An accurate picture of somebody's market, but whose?
The day it appeared, a buyer client looking in the medium-price range forwarded me the Wall Street Journal's September 13, 2010 article "Banks' Plans for Foreclosed Homes Will Drive Market", asking for my comment.
The gist of the WSJ article was the usual stuff that's put so many buyers on the fence and in a panic:
banks own a huge number of foreclosed homes, and will own even more in the months ahead
banks "are much quicker [than other sellers] to slash prices to unload properties"
"price declines that began four years ago accelerated rapidly in 2008 as banks dumped foreclosed properties at fire-sale prices"
despite mounting mortgage defaults, the real estate market has been stabilized by low prices, low interest rates, buyer tax credits and FHA low-down payment loans
also staunching the bleeding was the Home Affordable Modification Program, which modified relatively few loans but "served as a 'closet moratorium' on foreclosures"
despite all this, "demand plunged this summer after tax credits expired, and...more foreclosures could move onto the market", so now
"we see the perfect storm brewing with rising supply and falling demand"
The WSJ reporter then gives us a key indicator that his article might be more pop art than sober analysis by quoting Glenn Kelman, the Redfin CEO famous mainly for being famous.
My response:
"Thanks, it’s an interesting article, but it doesn’t describe the local midrange market. It does describe East Palo Alto or east San Mateo or downtown San Jose, except that these areas now have a shortage of bank-owned homes—there aren’t enough to go around for all the investors and first-time buyers who’ve been priced out since 2005. As a result, bank-owned homes often get multiple offers, often selling for all cash.
These low-priced areas may well have a huge backlog of foreclosed homes yet to come on the market, although no one really knows—estimates on the amount of "shadow inventory" nationally range from 1.5 million to 7 million—but there’s no sign of it further up the price range: bank-owned homes and even the precursors to foreclosure, short sales, are extremely rare in midrange neighborhoods.
The expiration of the tax credit cited in the article has indeed stifled demand at the very low end here, but it wasn’t a significant factor further up the price range because the credit started phasing out just as you got to the income level needed to buy a midrange home.
FHA loans, also cited in the article as a market mover, have a negligible presence in our local market, partly because of the low cap on loan amounts, and partly because sellers (including and especially banks) don't trust the low down payments that go with these loans.
Although low mortgage rates have certainly helped the local low-end and midrange markets, rates are increasingly less a factor as you go up the price range—it’s not uncommon for the winning offer on a $1.5M Palo Alto house to be mostly or all cash—while the tech sector's health becomes increasingly more a factor.
And while our low-end market did indeed begin to weaken in 2006, the date the article gives as the start of price declines, prices in our midrange and top-end markets continued to rise through early 2008.
So the market the WSJ article describes—its looming shadow inventory, its market movers, its price range, even its milestone dates—isn't your market. It's somebody else's market, the low-end that's a relatively small part of our market, a part that's discrete from the rest.
I won't deny that there’s uncertainty throughout our market, in almost every area and price range, but it really is a different animal than the national and even many coastal markets. And we’re certainly not immune to downturns—I’ve seen several just since 1998—but the midrange market you’re in is the meat-and-potatoes and strength of the local market, and while it’s not exactly booming, open houses are usually active and well-priced homes do sell, sometimes with multiple offers.
The problem with national real estate coverage like this, even when it appears in the venerated WSJ, is four-fold. First, there seem to be only a handful of reporters—no more, perhaps less—who know real estate well enough to write an insightful article. There seem to be only a handful of reporters, for example, who understand that foreclosures are a significant market factor in just a handful of heavily-impacted states, and a non-issue in the rest, and that even a foreclosure hotspot like California has relatively unaffected pockets. Second, there seem to be only a handful of economists—no more, perhaps less—who understand that real estate isn't one huge national market, like the stock exchanges they studied in grad school, but instead a multitude of local and differentiated markets. They don't realize that their weighty pronouncements on a largely illusory "national market" are largely irrelevant. Third, these articles are invariably based on statistics that either don’t apply to this area, or apply only to a limited segment of local real estate. And, fourth, virtually the only people who can comment intelligently on the nuances of the local market are those in the market, agents, and no one trusts them except maybe their clients.
It all adds up to less than zero, even in the WSJ, which is why there’s a huge vacuum in the popular understanding of local real estate. It’s a subject I’ve deal with extensively on my Web site, and there you can find any number of examples of me using economists and real estate reporters for target practice. In fact, they’re the easiest articles to write.
But here's the real take-away lesson: always mistrust bumper-sticker slogans. "Banks' Plans for Foreclosed Homes Will Drive Market" would make a great bumper sticker."