Counter Intelligence: The Real Estate Cafe Weblog

Are seller concessions masking deeper discounts on sales prices?

Side-by-side competition driven by the rising inventory of unsold homes across Massachusetts is creating a new kind of bidding war:  escalating financial incentives to help sell homes as soon as possible. 

Some time ago, the local MLS added a new field to document seller concessions at closing. However, entries are rare and as noted by one prominent critic, "current house price indices are failing to pick up the full decline in prices because they miss the various concessions (seller paid closing costs, buyer-side realtor bonuses, and seller subsidized mortgages) that sellers often use to move their houses."

That problem is compounded by the fact that median prices can be misleading, particularly when rival data sources reported different median prices in Massachusetts in July 2006. The Massachusetts Association of Realtors reported that single-family prices declined 3.5% statewide, while The Warren Group calculated a 6.1% decrease.  Adjusted for inflation, year-over-year prices fell 7.8% using MAR's stats and 10.2% using The Warren Group's according to BostonBubble.com.

To help get behind the confusion, The Real Estate Cafe created a real estate bubble map to document falling prices on a property-by-property basis.  We'd also love to use the map to document innovative sales incentives being offered by sellers, listings agents, and developers in Boston and beyond. Locally, one listing agent recently mailed fellow agents coupons for $20,000 off a new development in Cambridge.  That seems modest by comparison to the ambitious "Summer Full of Savings" being offered by one homebuilder across 17 developments in California.

Please let us know what's happening in your market, either by posting your comment below or on our RealEstateBubbleMap.com. We're particularly interested in learning which sales incentives you find most appealing, as well as seller concessions you've requested in recent offers (like asking sellers to pay your closing costs).

Industry's seller bias understates risk to homebuyers

Kudos to the Boston Herald for asking "Has the Mass. housing bubble burst?" on their front page this morning.

If homebuyers focus on median sales prices, they might reach the same conclusion the Massachusetts Massachusetts Association of Realtors (MAR) did three months ago when they told the public that a "New study finds no evidence of a “housing bubble” in metro Boston."

Afterall, according to MAR's report on existing home sales during July 2006, median single-family home prices decreased just 3.5 percent from the previous year, despite declining sales during 17 of the past 18 months.  To their credit, MAR also disclosed:  (1) that is the largest annual price decline since March 1993; (2) median sales prices have declined for six consecutive months, and (3) that is the longest slump since housing prices fell 13 straight months from March 1992 to March 1993.

What raises questions is that The Warren Group reported that median sales prices for single-family homes fell by 6.1% or 74% more than MAR's figure.  Maybe that's because MAR based their assessment on a median single-family price of $361,750; in contrast, The Warren Group's median (which includes sales outside the MLS) was $339,000 or $22,750 (6%) less.  Far more alarming is that The Warren Group figure is $1,000 less than their median sales price two years ago, $340,000.

So, despite the lowest prices in two years and the sharpest drop in sales since 1995, what's distressing -- as a buyer's agent -- is that MAR's talking points continue to understate the risk for homebuyers:

"Today’s lower prices reflect softening buyer demand and rising in inventory levels, which have started to trigger modest price adjustments on the part of sellers. With demand still historical strong though, major price corrections are unlikely."

If homebuyers look beyond median prices to individual transactions, they'll see that major price corrections are already underway.  The Real Estate Cafe has already mapped nearly 400 sales below assessed value across 27 of the most expensive cities & towns in Greater Boston.  In coming days, we'll post another 200 sales to our real estate bubble map including 50 in Greater Boston plus another 150 from Southeastern Massachusetts, primarily on Cape Cod courtesy of RealtyInsite.com.  If you see evidence that prices are falling, please post them to the real estate bubble map or create your own.  If you're one of our clients, we'll reward you for each property (see "Tipping Policy" for more detail.)

CAUTION: You are entering "The Bubble Spin Zone"

"You're traveling to another dimension, a dimension not only of sight and sound... but of mind. A journey into a wondrous land, whose boundaries are only that of the imagination... you're entering... the Bubble Spin Zone."

Reading some assessments of the current Massachusetts housing market, one wonders if industry spokespersons are taking their cues from Rod Serling classic, "The Twilight Zone."  Arguing "that prices are not declining sharply in response to falling sales," one recently told the Boston Globe that "I'm seeing some concessions from sellers, but not a whole lot."  Last August when the same spokesperson was asked by WBZ-AM radio talk show host Paul Sullivan if buyers were in danger of buying at the height of the market, he said no.

So, to help inform homebuyers and protect them from overpaying in overvalued housing markets, The Real Estate Cafe has developed an interactive map to involve homebuyers (and fellow buyer agents) in the process of documenting falling housing prices, in Massachusetts and beyond.  Beyond price concessions, we are particularly interested in mapping sales below assessed value.  Would you believe that some buyer agents first began chatting privately about homes selling below appraised value this time last year?

If you are actively looking for a home, please visit our real estate bubble map before making an offer.  Working with site users, we've already mapped nearly 300 properties sold recently below their assessed value in 27 of the most expensive cities and towns in Greater Boston.  We assume our readers know more than we do, so we've made it easy for you to post comments, add new properties, or start your own local bubble map.  Some consumers have begun documenting sales below assessed value in highly desirable towns like Cambridge, Brookline, Newton, and suburban communities near Route 495.

Shortly, we'll add another 150 sales below assessed value which occurred during the past six weeks.  Some of the properties already mapped have sold for at least $100,000 off, but don't let that cause you to rush into an offer.  The largest price reductions could be between Thanksgiving and New Year's Day; when historically, one in five properties sells for at least 10 percent off.  This year, we'll track how many sell for 10 percent below their assessed value, but we'll need your help to do it.

If you're one of our paying clients in Massachusetts, we'll reward you for each property you add to the one of our regional bubble maps.  See our Tipping Policy for more detail. (Get it?  Real Estate Cafe, Tipping policy?)

Think Outside the Commission

Fifteen years after the Consumer Federation of America first called for the traditional two-sided real estate commission to be uncoupled (a reform they repeated recently in congressional testimony), some momentum is finally building to change the way real estate agents get paid.  What's surprising is that the most recent proponent has presented his case to fellow professionals through a provocative mini-series called "The end of MLS as we know it."  Policies once assumed to be barriers to implementation may no longer be obstacles, according to a well-respected attorney who advises multiple listing services.  That's GREAT news for real estate consumers who could save billions of dollars annually:

It is widely believed that it is impractical or impossible for the buyer to pay her own broker at closing. A report published in spring 2006 discussing the future of MLS considered the idea of buyers paying their own brokers: "It is unlikely that this will happen unless HUD and Fannie Mae allow the buyer to finance the portion of the commission that the buyer would need to compensate their own agent."

In fact, HUD and Fannie Mae regard a commission paid by buyer to buyer’s broker at closing as a valid closing cost. In other words, to the extent that closing costs can be financed, a buyer broker’s fee can be financed as well. The traditional view is that the buyer borrows money to pay for the purchase price and comes to the closing with the closing costs in cash. Practically speaking now, buyers have the option to come with a piggyback loan ready to cover some of the down payment and closing costs in return for a second lien position on the property. There may even be tax advantages to this approach for the buyer.

One of the first fee-for-service business models in the country, The Real Estate Cafe has been encouraging consumers and real estate professionals to "Think Outside the Commission" for more than a decade.  In fact, we've been monitoring mega-trends pushing towards a "tipping point." To learn why we think this transition is inevitable, take 90 seconds to view our video online.  Then, contribute your own ideas about how consumers and industry innovators can begin demonstration projects, document best practices, and deliver billions in consumer savings. 

If you're a homebuyer who can't wait for the industry to transition, The Real Estate Cafe already offers a variety of money-saving compensation options, including a 100% commission rebate plan.  If you're a lender interested in a demonstration project to that would give consumers the option to BYOB (Bring Your Own Broker), The Real Estate Cafe is eager to experiment and will gladly host a chat online or real estate roundtable in Boston to brainstorm next steps.

Add properties to bubble map before "Un-conference"

Exactly one year ago today, the Real Estate Cafe participated in a radio broadcast entitled, "The Beginning of the End of the Bubble" which featured some of our recorded interviews.  Today, we celebrated that anniversary with more good news:  the leading real estate technology news service featured our real estate bubble maps as an example of "Real Estate 2.0."  Our interactive maps are getting attention because they allow users to post their own examples of a falling prices, particularly homes selling for below assessed value in Greater Boston.  We created the bubble maps because news reports, including one this evening, continue to point to modest declines in median prices as evidence of a "soft landing for the housing market.

If you share our belief that median prices are masking deep discounts on many properties, we invite you to add properties to document what's really happening at the street level.  Here's an example of what one homeowner has already done, plus a description of our "Tipping Policy": commission credits for paying clients who post properties to our map.

RealEstateBubbleMap.com, an experimental wiki authorized users can edit, will be presented as a case study Monday at an Un-Conference on Citizen Journalism at Harvard.  Before then, we invite you to post additional properties to the Boston bubble map if you live locally, or create your own local bubble map if you live in one of the 71 "extremely overvalued" housing markets nationwide. If there is interest, we'll host a Bubble Hour chat or conference call before, during, or after the presentation Monday for local clients, or real estate bubble bloggers and their readers nationwide.  Email us at [email protected] if you would like to participate.