Amidst the sub-prime lending mess, it is difficult to gauge the true state of the real-estate market. Several blogs track the inevitable correction, and academic Casandras such as Robert Shiller– who correctly called the end of the 2000 technology-fueled stock bubble– have been predicting doom and gloom for some time. Meanwhile the National Association of Realtors would like to assure you that all is well, pay no attention to the man behind the curtain please. (In fact, one full-page ad published in the New York Times in late 2006 hoping to stem the rising tide of panic stated: “It’s a great time to buy or sell a house.” Simple economics would dictate that it can’t be a both buyer’s market and a seller’s market but hey, irrational exuberance is all about freedom from the dictates of logic. BigPicture blog compared the advice to an investment banker suggesting that it’s a great time to buy or sell the same stock.)
It does not help that the market indicators themselves have been completely skewed, in spite of the full disclosure tradition. Keeping with Justice Brandeis’s principle that sunlight is the best disinfectant, few other markets have so much regulation intended to keep the level of transparency. From the seller’s obligation to disclose known defects to the public database of all transactions, residential real estate makes the post Sarbannes-Oxley corporation look like the Iran Curtain. But compelling disclosure does nothing to ensure the accuracy or relevance of the data published. Since perception is everything in market-setting, it is very much in the interest of sellers to project the existence of high demand and a robust market firing on all cylinders. Nothing ruins that picture as evidence of price declines.
Because the entire history of the transaction including original asking price is conveniently available on MLS, it would obvious when the seller did not succeed. That sets a bad precedent, especially when identical units have to be moved. If the average cookie-cutter suburban development has 100 units and the first few go below market, the next customers in line will demand deeper discounts. Soon the builder is in trouble. Much better to inflate the selling price by throwing all types of incentives. Paying the buyer under the table by the way, is illegal, so builders need more subtlety, in the same way car dealerships charge exorbitant premiums under the “fresh-air-and-sunshine” package. Paying closing costs, throwing in extras and upgrades, in one case offering a car along with the house, are all examples of incentives that are not reflected in the recorded sale price in MLS and not visible to prospective buyers looking for comparison basis. (Here is another article from the San Diego Union Tribune on incentives skewing the data and how that impacts lenders.)
So one must turn to more indirect signs to measure the correction. Fore-closures are one gauge that can’t be faked or sugar-coated, but they reflect the worst-case scenario. Money/CNN now reports on another: the traffic on a website that helps home owners quickly sell their property. According to Florida foreclosure future shock, the House Buyer Network website guarantees a sale by pricing it below market (one would hope, based on an honest appraisal this time, instead of the equally inflated appraisals used to secure financing) and having a real-estate agent commit to purchasing at even lower price if no buyers are found after a specified time. Company president claims to have correctly called the correction in Phoenix, Palm Beach FL and two California counties ahead of time. Their next reading: Central Florida is in trouble, even though Gainesville, FL home of the University of Florida Gators still posted the fourth highest year-over-year gain of all US cities.