Intelligent Investing Panel
Home Sellers, Please Relax
Stephane Fitch 05.26.09,
6:00 AM ET
Forbes
recently gathered a panel of real estate experts to discuss whether the
U.S. is truly experiencing a bottom in housing prices. Panelists
include Pat Lashinsky, Michael Feder, Spencer Rascoff and Peter Slatin.
Our panel believes that if you are a seller it might still be prudent
to wait as the bottom is not yet here. The discussion follows.
Forbes: Gentlemen, welcome back to our lively
discussion of the housing market and the economy. Michael Feder, Radar
Logic has released data that supports the idea that the housing market
crash is slowing. The number of housing transactions in January was
down just 6% from January 2008. And in a few key markets, particularly
California, the transaction counts are up hugely, by 11% to 33% in that
state's big cities. Prices are way down, of course, but the plummet is
slowing, with house values losing 0.3% per month on average nationwide
in the first three months of this year vs. the whopping 2% a month we
saw them sliding last year.
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Spencer Rascoff, Zillow's recent survey of homeowners indicates that
many of them expect we're near a bottom, too. We can talk a bit about
that.
But is all this talk premature? What would each of you tell a
wealthy, investment-minded homeowner who has decided he or she owns too
much real estate? Do you say sell now? Do you tell them to wait and
see? Do you tell them lease their homes out? What's the smart move and
how do smart investors make sense of all this talk?
Pat Lashinsky, ZipRealty: If you are a seller, you
wait. Our April reporting showed that the median price of homes for
sale in the metro areas where we do business were up in every market in
April, and inventory levels are down. So while stabilizing, if you are
a seller, there are numerous figures to show that waiting could be
beneficial right now.
Michael Feder, Radar Logic: Yeah, if you're a
sophisticated investor and you think you have too much real estate,
you've probably been trying to sell for a while. If you haven't already
sold, and there are signs of stabilization (which we think there are),
wouldn't you wait now and see?
Spencer Rascoff: Nationwide, we're not at the
bottom yet. Nationwide home values will still decline into 2010, and
then I expect a long slow recovery--an "L-shaped" recovery rather than
a "V." So from a pure returns standpoint, your investment-minded
homeowner should either sell now or wait a few years, but don't plan on
selling six to 12 months from now. The problem with trying to sell now
though--and I see this all over the place--is that homes get tainted if
they come on the market priced too high and then sit. So if you're
going to try to sell now, price the home to move. Don't plan on being
able to slowly drop the price if it doesn't sell right out of the gate.
Forbes: Good practical advice. Perhaps we shouldn't
think that putting a house on the market at an above-market price and
waiting a year for a buyer works.
Don Trump Jr. isn't here today. But I'm not sure he'd agree with
this. His dad is a master marketer, obviously, and I've seen him be
very patient selling condos in New York, even during the boom. That's
come back to bite him in Chicago, I think. Next time we'll ask Don to
explain when it makes sense to let a property hang out there on the
market.
Rascoff: It's almost impossible for a seller to
resist the urge not to price too high and "see what happens." Sometimes
listing agents exacerbate the problem by "buying the listing" by
quoting the owner a higher initial listing price and then lowering it a
few weeks after putting it on sale. The Internet has made this tactic
much more dangerous because buyers can now easily see "days on market"
and the price history.
Peter Slatin, Real Capital Analytics: I have to
agree with Pat--if you can, wait to list the property to begin with.
Remember the blockbuster foreclosure rate we just saw, meaning more
low-priced inventory on the market. But again, as always, a lot depends
on your submarket or even your block. Whatever you do, don't do it in a
hurry.
Forbes: I assume it's a different story in
different markets, though. How do you know if you're in a place where
it's worth waiting? Talk to local agents?
Lashinsky: In general, I cannot think of any market
besides Bakersfield, Calif., right now where if you are a seller, it
probably doesn't make sense to wait. Maybe New York, if you have to get
out in the next year, now is better than later this year.
Forbes: What about talking to your agent, Pat? In
my experience, most realtors are fantastic at giving you a snapshot of
what's going on today by looking at comps. But can realtors be a good
source for info when it comes to trying to predict what the market will
do in the next six months? Is it a discussion worth having with them?
What do you tell your ZipRealty agents?
Lashinsky: Talking to a local agent is always going
to give you great insight into the local market. However, I would
caution a seller that agents make money when they help sell a house,
and you have to be careful about what you are asking. If you are not
clear, an agent will come in and tell you why you should sell, and what
the price is. What they won't (and often can't) tell you is if it is
better to wait and what waiting will mean. Agents have no better
crystal ball then anyone else. They can tell you current conditions.
To really know, you need to combine knowing current local conditions
(not three months ago), with their own understanding of the current
macro conditions, and where they think that will go. So we spend a lot
of time educating our agents and clients on the current real time
trends so that the agent is educating and current, and the client is as
well.
Rascoff: A local homeowner should look at the
second derivative of housing values--are things getting "more worse" or
not? Zillow's data is starting to show a decrease in the rate of
decline in parts of Southern California for example. So things there
are still terrible--double-digit year-over-year declines--but they're
not getting worse any faster than they previously were. That's the
first sign of a bottom.
We've seen early signs of improvement in 17 of the 161 markets we
cover. In a few cases (Oklahoma City, Toledo, etc.), values have
actually shown bigger increases in the past two quarters. In most of
these, what we're seeing is year-over-year value changes get "less bad"
from quarter to quarter (for the past two quarters). The most notable
are the San Diego and L.A. [metropolitan statistical areas].
Here's the YoY value change in L.A. for the past several quarters:
Q3 2008: -20.8%
Q4 2008: -20.7%
Q1 2009: -18.9%
Here is San Diego's:
Q3 2008: -19.1%
Q4 2008: -18.9%
Q1 2009: -18%
Forbes: Michael, your own data certainly prove that
different markets are behaving differently. Does it matter where you
live, and how does a smart Forbes reader figure out what's going on?
Feder: Well, Stephane, that's the question. There
are several factors: supply, demand, capital availability, local
economy, etc. Our numbers (along with others) can give you a sense of
market performance and you can analyze that relative to history. It is
spring time, and real estate tends to do better in the spring. Maybe
it's a bottom and maybe it's not. Only time will tell.
Forbes: Fair enough. But would you have a homeowner
look at Radar Logic's Web site to find out what's happened in their
local area? Should a homeowner who's thinking of selling be cognizant
of what's happened in their local MSA in the past year or two? Or is
the past simply the past?
Feder: Of course we would. That's the point of the
RPX data that's published. It can help any interested party track and
evaluate what is happening to real estate in their market. The idea is
to show a standard metric, in our case a price per square foot. With
the knowledge that trend will provide, buyers and sellers can be better
informed as they think about what they want to do. We think agents and
brokers can benefit from the data as well.
Lashinsky: One of the problems I see is that too
much of the information is old. We at ZipRealty are seeing trends live
right now that are very different from three months ago, which is when
a lot of information is coming from. Understanding the current--read
today--market is difficult.
Forbes: What about rents, Peter? I know you look
hard at the apartment market. Should a person who's thinking of selling
consider leasing his home out instead? What's a rule of thumb for when
it's better to lease out than it is to sell outright?
Slatin: The rule of thumb is, can you cover your
nut and not damage your value? I know a few disgruntled sellers in NYC
who are trying this and their gruntle is getting more dis as they go
along. Still, it's not a bad strategy--as has been pointed out, if you
price it right. Stop expecting miracles. They are on hiatus from this
market.
Forbes: Spencer, You often talk about "dual track"
buying. What about "dual track selling"? Should a seller also be
looking to lease out an unwanted property?
Rascoff: I'm seeing a lot more "dual track selling"
than I used to. Sellers need to be smart about how to incentivize their
agents in this regard though because a listing agent is always going to
get a higher commission in the sale than in the rental. It's
unrealistic for a seller to assume their listing agent will effectively
market their home as a rental simultaneously. So unfortunately a seller
who's dual tracking a lease option probably needs to handle the rental
portion of the listing on their own. This means posting it on
Craigslist and other rental sites; making sure that it's represented in
the MLS as also for lease; advertising it as a rental option wherever
you market the home; and perhaps most importantly (and most complexly
with respect to your listing agent) marketing it to open house visitors
as also for rent.
Lashinsky: Also, more buyers are "dual tracking,"
if they think the market is going to continue going down, they are
doing "lease to own deals." A pretty interesting trend right now.
Forbes: OK, guys, for the last 10 minutes, I have a
new subject. Here's what scares the daylights out of me. It's not the
markets where prices have come way, way down. It's the markets where
there's been little if any tumble in prices. Case in point: Manhattan.
Michael's firm follows Manhattan condo prices. They're not down in the
past two years. They're actually up, solidly.
Meanwhile, I've been looking at home prices in West Los Angeles. In
the city's Tiffany markets, like Santa Monica and Venice, prices seem
pretty close to where they were two years ago. I looked at the fancy
parts of Marin County, north of San Francisco, and I see something
similar.
What's going on here? Are these marquis markets going to dodge the
whole real estate crash? Or are they the scary markets that haven't
capitulated and that will crash badly later and ruin this comeback
we've all been talking about?
Feder: Stephane, we would suggest you may be
missing the subtleties in the data. As we have been saying, Manhattan
condo activity has fallen off dramatically and more so in the "resale"
market than the new construction market. Much of the data we have been
showing is based on contract closings from signings as long as 18 to 24
months ago. As a result, those closings reflect "older" prices and have
a tendency to distort current pricing analysis. When you look only at
resales, Manhattan prices have come down substantially.
Lashinsky: You mention very different markets. Manhattan is very different than the California markets you mentioned.
We are actually seeing activity pick up in those areas of
California, right now. So despite the fact that prices have not fallen
as much, the most sought-after (with great schools, good commute
locations, safe, etc.) areas remain in demand and are more insulated
from big price shocks.
Manhattan has the co-ops to protect prices, but I expect that you
will see a delayed change there coming. It is already happening in Long
Island and Westchester. Check out Manhattan prices in the last two
months, they are adjusting downward very quickly right now. Very
quickly! But no, the world is not going to cave in on those areas.
Forbes: But Michael, haven't Manhattan prices been
buoyant, though? It's not like Phoenix, down 35% a year for the past
two years or whatever.
Feder: Actually no, prices have shown real downward
pressure and activity is way off. Even the local brokers are saying so.
We won't know for sure until there is enough activity in the market to
provide a sense of valuations, but that may take a while. And there are
a lot of new constructions that appear to be slowing or even halting.
That too will need to work through the system.
And in regards to what Pat has just said, we see the same thing.
Rascoff: In addition to days on market and listing
price history, there are two more pieces of info that the Internet has
made widely available to buyers, which relate to this conversation:
prior purchase price of the home (which is readily available on Zillow
and elsewhere) and mortgage amount of the home (which is harder to
find, but many county Web sites include it).
Why do these two things matter? Well, take the example of someone
who bought their home for $900,000 four years ago and the home peaked
in value at $1.3 million one to two years ago. The owner might try to
sell his home now for $1 million and would still be able to pocket a
gain (depending upon taxes and fees). The buyer knows that the seller
has a psychological floor at $900,000 because that's what the seller
paid for the house a few years ago. Every bit of information at the
buyer's disposal is helpful, and the purchase price of a home is no
exception.
The second piece of information that's interesting is the
originating mortgage amount. If you know that the seller is paying
about $3,000 per month in his mortgage, then you can craft a rental
offer that allows the seller/landlord to cover his mortgage payments
and still come out on top.
Information is power. Isn't the Internet a beautiful thing?
Slatin: Obviously, sellers in these markets see you coming ...
Really, though, at this point things could go either way--that is,
way, way down of holding steady if there is a surprising upturn or
leveling off before the higher markets really crack. There's no
question that volume in Manhattan is way down and prices have fallen,
but it will take time for the data to catch up. There is a lag in all
these markets, I think, because the high-velocity condo market also
lasted longer in these places.
