Reinflating the real estate bubble?

Even at the most recent housing bottom, the price of Boston housing relative to rents and to long term trends has still been on the historical high end. The problem is that during the boom, everyone who could afford a home bought one. Everyone who COULDN'T afford a home also bought one (or more). Where is the marginal buyer right now?

With high job losses, tightening credit, and few marginal buyers, the idea of "desperate buyers" seems a little absurd to me. If I don't buy now, will I be "priced out forever"? That was the argument I heard back in 2005-06 about housing. Right now, the pop in prices, the so-called "stabilization" we are seeing is only due to three factors: The Federal reserve buying 80-90% of mortgage backed securities, artificially low interest rates, and the homebuyers' credit. If you remove those three things and the Boston markets still goes up, THEN I will concede that we have a real recovery.

The tax credit functions for the buyer as immediate gratification. If prices were up 3.7% and high end prices were likely down, that means low end prices may have been up as much as 8-10%. However, the thought of an $8,000 check and very low down-payment was too much to resist I guess. This suits a certain segment of the population, likely the same people who carry large credit card balances for prior impulse purchases.

My wife and I bought our house two years ago when prices were just starting to come down a bit. We looked at sixty houses and maybe saw three to five half decent ones. We were astounded at what people were asking for houses in need of serious updating. Yesterday for the first time in a while I was searching online and saw many of the same houses posted once again for pretty much the same high prices, if not a bit higher than before. I don't see this as a positive thing at all given that these houses were dramatically overpriced to begin with. Considering what the job market is these days I don't see how we could possibly go back to the days of multiple bids on sub-standard houses. Banks seem to have tightened lending standards and the appraisal market has changed as well so something doesn't seem right here. I think the higher numbers for sold homes must be on the lower end including foreclosures, and those asking prices similar to three years ago are going to be in for a rude awakening.

Though I wouldn't be surprised if there were a blip up in the numbers from the assumed end of the "cash for shacks" housing subsidy, Zillow isn't data!!!!

Fundamentally, people need to pay for houses. Unless salaries or credit goes up, prices will not go up. Currently they are being pushed by govt money. When (ok, maybe if) that goes away, prices will reflect fundamentals. Its as unavoidable as gravity. Not a matter of opinion, a matter of math.

(That doesn't mean Boston prices will become as cheap as the rest of the country - that would be too cheap. It just means Boston prices will reflect the income of Boston inhabitants, and the level of household formation in the area. That last should scare the bulls.)

Zillow is positioning itself (quite successfully) as a reliable shill for the real estate industry. Although cited increasingly often as an objective and legitimate source, their value estimates are neither accurate nor based on reality. A real life example will make this clear. Compare Zillow's current value estimate for Wellesley with actual market data...

Sale price per square foot (actual): -10.6 % MOM, -12.9 % YOY
Median sales price (actual): -13.6 % MOM, -34.1 % YOY
Zillow HomeValue Index (estimated based on Zillow's model): -0.2 % MOM, -4.0 % YOY

Notice a difference?

My advice is look at real data, not opaquely calculated fluff from the pseudo-economists and aspiring numerologists.

Lance -

Why do you think Zillow is a shill for the industry? This seems a little harsh (unless you were sitting in a back room at Zillow headquarters and hear them talking about faking data to prop up the housing market...). Lets just agree that they are making estimates, not relying exclusively on actual sales data.

In the case of Wellseley (above), aren't you comparing apples and oranges? In one case, what actually sold (I agree, actual data). In the other case, you are looking at what they project for all houses, both on and off the market. I do not know how to look at this data in depth, but are the actual sales numbers a representative sample of the housing stock as a whole? Are the high, middle, low end, condos, etc. appropriately sampled?

Just curious...

Lance-a bit off subject but we are looking in Wellesley and notice that the area is getting 'crushed' as you stated in a previous blog. We are renting in Newton and have just outgrown our Cape. We are very conservative and are not ready to buy, but were thinking about approaching an agent about a lease to buy option/agreement on a house that is currently on the market for rent. We have great credit and a middle six figure down payment. The problem is, is that the agents today really don't want to think outside the box. They would rather let the house sit on the market for 400 days + . Or maybe i'm just living in a dream world. How else are they going to unload their white elephants (good one Marcus). Any thoughts or ideas would be appreciated.

Hi Lance,
Katie from Zillow here.
You point out an important aspect of the Zillow Home Value Index: It is quite different from the median sale price.
The median sale price looks at only the prices of those homes that have sold recently. If those homes are clustered in a high or low price tier, that will significantly influence the median sale price.
The Zillow Home Value Index looks at the median value of all homes, whether they have sold or not, so the mix of what is selling when has much less of an influence. Another factor that could be influencing the difference between the two metrics are foreclosures. We do not include foreclosures (either the foreclosure itself or the subsequent sale of a foreclosed property) in the ZHVI. As a native Bostonian, I do realize that Wellesley is a higher-end market, which may seem immune to foreclosure. But some of our recent research indicates that foreclosures are moving up-market and are starting to affect higher-end homes. Because foreclosed homes generally sell for less than non-foreclosures, this would bring down the median sale price.
Both the ZHVI and the median sale price (as well as repeat-sale indexes, like Case-Shiller and other methodologies), have their place when examining a real estate market. it's just important to understand the nuances of each.

Zillow is a joke. Their valution methodology is severly flawed. Home prices do not fluctuate by 10% or more in a month as Zillow often claims. You might as well survey current homeowners and ask them if they think the value of their home has gone up in the past year and use that as your basis for claiming a YOY price increase.

Even if the government is successful in re-inflating home prices, real estate price appreciation will greatly lag general price inflation. It doesn't matter if home prices start going up 10% a year again if the cost of food and energy are going up 20% a year. Nominal prices might rise, but real prices will continue to fall. And real prices are what matter.

The zindex is a pretty complicated model. It's designed to be a black box, so it's hard to tell exactly what's going on. But in response to Lance, one thing that the zindex tries to correct for, which doesn't always show up in the median price or $/sqft numbers, is the mix of properties that are being sold. If more low-end homes have been sold lately, then median sales price will plummet, even if the price of each home has stayed roughly the same.

Also, after reading quite a bit about the zindex model, I have no idea whether the numbers are seasonally adjusted, or how it takes foreclosure sales into account.

Looking at zillow vs C-S or OFHEO numbers, they're generally within a few percentage points of each other. 3.6% shouldn't be taken as some kind of scientific data point, but in rather more subjective terms, "prices have gone up a little." Maybe prices really have gone up a little (fthb credit frenzy, looser fha rules, and all that), maybe the model was a little low last month, maybe it's a little high this month. The black-box nature of zillow's numbers leaves me without a lot of trust, but the numbers pass the smell test, and roughly jibe with what I'm seeing in the real world: prices just haven't come down much lately.

"The Zillow Home Value Index looks at the median value of all homes, whether they have sold or not, so the mix of what is selling when has much less of an influence."

That's fine if that is the basis of the index, but to claim that it reflects true market value (price) is naive. The true market price of anything is what someone is willing to pay. Otherwise all you can do is make your best guess of price based upon comps; $/sf; value of upgrades etc.

"We do not include foreclosures (either the foreclosure itself or the subsequent sale of a foreclosed property) in the ZHVI"

How are we supposed to take the ZHVI seriously if you exclude, what is in many areas, a significant portion of the market? You might as well exclude all sales of say, less than $500K to skew the index higher.

"Both the ZHVI and the median sale price (as well as repeat-sale indexes, like Case-Shiller and other methodologies), have their place when examining a real estate market."

What place does an index based upon a black box methodology, that excludes a huge segment of the market (foreclosures), have in analyzing the real estate market?

Rely on a measure that excludes foreclosures, which have been the primary driver of price declines in the largest housing bust since the Great Depression? OK. Sure.

Incidentally, I happened to look at some homes in Wellesley this weekend, and was astonished by the numbers of foreclosures, short sales and otherwise distressed properties on the market. Wellesley had a reputation during the boom of being ground zero for Alt-As and other funny mortgages; it looks like that reputation may have been accurate.

If I'm reading Katie's comment correctly, the way Zillow takes foreclosures into account is dumb. Foreclosures are real sales, but I suppose the numbers could wind up a bit skewed (people pay less in the sale price, but spend more in time, effort, and legal fees). But there's no good reason to ignore the subsequent sale, as well. Sure, you can't measure point-to-point change from the foreclosure number, but you could certainly measure the change from the previous purchase price.

And even if ignoring foreclosures does have some valid basis, something needs to be done to correct for it (and, again, since zillow is a black box, I don't know if they already correct for it). Imagine 100 houses bought in 2005 for $500k each, with 20% down. Because of varying conditions, the houses are now uniformly distributed in value, between $350k and $450k. No matter how you calculate it, there average drop in house price should be 20%. But all of the houses worth less than $400k (half of the total set) are underwater. These houses would likely only sell through foreclosure or short sale. Of the 50 non-foreclosure houses, the average price drop is only $75k, or 15%. By ignoring foreclosed houses, zillow is ignoring the houses that dropped in price the most, but still looking at the prices of houses that weren't hit as hard. Which makes it mostly useless in this market.

I've never really considered zillow a shill for the NAR, but their reasoning seems to make about as much sense.

There is a new survey out that says that only 5% of Americans plan to buy a home next year. Hardly the demand needed to re-inflate the bubble.

If you want to understand Zillow's perspective on the market, start by examining how Zillow gets paid. Zillow is a website which earns revenue selling ad space and leads to brokers and others in the real estate industry. Unlike Warren Group (for example) which is based on a subscription model, Zillow is not in the business of delivering transparent, objective, fact-based information. It is in the business of delivering warm leads to realtors-- the warmer the better. Zillow's value estimates are a marketing gimmick to lure customers. (How much is your house worth? Log on and find out!!!) It is entertainment masquerading as information... Zillow's target market is the HGTV crowd, not professionals.

I am not criticizing Zillow. Their business model is clever and their value estimates are fun. But realize they are an agenda-driven organization serving the interests of the real estate brokerage community and related businesses. Personally, I place Zillow in the same camp as most mainstream print publications (which earn lots money from realtor ads) and the NAR. Enjoy the entertainment they provide and take what they say with a grain of salt. Understand they have a strong bullish bias.

And real prices are what matter.

Tell that to someone who is underwater. Nominal price appreciation absolutely matters if it means an owner can sell without bringing tens of thousands to the table at closing. It matters if it means an owner suddenly has enough equity to refinance.

Real prices mean everything to an investor, but nominal prices matter quite a lot to the owner looking to get out from under a bad situation. Thus, they matter to the housing market in general, and the national economy.

#16

Very true. However, there are far more people that view their home as their single biggest investment (I am not one those people) than there are people in the situation you describe. So I counter, that in the end, more people will be harmed financially by real price declines, than people will be helped by nominal price gains.

#17

Yeah ok maybe, but I'm just not that concerned about real prices over the long term. Not saying it wouldn't be a problem, but the immediate and bigger problem is a death spiral in prices. Nominal price rises would help everyone in the short-to-mid term I would think. Fewer foreclosures and greater liquidity mean individual and bank balance sheets heal sooner, and that's good for the recovery. Let's worry about long-term real home prices being below other prices in a few years.

but the immediate and bigger problem is a death spiral in prices. Nominal price rises would help everyone in the short-to-mid term I would think.

Nominal price declines would help everyone in the short-to-mid term I would think.

Fixed.

I think that more people care about the nominal prices. Assuming a fixed rate mortgage, the costs are in nominal dollars. The house gets cheaper every year as a percent of salary, assuming typical cost of living raises. Looking at historic long term trends -- not recent history -- either (1) there's an investment of a fixed monthly payment, nominally, and the house increases 3-4% annually in nominal terms, or (2) the monthly payment goes down (in real terms) and the house value increases 0-1% annually. I would bet that more people have the former worldview.

Also, the people who view their own home as an investment (as opposed to those buying a 2-family or REIT) aren't the shrewdest of investors, and may not think in terms of real vs. nominal, if they even really understand it.

Zillow and it being inaccurate? There was a very long and in-depth article in the Boston Globe in 2007 about how flawed their pricing information and statistics were. This article was saying what all the other major newspapers were reporting at the time, such as the San Francisco Chronicle, LA Times and other papers out here on the West Coast.

I remember reading the article in the Globe and thinking on what a well researched piece it was.

I would suggest to the bloggers, writers, columnists and letters to the editor crowd that we all do our research and simply look within the Globe archives (for example) for information which had been done in the not too distant past and use that in our comments and in our reporting.

For anybody who is heavily-leveraged, nominal price declines hurt much worse than real price declines accompanied by flat or rising nominal prices. Inflation is a debtor's best friend as long as the interest rate on the note is fixed.

Nominal price declines would help everyone in the short-to-mid term I would think.

Really? How does that help homeowners and banks in the short-to-mid term? It seems to me it exacerbates an already terrible problem.

Unless you're of the school that says let's get to the bottom of this things asap, foreclose on everyone that needs foreclosing, get prices back to normal levels, and return the market to health.

It's a good argument on paper. But one thing it isn't is good for everyone in the short-to-mid term. Not good for homeowners who bought in the last three or four or five years. Not good for banks. Not good for the economy.