Nobody cared because we were in the middle of a long-term market paradigm where demand was greater than supply. Remember, that chunk of people just turned 65 so they’re pretty much out of the market. That paradigm is shifting- ask Gary Keller.
Oh, lenders weren’t innocent either. Lenders (and their counterparts on Wall Street) were so willfully absorbed with the next quarter’s profits (produced by the shadow banking system) that they grew a cabal so powerful that its failure is defined now as “systemic risk”. The days of what Greg Swann refers to as “flinty-eyed bankers” gave way to the crap-shooting S&L cowboys and gun-slinging investment bankers.
In the end, we had to sell the former Second-World countries on the compunction of Joe the American so we could keep the taps running. Joe the American turned out to be a bad bet and the Second-World sovereigns are pushing back.
We ignored the demand-side of the trade. Now, when Mao and Ivan tell us to mark those mortgage bonds to the market, we have no reliable pricing service because we can’t see what the demand, property by property, is. We can’t build a pricing model worth trusting because we have no idea about the true demand for the collateral behind the loans. This mortgage-backed securities market collapse goes deeper than the Fed’s unexpected flight from support. It started when a bond fund manager suggested that our nation’s collateral, and confidence, was in jeopardy of being downgraded. This rise in mortgage rates is as much a fear of systemic failure as it is of inflation…
…and it ain’t over yet.
I met a guy last month who thinks he has a solution. It’s so simple it’s silly; an open market, like the NASDAQ, for real estate. Watch offers for houses, in real-time, be accepted or declined. NASDAQ Level Two Quotes go beyond the bid and ask; they show the “size” of the market for those prices. The implementation of that transparency greatly reduced the previous NASDAQ market manipulation, that stymied the individual investor to favor institutions. It isn’t perfect but exposure to that data makes the market operate more efficiently. Apply that model to real estate and you will quickly determine what the “real” market is for a property.
Prudential California tried a similar approach with its range-pricing model. The range pricing model reflected a bid and ask price but withheld any “size” of those numbers…so the numbers were useless. Range Pricing then, is a marketing gimmick, not real market transparency vis-a-vis the demand side of the trade.
How then, can we solve this problem so that confidence is restored in property valuation? I gotta tell you that The Second-World Nation investors don’t trust our Government. Our Government doesn’t trust Wall Street. Wall Street doesn’t trust the banks. Banks don’t trust real estate agents and the public doesn’t trust anyone right now. Money flows where trust goes so restore trust in the valuations and the money will start flowing again.
Prominently display the terms and dates of the rejected offers, verified by participating market professionals, in the MLS system, and you solve the demand side of the equation because you identify the “size of the market”. Share that information with the banks and they’ll start trusting you. Show it to the prospective buyers and they’ll throw their arms around you in joy. The sellers will “get real” about the market, also.
We all know that ain’t gonna happen because “The Man” doesn’t want to release his clutch on the market.
That’s the real problem. We don’t have a real estate market, we have a real estate industry created market. Since the real estate industry isn’t going to restore confidence in the real estate market, I suppose we’ll have to look elsewhere…
…like this guy I met.
Expect to hear a lot more from me, about this topic, as I learn more about it. Now, you’ll have to excuse me while I go pester this guy via e-mail. Thanks for letting me vent.
Tom Vanderwell says:
Brian,
I do believe you and I are approaching the same problem, the same issue, from opposite sides. I’m looking forward to what you have to say further.
Tom
June 11, 2009 — 5:00 am
Greg Swann says:
Read, learn, mark and inwardly digest. This is the future the Realty.bots missed. Of all the posts you will read, here or anywhere, this is the one with the greatest portent.
June 11, 2009 — 6:07 am
susan kelly says:
Obi-Wan, sometimes you do amaze me~
June 11, 2009 — 6:48 am
Thomas Johnson says:
Bid/Ask and size Wow. Where do I sign up to be a market maker?
Another issue with the shadow market is that nobody knows how many defective titles/liens are out there. I think that is why Paulson had to back off TARP#1. The Fed and Treasury didn’t want any part of the worthless paper. If the shadow dwellers were smart, they would modify every loan they could and clean up the liens in the process as part of the loan mod.
June 11, 2009 — 6:55 am
Brian Brady says:
Where do I sign up to be a market maker?
THAT is the question you should be asking. The folks on Active Rain are boxing shadows when they should be asking what you just did, TJ.
I’m trying to find out the answer to that question; that was the reason for this post.
June 11, 2009 — 7:23 am
Teri Lussier says:
>We don’t have a real estate market, we have a real estate industry created market.
Which is great marketing, from a marketing standpoint, but really sucks rocks from a consumer standpoint.
Love this post, Brian. These are exciting times in the real estate industry.
June 11, 2009 — 7:24 am
Cheryl Johnson says:
Brian and I started this conversation over on AR, I think it is time to continue the conversation here.
I said: “Personally, I would feel uncomfortable publizing the price and terms of any failed/rejected offers on any of our listings. I would feel even more uncomfortable publizing the fact that a particular listing had not yet received any offers. But maybe that’s just me.”
Brian answered: “No CJ, it’s not just you it’s the definition of the real estate industry; protect the seller to the detriment of the buyer. My idea is going to feel uncomortable because you have decades of experience and training that tells you to do this. All we’re really doing is evening up the playing field here.
Banks have already started to implement a modified verison of this sytem, on short sales, with the two-step “highest and best offer” auction and y’all are participating. Banks will start demanding that listing agents certify a list and terms of all rejected offers, in addition to the property appraisal, to determine valuation for the property. Some of you will say, “They can’t do this” which is fine. To protest this you should then refuse to do transactions that involve buyer financing.
This has already started; the wheels are in motion at the secondary loan markets level.. The system that automates and commercializes it will just be an opportunity for real estate agents to participate.”
Greg, what do you think? Bloodhound Realty has elevated the marketing of listings to an art form.
I see Bloodhound Realty has a beautiful home available in Sun Lakes right now. Would you be eager to publish a list of rejected offers/failed offers/no offers on that property’s web site?
June 11, 2009 — 8:12 am
Michael Cook says:
One of the best and most comprehensive pieces I have read in a long time and in my line of work, that says a lot.
The question is how do you wrest control away from the NAR and empower consumers? Buyers have been suckered into believing that they dont pay any commission when they purchase a home. They foolishly forget that if the seller didnt have to pay 6%, they would have incentive to lower the price. Lets also not forget the wildly stupid compensation plan that puts all the incentive on the seller side of the transaction.
Sellers are trapped between legal hurdles mounted by the NAR lobby and a market that they have a tremendous amount of trouble accessing.
Your appraiser critique is also spot on. No one should trust an appraisal. The first rule of markets is “Past performance does not dictate future returns.”
The flip side of this analysis; however, means that there is great opportunity for savvy investors that know how to navigate the market. Smart buyers can easily disintermediate the real estate agent and save 3-6% on their purchase or more.
The NAR does not understand that better mouse traps keep springing up because people are starting to understand the waste in the real estate industry. While the NAR might not die in the next 20 years, I certainly expect it to lose a lot of its teeth.
June 11, 2009 — 8:46 am
Brian Brady says:
“One of the best and most comprehensive pieces I have read in a long time and in my line of work, that says a lot.”
Thanks. Having walked a short time in your shoes, I knew you’d “get” this.
“The question is how do you wrest control away from the NAR and empower consumers?”
Supplant it (as Greg would say). When banks require this disclosure to fund loans (and they will), the NAR will no longer be able to operate under the cloak of secrecy (unless the NAR is made up of agents who only deal in all-cash transactions)
“Smart buyers can easily disintermediate the real estate agent and save 3-6% on their purchase or more.”
Not necessary, MC. In this model, the right agent can be invaluable to a buyer. Agents who embrace the role of fiduciary rather than cling to the (quickly diminishing) functionary role, will be wildly successful in a model like this.
June 11, 2009 — 9:11 am
Brian Brady says:
“Greg, what do you think? Bloodhound Realty has elevated the marketing of listings to an art form.”
If it’s priced properly, a listing agent would have nothing to hide, CJ.
Brokerages, hired by REO asset managers, price properties so low that an auction takes place. If this were in the public’s eye, it would provide upwards pressure on the price. Expect REO firms to adopt this model soon. Once that happens, this disclosure will be demanded by all buyers and embraced by most sellers.
We all want true market price discovery. Access to true demand data facilitates that
June 11, 2009 — 9:42 am
John Rowles says:
What “MLS system”?
There is no system, just 900+ disconnected obstacles looking for a way to justify their existence.
That said, what you are talking about *is* a way for MLSs to justify their existence.
IF a significant chunk of the MLSs got together and formed a market-tracking index, they would actually be doing something that no other existing entity can do at the moment.
Everything else the MLSs currently do can be replaced in less than a week using existing technology. If they were smart, they would take a hard, objective look at this idea.
…And then monkeys might fly out of my butt.
June 11, 2009 — 12:16 pm
Michael Cook says:
“Not necessary, MC. In this model, the right agent can be invaluable to a buyer. Agents who embrace the role of fiduciary rather than cling to the (quickly diminishing) functionary role, will be wildly successful in a model like this.”
Last I checked a fiduciary is not worth 6%, perhaps worth 1-3% though. And I would bet good money on the NAR fighting to keep 6% to their graves (hopefully). The NAR lobby is very powerful, so I find your change sensible, but hardly what the NAR would consider practical. If it makes sense to me, you can guarantee they wont be doing it any time soon.
Luckily in our psuedo free market system, someone will find a way. There have been some false starts, but people are definitely getting closer.
June 11, 2009 — 12:40 pm
Tom Hall says:
Brian – facinating. Loved it. I can only see a fuduciary responsibility in sharing terms and conditions in a transparent way. It provides real credibility to pricing correctly.
June 11, 2009 — 1:22 pm
Petra Norris says:
I’m new to Bloodhound Blog, but I can see that this is a site I’ll have to visit often. REO and Bank Owned home pricing has been a big challenge for us here in Lakeland, Florida. I hope to see more transparency soon.
June 11, 2009 — 2:04 pm
Anthony Crecco says:
thanks Brian for the post. really good information. i enjoyed reading it very much.
June 11, 2009 — 2:21 pm
Don Reedy says:
Brian. Dude, you are spot on with this post. In fact, it’s not even a post, it’s the whole fence.
You indicate the banks might demand data, and that got me to thinking about whether there actually might be something agents with a little moxy might begin doing themselves. It is a fact that sellers employ agents, and it is FOR these sellers the listing agents work. It would, then, be appropriate to market TO the seller that any and all offers that come in would be disclosed to all potential buyers.
Brokerages, hired by REO asset managers, price properties so low that an auction takes place. If this were in the public’s eye, it would provide upwards pressure on the price. Expect REO firms to adopt this model soon. Once that happens, this disclosure will be demanded by all buyers and embraced by most sellers.
I have experience with auction type sales of properties here in San Diego, and they have been very successful. They are in fact merely the releasing of potential offers in a controlled setting, completely open, with the result often being that buyers compete against other buyers in a forum that often leads to a pretty good result for the seller.
Perhaps the hole in the dike is in fact the real estate auction process. Many of the large brokerages are familiar with, and even offer, auction plans of their own, so that’s a horse that may not have to be broken.
Anyway, this really is one of the best pieces of original thinking, clear composition, and compelling calls for action yet put to the press here.
June 11, 2009 — 5:29 pm
Sean Purcell says:
Brian,
Must admit, I’m a little torn here. On the one hand, as a former trader (like you), I love this idea. An open outcry marketplace supplants every other model.
On the other hand, you’ve got Tom Vanderwell and Michael Cook siding with you from the jump… usually a pretty good contra indicator. 🙂
June 11, 2009 — 6:43 pm
David G from Zillow.com says:
I’ve written this post in my head a hundred times but I always manage to talk myself out of it …
For a marketplace to function properly the primary ingredient is liquidity. Liquidity has two dimensions; bid/ask volume and bid/ask rate. You need both a healthy volume and a healthy rate of bids for useful liquidity. You get that kind of liquidity on the stock market and it can happen in real estate; Zillow for example has built an incredibly liquid and efficient marketplace for mortgage shopping.
Another important prerequisite for this type of liquidity seems to be marketplace symmetry. Markets work best when there’s a more or less equitable balance between bids and asks. You find this balance in financial markets where many sellers hold the exact same stock. In mortgages, symmetry is also possible, largely thanks to the fact that the supply of mortgage funding is fungible; it can be repackaged in so many different ways.
Creating a liquid marketplace for houses on the other hand, would be a significant challenge that quickly becomes impossible as you try to make it work for all homes.
Now, granted that some small percentage of homes may have sufficient bid volume to learn something about the “market” for those homes. These properties however are few and far between and certainly don’t represent the “average” home (whatever that might be.) But when you start to think about the further requirements for both a high rate of bids and a symmetrical balance between bids and asks (per trade), you realize that it’s a pipe-dream.
Creating a high rate of liquidity in Real Estate would require synchronizing real-time bids and that would require significant (and probably impossible) changes in buyer behavior. If you think about, people have been trying this in Real Estate for decades with almost no success; we call these transactions “auctions.” If auctions were a viable way to sell the average home, you’d all be listing homes on eBay by now but besides some notable exceptions, auctions are not a smart way to sell the “average” home. As an aside, land auctions have had significantly more success (just check eBay for confirmation of that) and it’s because land is more fungible from a buyer’s perspective and that fact creates additional buy-side liquidity which results in symmetry that simply you can’t get with homes.
So bids on homes don’t have sufficient volume or rate for liquidity but symmetry is still the biggest problem for an RE marketplace. I don’t have to explain how not every buyer will bid on every home and how, in a sellers market it’s an even more impossible proposition.
Don’t get me wrong. I think transparency into RE bids is be a necessary innovation with many great implications for consumers; but a true marketplace is not one of them. And I do believe that if your buyers’ agent knows how to structure an offer correctly with a suitable escalation clause, lack of precise visibility into your competing bids is not really a factor.
OK, have at it …
June 11, 2009 — 6:44 pm
Tom Vanderwell says:
Sean,
You crack me up!
Tom
June 11, 2009 — 7:02 pm
Brian Brady says:
“Zillow for example has built an incredibly liquid and efficient marketplace for mortgage shopping.”
ZMM is an efficient and popular matchmaking site but a market it is not. No money exchanges hands and no loans are transacted. If we were to see the final loan terms compared to the “winning bid”, with performance variables alongside the “provider ratings”, a market it might be. Having disclosed that, it is wildly successful marketing site for anonymous borrowers to meet quality lenders.
David, I made a comment to you a while back that must not of resonated. I’m certain Sean Purcell and Michael Cook will understand this; you can make a market in ANYTHING. Certainly, conformity and consistency lead to greater liquidity but ask any NASDAQ trader or ZMM bidder and they’ll assure you this; markets can be made, by anyone, on anything…
…even incense, marijuana paraphernalia, or used motors:
http://www.kobeyswap.com/kobhist.htm
My ZMM experience completely prepared me for the chance meeting I had with the owner of this idea. I was able to give him great feedback from that experience.
June 11, 2009 — 7:53 pm
Greg Swann says:
Brian > Banks have already started to implement a modified version of this system, on short sales, with the two-step “highest and best offer” auction and y’all are participating.
Damn straight. Right now, most short sales are undisclosed silent auctions. Sucks completely for buyers.
Cheryl > Greg, what do you think? Bloodhound Realty has elevated the marketing of listings to an art form.
> I see Bloodhound Realty has a beautiful home available in Sun Lakes right now. Would you be eager to publish a list of rejected offers/failed offers/no offers on that property’s web site?
We never hesitate to tell agents when we have offers over list. 😉
The issue is one of justice, and you may be assured that Brian’s revolution will not be led by listing agents.
But consider this: If I am obliged to report all activity on my listings, I am much likelier to find the market price — and more quickly — than I am by means of the present secrecy. Buyers will know what my sellers won’t accept, but my sellers will also know what buyers won’t pay. Listers who have spent the last three years pleading with irrational sellers — we don’t do this; we won’t list for above-market prices — will see the benefit to two-way transparency.
Brian > Once that happens, this disclosure will be demanded by all buyers and embraced by most sellers.
Actually that would be an interesting item to add to a purchase contract: Intent to purchase for no less than 103% of highest rejected offer, with determination of final purchase price to be negotiated upon full disclosure of all rejected offers. That’s a new tube of lipstick for a lot of pigs.
David G > And I do believe that if your buyers’ agent knows how to structure an offer correctly with a suitable escalation clause, lack of precise visibility into your competing bids is not really a factor.
Dood. Only you live in a world where escalation clauses are common. Most buyers need a deescalation clause: The price should go down for every lie the listing agent tells.
Everything else you’re saying presumes that a bourse can only exist in a rapid-fire environment. In Phoenix, most listing contracts are 180 days in length (we write 90 days, but we sell in 43 days, on average). In six months, there will be activity — and if there is not, that is a valuable market datum in itself.
In the present circumstance, buyers are unable to plumb for true value because they know only their own bids. At the same time, sellers are insulated but their own secrecy from coming to terms with pricing errors.
Whether or not this is satisfying by some academic standard, it is by far superior to what we have now — as everyone representing buyers in short sales will attest.
June 11, 2009 — 8:17 pm
Brian Brady says:
“That’s a new tube of lipstick for a lot of pigs.”
Yes it is.
“Everything else you’re saying presumes that a bourse can only exist in a rapid-fire environment. In Phoenix, most listing contracts are 180 days in length”
I’m hopeful that this idea will compress that marketing time. What ZMM does is compress the shopping time for a mortgage for the willing borrower. What it doesn’t do is vet the willingness of the borrower.
I think if ZMM allowed a borrower to “make me borrow”, by naming starting terms, the efficacy of that matchmaking service would increase. Lenders would steer clear from unrealistic expectations and focus on serious borrowers.
June 11, 2009 — 8:44 pm
Kaye Thomas says:
Brian,
Much of what you are proposing is certainly of interest. However I think you are forgetting that unlike the stock market where bids, trades etc are relatively anonymous.. home sales are very personal.
It’s one thing to discuss offers and sales on a bunch of track homes still listed with the developer. But when you start talking Bob and Betty’s home you are getting into a personal realm of information that is not necessarily up for total public consumption.
It’s like discussing lung cancer.. it’s not a problem as a general topic of discussion but when you are talking about my lungs or my cancer then the issue is strictly between me, my doctor and those I choose to inform.
Homes are private property. A seller doesn’t need to share his motivation or anything else that does not relate to the integrity of the structure with anyone.
We have become so focused on the notion of transparency that we have forgotten the concept of privacy and in the matter of owner occupied homes.. the owner’s right to his privacy.
June 11, 2009 — 9:43 pm
Brian Brady says:
Howdy Kaye!
A few thoughts:
1- Stock traders all know each other; it’s very personal.
2- See my response to DavidG; you can make a market on anything.
3- I think the owner relinquishes his “right to privacy” when he invites a financed borrower into the transaction.
4-I’m just the messenger on this one who is trying to find out how to benefit off of the inevitable
June 11, 2009 — 9:49 pm
Don Reedy says:
Just watched the end of the Lakers/Orlando game.
Then I picked back up here.
David, here’s something you say that has me perplexed.
Now, granted that some small percentage of homes may have sufficient bid volume to learn something about the “market” for those homes. These properties however are few and far between and certainly don’t represent the “average” home (whatever that might be.) But when you start to think about the further requirements for both a high rate of bids and a symmetrical balance between bids and asks (per trade), you realize that it’s a pipe-dream.
Now don’t jump out of your skin when I say this, but isn’t your “pipe-dream” exactly the essence of Zillow? The big beef during the early years of your product was the “lack of bid volume.” That is, your numbers really weren’t accurate because you had insufficient data about a particular home, and more significantly, about the homes that made up the “offering”, i.e. the data from which you extrapolated the Zestimate.
But you managed, and are managing, to make those first data sets much better now, aren’t you?
Such would be the way of any new movement to rectify the lack of transparency between buyers, sellers, and lenders. You say the following: So bids on homes don’t have sufficient volume or rate for liquidity but symmetry is still the biggest problem for an RE marketplace. Zillow itself didn’t have symmetry at first. You worked at it. You’ve made strides. Perhaps you’ve even knocked down a few walls between yourself and real estate practitioners who thought Zillow’s offering was a “pipe-dream.”
I don’t need lots of data to help me buy a home. What I need is the best data I can get my hands on. Your analogy of bid/ask simply does not apply to real estate.
Don’t get me wrong. I think transparency into RE bids is be a necessary innovation with many great implications for consumers; but a true marketplace is not one of them.
Let’s see. “Great implications. Necessary innovation.” But, your conclusion…..”a true marketplace is not one of them?” That’s a leap I don’t think you made at Zillow, and certainly don’t want to make for the real estate industry as a whole.
But…. have at it.
June 11, 2009 — 9:55 pm
J. Paul Francis says:
“unwilling to operate in a transparent marketplace.”
“It’s partly the National Association of REALTORs fault. They’ve hoarded supply data and intentionally suppressed demand data since inception.”
LOL! You make it sound like the MLS is a public utility like County Tax records or something along those lines. Where would people be without the MLS? (Even in the supposed broken and pathetic form you suggest?)
“That lopsided opacity was the real reason for the eventual implosion of the real estate market. We hid market information from the buyers..”
Really?… The eventual implosion was primarily because of Lenders that gave out a bunch of crappy loans to anybody with a pulse and appraisers just rubber stamping them through. Real estate agents played right along with it with “real estate always goes up in price”.. etc.. etc.. Higher demand for anybody with a pulse buying up everything they could drove the prices up… nothing more.. nothing less. And new home builders were more then happy to play that fiddle and build, build, build with profit margins that went through the roof for building crap.
I have no idea on what that has to do with data from the MLS. The MLS is really nothing more then an advanced Craigslist with rules and approved users. It’s original intention is for the ultimate network for advertising real estate for sale. How somebody uses the historic information such as sales data is another story.
“I met a guy last month who thinks he has a solution. It’s so simple it’s silly; an open market, like the NASDAQ, for real estate. Watch offers for houses, in real-time, be accepted or declined.”
And there you go… people treat real estate like it’s the stock market which is precisely how the market got so screwed. Stupid little charts saying what already happened… heat indexes, etc.. etc..
Throw in a bunch of geek real estate writers for third party sites, journalists, etc.. who have no clue about real estate 1,500 miles from where they live… (you know who that is directed to. 😉
If you want to treat real estate like it’s the stock market… go invest in a REIT.
Sorry… but as the son of an Executive of a bank in commercial lending who grew up with friends of actual builders.. I know how screwed the lending business has been for the past 6 years and how screwed it is right now as they try to figure out what happened and why… and that my friend is the real problem.
Ironically… just got off of the phone with my parents and we just have to laugh at pretty degree people in charge just being completely stupid on what is going on and have NO CLUE of what actually takes place in the trenches.
By the way… how do you explain all of the overpriced new homes that were not on the MLS with hundreds of people waiting in line to buy one? Hell… during the crap days of real estate, more then half of the builders were not even paying commissions to real estate agents.
$66 a Square foot to develop and build…selling it for $200 a square foot. (Straight from the GC of a new condo development that I was the Director of Sales for.)
Sorry my friend.. it’s not the MLS or the NAR that was the problem… it’s the internet and everybody who jumped into the real estate market chiming their opinions on values when they have never even lifted a hammer or have any clue on development to begin with. (Don’t even get me started on all of the people who have no clue what positive cash flow is or the difference between a liability or an asset.)
Throw that in with Lax lending standards… Oh.. you want us to lend you $400K for a home that only rents for $1,200 a month? Sign here… what a great investment!
Hoarding data?? LOL!!
All the data was there… you just need to know how to read it in the first place. And I have several real estate investors that will vouch that I told them to get out in 2005 from this exact same data…
Sorry… the real problem was just stupidity. Much like Tulips, Baseball cards and tech stock get rich quick dreams/schemes of the past. This time.. it was just real estate.
Nothing more… nothing less…
June 11, 2009 — 9:56 pm
David G from Zillow.com says:
Greg –
Think about it: the length of time that a listing is under contract is immaterial to this discussion. All that matters is the time from offer to accepted and as you know, it’s a LOT less than 180 days. The seller can’t exactly spend the 180 days under contract taking better offers – that would be the least buyer-friendly marketplace we could possibly build in real estate. It’s a great concept but in reality, the average bid rate per listing, which is essential to marketplace liquidity, just ain’t there (on average; there are obviously exceptions.)
“Most buyers need a deescalation clause: The price should go down for every lie the listing agent tells.”
ROFL – I am absolutely going to quote you on that.
Brian –
This is semantics so not worth arguing over but your definition of a marketplace (i.e. one which also facilitates sales) is actually commonly referred to as an “exchange” or “bourse” as Greg likes to call it. Exchanges are obviously also marketplaces, they’re just a special case there-of. ZMM is very much a marketplace (you only have to ask @jmchood about how he’s had to re-price to compete for ZMM borrowers for confirmation of that) but ZMM is not an exchange.
That aside, do you have any feedback about my actual feedback? Merely asserting that “you can make a marketplace for anything” does indeed explain why there are some homes that actually do sell at auction BUT it does not begin to make an argument for why all homes could be better sold that way.
June 11, 2009 — 10:01 pm
Greg Swann says:
> Think about it: the length of time that a listing is under contract is immaterial to this discussion. All that matters is the time from offer to accepted and as you know, it’s a LOT less than 180 days.
Say what? There are thousands of houses in Phoenix that have been continuously marketed for more than a year, many for more than two years. Brian’s expectation that these terms would be reduced by factual reporting of the offer history seems very reasonable to me.
> The seller can’t exactly spend the 180 days under contract taking better offers
Nor has anyone suggested anything of the sort. It’s the history of rejected offers that matters.
June 11, 2009 — 11:06 pm
Brian Brady says:
“you can make a marketplace for anything”
I never said that. I said:
“you can make a market in ANYTHING.”
Big difference. Exchanges host market makers. Marketplaces introduce market participants
June 11, 2009 — 10:07 pm
Brian Brady says:
David,
I apologize; it’s been a long day and I’m making assumptions. You asked:
“why there are some homes that actually do sell at auction BUT it does not begin to make an argument for why all homes could be better sold that way”
I’m not proposing an auction, I’m proposing a transparent, two-sided marketplace where both buyers and sellers announce intent, terms, and price in an open outcry “pit”. The only difference between this and the CBOT is that it can be done online and the transaction doesn’t have to be consummated in seconds.
June 11, 2009 — 10:18 pm
David G from Zillow.com says:
Don –
I’m not sure how you got there but you are confusing Zestimate values with a marketplace somehow; you’re going to have to explain that to me over a beer sometime. I was certainly not suggesting that Zillow has built a marketplace for bidding on homes but it seems you’re trying to make that leap. I honestly find this idea really fascinating, have given it much thought and there are in fact other flavors of it that I do in fact like and may bet on. As you know, I have no issue with getting into detail about Zestimate accuracy but as far as I can tell, it has nothing to do with this topic.
June 11, 2009 — 10:18 pm
David G from Zillow.com says:
Thanks Brian,
I do understand what you are proposing; and do I maintain that it would require liquidity and symmetry to succeed and that that is impossible at the individual house level. I’m still not seeing anything here that explains how you would create liquidity and symmetry; merely declaring the marketplace “open” won’t come close. So I do believe that it’s impossible but I’d be the first I was wrong if someone actually proposes a workable solution to this problem; it’s obviously a very sexy concept.
June 11, 2009 — 10:26 pm
David G from Zillow.com says:
Ugh – sorry for the horrible grammar above. G’night y’all and thanks for the brain-food, Brian.
June 11, 2009 — 10:29 pm
Brian Brady says:
“sorry for the horrible grammar above.”
You got good grammar, David. Thanks for participating.
June 11, 2009 — 10:33 pm
J. Paul Francis says:
“Think about it: the length of time that a listing is under contract is immaterial to this discussion.”
Terms are an essential part of a contract and just as important as the price.
For example:
The whole point of true pre-construction buying was locking in on a price with below market values with the appreciation factor in consideration for a home that would not be closed on for six months plus as it was being built. (Risk for not having an actual product built and reward for being able to read plat maps / blueprints.)
This worked great pre-2003 before builders caught on that they could sell pre-construction homes for more then market value on the false promise that “each phase goes up in price”.
The problem is that everybody jumped in on this scheme and dream program which helped artificially bump values. Once again… nothing to do with the MLS at this point because of how many buyers ignored actual resale market values for the area. Buyers just automatically thought that if they got in at Phase 1 or two that they were going to make money. (Who needs a real estate agent? We are real estate geniuses!)
The length of time involved for a short sale approval should be a factor when market values are declining.
In other words… I’m quoting that phrase because it truly shows the lack of understanding of the real estate market and somebody who thinks that everything can be explained with a chart of what already happened.
Kind of like buying stocks due to a chart history… it might be OK for commodities but certainly not ok for real estate.
In other words… Here is just one more indication of the real problem.
June 11, 2009 — 11:09 pm
J. Paul Francis says:
By the way… builders were able to put any price on those “pre-construction” deals because they had lenders more then willing to lend and appraisers that just wanted their business.
In other words… just another factor that reputes your theory that the real estate market collapse was contributed by REALTORS hoarding data.
It’s not about hoarding data… it was all about misinterpreting data.
June 11, 2009 — 11:37 pm
J. Paul Francis says:
And to completely beat this dead horse post with my whip, I have a short sale listing that has been under contract since January where we have continuously reduced the price down from $600K to the final lender’s approval to $500K.
IF the lender would have approved the short sale back in January.. they would have made tens of thousands more but their complete incompetence has cost them $100K.
Once again… just another example of what the real problem is with the real estate market:
Lenders.
June 12, 2009 — 12:06 am
Teri Lussier says:
With HUD homes, at least in Ohio and I would assume elsewhere, the entire bid history is disclosed once there is an accepted bid. That does help somewhat because these transactions do fall through and homes are placed back on the market. Now a buyer has an idea of what HUD will accept.
Interesting as well is that HUD “pays a commission” on most properties of “up to 5% and sometimes more”. Since the buyer is bidding, and HUD is looking for a highest net, not the highest bid, the buyer’s commission is obviously negotiable, and it’s very obvious who is paying the commission.
The HUD system is not perfect. HUD does require a buyer to use an approved broker, but it does require a lot of discussion about the entire process, including the commissions. There is no way to place a bid on behalf on your clients without letting them see how commissions are paid, and discussing what you are worth.
It would make people squirm, of course, but it’s a fascinating system that could be utilized privately with some tweaking.
June 12, 2009 — 5:35 am
Brian Brady says:
“It’s not about hoarding data… it was all about misinterpreting data.”
Huh? When was demand-side data ever available?
You (and every other Vegas REALTOR) had access to demand-side data in late 2005; you’re phone stopped ringing off the hook. You shared that with your best friends but not the the public.
The short-sale lender couldn’t make a decision about the sale because nobody showed them demand side data on other homes in the area- they got stung for six figures.
This clubby, self-dealing, “tell only your buddies when the shitstorm is coming” atmosphere, that permeates our industry, much like it does on Wall Street, has to stop.
June 12, 2009 — 6:40 am
Anonymous says:
No reason to over-analyze this. I can break down the real estate market for you.
1- Real estate is supply and demand. Creative loans created a bigger supply of buyers and therefore a higher demand on homes. Now that loans again have stricter requirements we have reduced the buyer pool and therefore reduced demand.
2-If a seller rejects some lowball offer or even a good offer they won’t take, it’s nobody else’s business but that sellers. There is no reason to advertise rejected offers. If you want to see rejected offers HUD’s auction period is the best way to go in that they release offer bids after an accepted offer.
3-A house is more like a commodity than a stock. A car, a computer, and toothpaste are like items on a smaller level. A stock is not like a house.
June 12, 2009 — 6:56 am
Anonymous says:
Oh, and to think that Real Estate agents control the market is ludicrous. That should have been in the supply and demand part of my previous post. The market it controlled by supply and demand, which is ultimately controlled by loan availability. At the end of the day lenders have far more control over real estate than the agents do.
June 12, 2009 — 6:59 am
Tom Hall says:
I’m loving the open market concept more and more. Agents become more accountable to taking listings they can SELL, not just LIST.
June 12, 2009 — 9:43 am
Genuine Chris Johnson says:
Looking at explosions again. Brian, you’re right. I’ve read and reread the post and comments a half dozen times. This post deserves followup and is–by far, and indisputably–the most important post to happen on BHB in a year or more.
June 13, 2009 — 9:20 am
Brian Brady says:
“this post deserves followup and is–by far, and indisputably–the most important post to happen on BHB in a year or more”
Thanks, Chris. I’d love to take credit but it was a chance meeting with the site’s (AREBOT) founder that got me thinking this way. He and I are in conversation and there will be lots of follow up.
June 13, 2009 — 10:16 am
Lenn Harley says:
It’s very nice to understand what happened. It’s over and we need to get over it. That said, folks had better get a handle on the market now and understand what is coming, not just for the housing industry represented by real estate agents, brokers, appraisers, mortgage companies, banks and the economy, particularly the economy.
The fed and treasury, if they have figured it out, have not said a word to the public or the Congress about the inevitability of what the housing industry and the economy as a whole will be in the next 10-15 years.
It ain’t pretty. Is that why no one is talking about it??
Lenn Harley
Broker
Homefinders.com
June 14, 2009 — 11:55 am
Dave Shafer says:
Great post Brian. Hope for a follow-up. Gotta agree with J. Paul Francis on this one. As I drank wine on my neighbors porch and discussed our amazement at the prices homes were selling for in my neighborhood and convinced it had to stop rising in 2004 again in 2005 and again in 2006 [when it did]there were no realtors nor their customers that I knew saying the madness had to stop. You could have disclosed the offers and seen them rapidly escalating, but how would that have changed the speculative fury?
As to the excess, when Pasco county [a rural county at least an hour away from most jobs] gave developers permits for 20,000 new homes in 2005 that should have been the final nail in the coffin for anyone looking at the data. Developers were absolutely crazy, buying up land and getting projects permitted. As were lenders lending to folks who had no business buying those $350,000 new homes with paltry incomes and poor credit. Don’t even get me started about the so-called investors around here who went by the greater fool theory [gotta find a greater fool to buy this house at a price higher than I paid].
For me it was just like 2000 and the tech stocks. Pay 50$ for a stock that has no profits and burning through capital like it would never end, sure I’ll be a millionaire in a month! And yes, my greatest mistake was buying one of those companies! Thank god I balanced it out with Berkshire!!!!
June 14, 2009 — 3:45 pm
Dave Phillips says:
Very interesting concept Brian and the guy you met. Don’t we need to know the name of the guy who came up with the idea (you know, transparency)? Sorry, just yanking your chain.
If we can have agents/buyers submit offers online in real time, this might work on a local level. Unfortunately, the economies of scale might make it hard to implement. Can you imagine if NASDAQ had to have a system set up for every MSA? Real estate varies so much locality to locality it would be tough to set this up nationally.
Very interesting concept to ponder.
June 14, 2009 — 7:03 pm
Anthony Carr says:
I appreciate where you’re coming from , but what I’ve seen in all past transitionary markets is the call for or the prediction of the demise of the standardized real estate market.
The last transitionary time period was when all the eggheads said they would create huge databases for the farming of the “for sale” market so buyers and sellers could trade homes much like you would exchange old persian rugs at the local flea market.
The fees for real estate would drop, they would save thousands and real estate agents around the country would be looking for new jobs or recreating themselves.
Instead, the access to all the information usually reserved for licensees only created more questions from the consumer:
What’s a property disclosure form?
Why does the seller need all that information about my finances?
Why is it illegal to take money from the settlement table?
Who says I can’t sell to “those” people?
So information flowed, knowledge wained and the power and necessity of the intermediating agent became even more evident.
Now, I hear that its NAR that control’s the market, not the market itself. That all the parties in the transaction are in cahoots to keep prices artificially inflated – the banker, appraiser, agent — all have too much to be gained financially to be willing to create an “open” Nasdaq-type system to provide access to all the offers (rejected and accepted) in one place.
Then in another paragraph, it’s stated that once we start operating in fiduciary roles instead of functionary roles, the true “market” will be revealed.
I thought protecting your client’s bottom line, was operating in a fiduciary role? What’s missing from all the arguments above is the client. I see no comment about how the seller doesn’t want me to reveal the three denied offers ($710,000; $725,000; and $775,000 – over 6 months) to the public.
That’s how he was able to secure a sold price of $822,000 and an appraisal at $825,000. What about my role as the fiduciary gatekeeper by NOT allowing other consumers to see the denied offers and protecting my sellers’ net through a discreet release of information to potential buyers?
Also, what I see above, is a talk about transition since we have so many REO’s and short sales. Again, this is a temporary issue.
In the Washington, D.C. area, the rate of foreclosure has dropped nearly in half; we are faced again with multiple offers, escalating prices, and waived home inspections/appraisals.
Buyers again are latching on to an agent who knows the landscape, changes in the market pricing and the recent rules/regs changes that have created new pitfalls in the marketplace.
Real estate is local. It is also NOT a stock.
It is made up of living/breathing organisms called houses that are sealed with lock and key so that only a state-licensed professional can escort buyers through the property, providing the seller and his property a sense of security that someone who knows what they’re talking about and understands the law – is actually letting someone walk through his/her house and not removing his personal property.
The market is the market. And as long as we have people who have to be nailed down to an agreement with 50-plus page contracts – we’ll have and need professional agents to lead the way!
June 15, 2009 — 7:43 am
Brian Brady says:
“It is made up of living/breathing organisms called houses that are sealed with lock and key so that only a state-licensed professional can escort buyers through the property”
It’s a property; O2 is not required. Please pay attention y’all:
You are not trusted because…
…you are ALL employed by the seller. This is what I want to change.
June 15, 2009 — 9:07 am
Rebecca Levinson says:
Brian,
This post is so fascinating and interesting to me. Recently I have been discussing something similar, was approached with a similar idea.
What amuses me about the industry, and not sure amuse is the right word, maybe I should say, makes me curious, is that transparency and disclosure are words thrown around all day long, and yet, when an idea like this takes written form I can sense a visible shudder.
Is transparency and disclosure, then, bite the dust. They are words meant for talk and not for action.
June 18, 2009 — 10:07 am
Brian Brady says:
Stay tuned, Rebecca
June 19, 2009 — 12:03 am