Wisest of the crowds

The National Association of Realtors reported that their “Pending Home Sales Index” for July fell to its lowest level since the post Sept. 11, 2001 period as a result of tightening credit for Jumbo mortgage loans (loans over $417,000).

So what is this index? Directly from the NAR release:

“The Pending Home Sales Index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months. “

It seems that Three Stooges of the mortgage ecosystem, lenders (Curly), Wall Street mortgage underwriters (Moe), and mortgage buyers (Larry) all woke up after a night of drinking and decided never again (well, at least for a few weeks!) ! These Jumbo loans are NOT purchased by the quasi-government agencies Fannie Mae or Freddie Mac whose job it is to purchase loans from lenders so that lenders have the funds to make more loans - a mechanism to facilitate home ownership for average and lower income home buyers. Jumbo loans do not qualify so they must be either held by lenders or sold to investors via wall street. Since Fannie and Freddie have continued to support loans at the low-end while the high-end has lost free market support, Jumbo’s have shut down for the minority and have gotten MUCH more expensive for the majority. Not surprisingly, the Western part of the US, which has the highest home prices and presumably the most Jumbo loans, got hit hardest being down a whopping 20.8% to 82.3 versus 89.9 nationally.

Will this last? No way. This is a temporary disruption as people reorient their perspective to risk. Will the cost of jumbo’s (as a spread to treasury securities) increase? You can bet on it!

No not what you are thinking - not social, ethnic, or racial discrimination. Redfin discriminates on price. PRICE! The 60 minutes piece was a yawn for me personally but it does give Americans the right to start to push back. See the posts and comments at TechCrunch, Redfin, Inman, BloodHound for an early read. Whether it becomes a consumer zeitgeist or fades will be seen but the open question is this: will price variation become mainstream in american residential real estate?

There is an old economic idea called price discrimination that is popular with every micro-econ 101 student, and their professors, that says you reach more customers and make more money by offering variation in pricing. Its sort of definitional for anyone who believes in supply and demand. It works like this: when you go to see a baseball game, there are a 100 variations in pricing to meet everyones needs and to tap into every possible cross section of demand. For example, there are ticket prices for corporations who entertain in luxury boxes and ticket prices for those who mostly prefer a beer and some sun in the bleechers. Ticket prices for season holders and ticket prices for last minute shoppers. In short, EVERYONE can have their demand met for baseball. A small example with the mighty SF Giants here.

What would happen if every ticket was the same price? Mayhem and lost profits. Some people willing to pay more for MLB tickets will transfer their money to an underground marketplace that will use price discovery to allocate tickets. Meanwhile, people at lower price points will be shut out resulting in further lost revenues to MLB. Thats why we have pricing variation. Its better for everyone because everyone gets an allocation and the business folks maximize their revenues.
People might argue that the price variation exists is in the underlying house price and not in the intermediary execution price (brokers & agents). If that were true, then why did trading volume in financial markets explode when electronic execution came into acceptance? (For a slightly more technical explanation {very slightly!}, see my earlier post here).

Redfin discriminates. So do I. It makes sense and it is better for everyone. Many people have commented that Redfin basically passes their work load to external agents to facilitate their transactions and to make their business model work. I can certainly see how that might play out. But if the consumer is footing the work load “bill”, don’t they deserve to get a rebate? Don’t consumers deserve the right to choose their level of service? In the end I believe that consumers will still depend on full service agents because housing is complicated and its something we do rarely. But by offering price variation, we get to grow the pie. Anyone else out there a discriminator? Anyone else want to make more money?

More news from the Commerce Department (pdf) yesterday - the number of homes sitting empty has increased fairly dramatically. Homeowner vacancy increased to 2.8% from 2.1% and rental vacancy increased to 10.1% from 9.5% versus the first quarter of 2006. That means that there are now almost 4 million units for rent, 2.2 million houses for sale and 7.3 millions units vacant for no apparent reason (dead cities?). When looking at homeowner data by area, cities increased 60% to 4% occupancy, Metropolitan Statistical Areas increased 45% to 2.9%, and suburbs increased 33% to 2.4%. Regionally, the South has both the highest rental and homeowner vacancy. The data below:

The Commerce Department released more data and analysis confirming what we know - that housing is dragging the economy. The economy grew just 1.3% (preliminarily) for the first quarter of 2007. From the press release:

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and state and local government spending that were partly offset by negative contributions from residential fixed investment, private inventory investment, and federal government spending.

Here is a chart of GDP going back a few years:

As you can see, things haven’t been this bad since Q1 2003. The markets largely shrugged this off but home builders took it on the chin:

Most of the big names down around 3% but the index as a whole finished down just 1.52%

Last night I had the great privilege to meet Glenn Kelman and the Redfin gang at the Socketsite drinks in San Francisco. There was a big mix of people including housing consumers, real estate professionals, notable bloggers, and entrepreneurs. What was most interesting was to hear the optimism from various people about the state of housing this year. Everyone acknowledged that the last quarter or two were hard but that 2007 is looking hot.

Interestingly, a couple of headlines this morning have highlighted the generalized and backward nature of news reporting versus the localized and forward looking of people on the ground. For example:

- Toll’s Orders Plunge, Forecasts Larger Land Writedown - largest U.S. luxury home builder, reported a 33 percent plunge in first- quarter orders

- HSBC shares fall after it ups bad loans provisions - “Foreclosures have shown a higher severity” than expected, Chief Executive Michael Geoghegan said on a conference call. “The major impact was taking into account adjustable mortgage resets.”

Please note that housing stocks are down approximately 3.00% this morning on the combined news.

So here we are again juxtaposing the headlines versus the word on the street. What HAS happened versus what IS happening and WILL happen. The global versus the local. Notable blogger and realtor, Kevin Boer in Palo Alto notes that properties are back in multiple offer situations. John Harper of Danville and Andrew Maury of San Francisco are also reporting mutliple offers and a very bright outlook for housing in their areas.
Stay close to your market and look at what is happening on the ground and what is likely to happen and don’t worry about the headlines. My-Currency is committed to help you gather hyper-local information that is forward looking.