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Timing the Market, A Banker’s Viewpoint

Credit for this post really goes to 3 Oceans contributor Eric Trailer who sent me this content in a letter this week. My clients got it last week, and the blogoshpere can now benefit. We can assume that Eric has better things to do on Labor Day than blog. I’m guessing something involving his lovely wife and son . . .

To see current market data and price trends over the past year for local communities and confirm or refute Eric’s prognostications on the local market in Palo Alto and the surrounding communities,

CLICK HERE to see real-time market data, courtesy of our friends at Altos Research.

As you have likely been hearing, there continues to be more and more evidence that it will cost prospective home buyers more to purchase a home in select areas of the Bay Area as they allow time to go by.
Why? Let’s look at the basic reasons, then review an example:

1.        The median price across the board in Palo Alto and the surrounding communities has risen since the beginning of the year.

2.        On a national basis, the trough of the market was reached in April.

3.        The conforming loan limit will DECREASE over $100,000 in 2009 to $625,000.

4.        Rates have risen about .5% since the beginning of the year, despite the increase in the conforming loan limit to $729,750

5.        Loan qualifications are becoming more restrictive with each passing week.

6.        More restrictions on loans and a tighter supply of money forces rates to go up

7.        Because loans require more work to process them (requirements today are 4x what they were a year ago), rates will go up.

8.        Inflation is the number one concern of the Fed, and should be the number one concern for all of us.

Let’s say for a moment that you agree that rates are on the rise, but feel as though prices may come down on a $1mm property today; thus, you want to wait. Let’s further assume that you are right and the future price is $950,000, but rates have increased .5% at that future time. Using 20% down, waiting just cost you an ADDITIONAL $117 per month-over $1,400 per year.

But now let’s be more realistic given the appreciation rates of desirable areas of the Bay Area. If rates increase and the $1mm home appreciates to $1,050,000, you are looking at an ADDITIONAL $550 PER MONTH-OVER $6,000 PER YEAR!

What’s the take-away here?   Price matters much less than true cost… My motto has always been that it always pays off to buy sooner than later, provided your holding period is greater than four years. And to prove that I walk the walk, I am happy to share my personal situation written as an article titled, “How to Afford a Home in Palo Alto Without a Trust Fund.”

Kindest regards,

Eric

To call Eric on his walking the walk comment, and get a copy of his article, “How to Afford a Home in Palo Alto Without a Trust Fund.”, click on his pretty picture over there in the contributor column to send him an email.

Tags: 4---mortgage-mania, absolute mortgage bank, mortgage rates, Mortgages, palo alto home prices, Palo alto housing market, palo alto market, palo alto real estate market

The Lessons Of Redfin, Part II: Targeting A Demographic Niche

Lost in the ongoing discussion about Redfin’s recent appearance on the Today Show is the blatant Redfin geek-baiting of their “Redfin Scientist” marketing push.

Many Realtors have looked at this document with it’s “No, duh!” recommendations (stay engaged, don’t overprice your property, do advertise it on the web) and thought, “I don’t need any ’scientist’ or ‘research paper’ to tell me that!  It’s just obvious!!!”

It may be obvious or it may not be obvious, but here’s the stroke of genius on Redfin’s part:  one of their core target demographics — Gen  X and Y geeks living in high-priced markets — tend to not take our assertions as fact until they see the underlying data-driven proof.

As a Gen X geek myself, I completely relate.  When the old-timers in the business say, “This doesn’t feel like a normal Fall market”, I don’t take it on faith.  I download a data set from the MLS, crunch some numbers, and come to my own conclusion.  Far more often than not, the old-timers’ intuition is spot on…but I’m not comfortable with their assertions until I see them backed up with data.

If I had a nickel for every time a Realtor told a prospective client at a listing appointment “Don’t overprice your home” but provided no hard data to back up that assertion, I’d have retired a long time ago.  Many folks are comfortable with assertions, but “geeks” (which I define as data-driven technology lovers) for the most part want the numbers.

Redfin recognizes this and gives it to them.

Traditional real estate advertising targets a geographic niche, typically a town or neighborhood.  One of Redfin’s primary niches — perhaps their largest one — is a demographic niche:  the geek market, or, more precisely, geeks in high-priced markets.  And guess what?  Seattle and the Bay Area, their two primary markets are not only expensive but are also full of geeks!  I have no inside information about their sales numbers, but I wouldn’t be a bit surprised if 25% of their Seattle business consists of Google and Microsoft employees.

The lesson in all this?  Know thy customer.  If you’re Redfin and your customer is a geek, give him the numbers.  State the obvious, state the not-so-obvious…but back it up with numbers.  Future studies I’d like to see coming out of Redfin’s scientists (or heck, maybe I’ll do them myself) include:

• Staging your home is a positive ROI investment.  Really?  Show me the numbers.  I suspect it’s true, but I’d love to see a study that compares the sales price of, say, $800K homes with and without staging.  Do the homeowners that invest $5,000 in staging really sell their home for at least $5000 more than the ones who don’t?
• Taking more and better pictures of your home makes your home sell quicker and for more money.  I’ve seen the numbers that prove a listing with more and better pictures gets a lot more online views, but do those views translate into more open house visitors and eventually into a higher price?
• Selling your home with a full-service broker will net you more than going with a discount broker.  Again, a common assertion.  Show me the data!  If, for instance, the average full-service commission in an area is 5.5% and the average discount commission in an area is 3.5%, are full-service brokers typically able to get a 2% or greater premium on the sales price?

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The Lessons Of Redfin, Part I: The Marketing Value Of The Obvious

No one can doubt Redfin’s Glenn Kelman is a master of publicity; witness his latest publicity coup: getting on the Today Show to talk real estate with Meredith Vieira. The re.net was abuzz, from Joel Burslem’s neutral coverage to the Bloodhound’s  semi-excoriating review to a withering ActiveRain critique on the “obviousness” of what Kelman said.

The joke, I would say, is on us. To anybody who’s been in the business for any length of time, Kelman’s advice — don’t overprice the home, do advertise on Craigslist — is painfully second nature.

But here’s the point: Kelman is a master genius at generating publicity around knowledge that we take for granted. So it’s obvious to you as a professional Realtor that overpricing a home is the kiss of death? But you’ve never created any marketing buzz around that! You instinctively know to push for a price of $749,000 rather than $751,000? Glenn Kelman just beat you at getting the phone to ring by spinning that message in the right way!

A further irony: this is really nothing more than a repetition of the same mistake we’ve made for decades in this business: assuming that our intellectual assets have greatest value when we hide them from the public and use it as bait to get them to call.  For many years, we hoarded MLS information in book form and made the public come to us to get it.  When the Internet came along, we figured we could do the same thing.  Oops!  Companies like HomeGain figured out a way to use online MLS information to get their phones to ring, and forwarded the leads to us…for a fee.

Then we thought, “Ok, we’ll let the public have information about active listings, but as soon as a listing sells, we’ll hide it again.  Hee hee…this will force people to call us for that kind of information!”  Oops!  This now-you-see-it-now-you-don’t mentality opened up an opportunity for some very smart and deep-pocketed folks from Seattle to start a web site which, among other things, enabled the public to find out what homes sold for.  Zillow realized what we didn’t:  there is great marketing value in letting the world know what you know, rather than trying to hide it.  (See this article I wrote about a year ago on the gold buried in our MLS’s.)

Come on folks, when are we going to learn our lesson?   In the Internet age, you don’t win clients by giving only a sneak preview of your knowledge and data and then crossing your fingers that they will come to you in pursuit of the rest of it.  The game now is transparency — I know, an overused term perhaps, but true nonetheless.  You develop a followership by demonstrating your value, and you do that partly by showing what you know.

What “obvious” thing do you know that may have marketing value for your business?

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Redfin on the Today Show Tomorrow

I know, confusing headline.  But that’s what you get when you combine a show with Today in the title, and an event that’s happening one day in the future.

I’ve been sworn to secrecy by Redfin’s PR maven Cynthia Pang until 9:01pm PST tonight (under pain of death, I’m told — though Redfin’s own Matt Goyer apparently broke the embargo early.)  It will, of course, be a live event, so we’ll see how Glenn Kelman holds up under the klieg lights.  (Fortunately for him, Kris Berg is not, as far as I know, conducting the interview.)

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Palo Alto Real Estate Prices Continues To Defy Gravity…And Expectations…But Tight Inventory Is Part Of The Reason

Amid all the current bad real estate news, with mortgage companies going bankrupt, Foxton’s closing shop, foreclosure rates rising, a liquidity crunch in the credit market, people can certainly be forgiven for thinking the sky is falling — especially if their little corner of the real estate world really is suffering.

Meanwhile, back in our little insulated corner of the world here in Palo Alto, prices remain strong, with the median price point having risen ten twenty thirty thirty-five percent year on year. Yes, that’s thirty-five, as in the number found between thirty-four and thirty-six. Hard to believe, but no less true for it:

(Skeptics will of course pounce on the slight drop from the high of $2.4M a month ago to where we are now — $2.35M — as evidence that — finally — Palo Alto home prices will begin to obey the same rules of gravity that apply elsewhere. I believe it’s more likely to be a seasonal thing rather than an indication of impending doom for our market.)

Not only is the overall market doing well, but every quartile is actually pulling its weight, with the top quartile doing particularly well of late:

Median prices, of course, are not the whole picture. Inventory, for example, is well below what you would expect for this time of year: a year ago at this time, there were 80 homes on the market, while now we’re just short of 50:

Our neighbors to the north in Redwood City, meanwhile, are showing a different story. Median prices are down, way down…

…and inventory levels are up, way up:

But again, that’s not the complete story. Observe…first, the lower two quartiles are indeed hurting…

…but the top two quartiles are holding their own quite well, thank you very much:

What’s the explanation for all this? Why is Palo Alto and the upper half of the Redwood City market doing so well, while the lower half of Redwood City is hurting? Friend, top broker, and colleague ex-colleague Steve TenBroeck (the “Steve” in the “Jeff and Steve” team) explains it thus:

Home owners in Palo Alto learn from the Merc and the Chron that the market is bad and decide maybe now ain’t a good time to sell. But, no worries — they don’t have to sell. Their mortgage, while high, ain’t killing them. They didn’t get an adjustable rate mortgage, so their payments aren’t skyrocketing. Owning a home isn’t causing them any cash flow problems.

Similar reasoning holds for the upper half of the Redwood City market. In the lower half, however, homeowners are hearing that the market is bad, and they’re personally experiencing it: their adjustable rate sub-prime mortgages are resetting soon, and their cash flow problems are about to become worse. Many don’t have the luxury of waiting for next year to sell. They have to sell now.

The lesson? Real estate is local, very, very, very local.

Tags: Consumer, Palo Alto, Redwood City, Steve TenBroeck

3 Oceans Honored On Inman’s List Of “Top 25 Most Influential Real Estate Bloggers Of 2007″

Inman News today announced their list of 2007’s “Most Influential Bloggers.” (May soon  disappear behind a pay firewall)  Yours truly was honored and humbled to make the cut.

A number of equally and more well-deserving folks unfortunately didn’t make the cut, including most prominently — in my opinion — the incomparable Kris Berg, Brian “Puke All Over The Internet” Brady, and Athol “Sock Puppet” Kay.

A number of good friends and colleagues of mine made the list, including (warning to my civilian readers:  corny inside jokes galore ahead…)

• The Sellsius Twins
• My own twin Pat Kitano (inside joke)
• Greg “The Libertarian Jesuit Bloodhound” Swann
  
• Teresa “St.-Paul-Not-Minneapolis” Boardman
• “Ahdell” DellaLoggia
• Marlow “Elvis Has Not Left The Building” Harris
• Doug “Mini Cooper” Heddings
• Noah “Down mahket?  What down mahket?  I work Manhattan, baby” Rosenblatt
• Dustin “Can’t comment on Move.com vs. Active Rain” Luther
• Jonathan “Neo” Miller
• Joel “Brad Inman Jr.” Burslem
• Jim “The Tomato” Cronin
• Adam “Plugged-In” Koval
• David “Aagh, neh mahn!” Gibbons
• Glenn “Re.net Punching Bag” Kelman

The others I don’t know well enough to bestow a nickname, but here they are:

• Morgan Brown
• Todd Carpenter
• Calculated Risk
• Paul Jackson
• Jonathan Butler
• John Cook
• Peter Coy et. al
• Everybody’s second favorite sock puppet, Keith
• Patrick Killelea

Tags: Glenn Kelman, Industry, Inman

How Come Redfin’s P&L Looks Distinctly Unlike That Of A Traditional Real Estate Brokerage? Because Redfin Is Actually A Brokerage, Not A Landlord!

Tipped off by another insightful Greg Swann piece (Greg — do you ever sleep?) I just read through Glenn Kelman’s fascinating soul-baring finances-revealing post over on Guy Kawasaki’s blog. As a serial entrepreneur — and quite a successful one at that — Glenn has certainly done more than his fair share of financial modeling, and his post is rich in advice for the prospective entrepreneur.

What is particularly fascinating is how Redfin’s financial modeling is thoroughly and utterly unlike that of a traditional broker. That makes sense, of course, since Redfin is, well, not a traditional broker. In particular, unlike traditional brokers, Redfin makes its money through the act of – wait for it — brokerage — that is, representing buyers and sellers of homes.

Traditional brokerages — Coldwell Banker, Prudential, ReMax, Keller Williams, Alain Pinel — on the other hand, most emphatically do not make money through brokerage activities — they leave that work to their agent work force, usually a collection of independent contractors. Traditional brokerages, you see, make their money through landlording.
They provide agents with office space, training, mentoring, branding, open house opportunities, telephone lines, etc. and then charge these agents twofold: first, a portion of their commissions (starting at 50% or more for new agents, going down to perhaps 5% or 10% for the top agents, averaging perhaps around 25%) and secondly, a rather long laundry list of fees, including tech fees, desk fees, legal fees, and a myriad of others.

Much of what remains in the agent’s pocket after the broker’s share is divvied up among countless vendors, including the local MLS, newspapers, cell phone carriers, web site vendors, and Lexus dealers.

Here’s a picture of the money trail:

…and here’s one of them new-fangled Sketchcasts…

Further commentary from others:

• Ardell summarizes her take on the article: Sounds like the practical people are the ones asking for money, and the impractical ones are the people giving the money.
• Joel wonders if the downturn in the market will do a Foxton’s to Redfin.

Tags: Alain Pinel, Coldwell Banker, Glenn Kelman, Industry, Keller Williams, Redfin, ReMax

After Active Rain vs. Move.com, What Next?

The ongoing Active Rain vs. Move.com dustup, our very own ongoing soap opera saga, illustrates one fact above all else: the re.net is maturing. As the traditional players in real estate (finally) begin to appreciate the potential of emerging technology in real estate, it’s inevitable that more acquisitions will take place — hopefully successfully.

Move.com’s overtures to Active Rain were actually not the first in which a traditional player courted one of the new ones. That honor, I believe, rests with our very own Joel Burslem of FOREM, which was acquired by Inman a number of months ago.

Some other possible pairings? Google must be looking with interest at both Zillow and Trulia. Inman, Ris Media, and other real estate industry news sources may be eyeing some re.net blogs.

And who knows…maybe the Bloodhound will make a play for one of the other Phoenix re.net blogs? Or perhaps these guys might be interested in this one?

Tags: Active Rain, FutureOfRealEstateMarketing.com, Google, Industry, Inman, Joel Burslem, Move.com, Trulia, Zillow

Reaping The Fruits Of Others’ Labor? Or Adding Value To It?

For those who care about such things, the big recent news is, of course, the Move.com vs. Active Rain dustup.  While much of the commentary amongst Active Rainers has been supportive of their fearless leaders, there is also an underlying angst about the notion that while the content of Active Rain is provided by its 50,000-odd members, the windfall from the prospective sale would have accrued not to those members, but to the owners of Active Rain.  Were Messrs. Mardini, Heaton, and Washburn indeed going to enrich themselves with the fruits of others’ labor?

The question really boils down to this:  wherein lies the value of a community network such as Active Rain?  I say the value is twofold:

1. The community itself
2. The ecosystem that provides value to that community

Without the hard work of the community, Active Rain would be just an empty shell.  Conversely, without the ecosystem that the Active Rain platform provides, many of the 50,000 participants’ blogs would be a fraction of what they are now.

So is it fair for the owners of an ecosystem to profit from the contributions of the members?  Fair or not, that’s the way our capitalist system works:  unless Active Rain was structured as an online collective, it is unlikely that the members would have seen a personal windfall.

Think of two other similar ecosystems:  Ebay and Craigslist.

At Ebay the sellers do all the work of getting a product ready, advertising it on the site,  shipping it to the winning bidder, and rating the buyer.  The buyers do all the work of bidding, submitting their credit card information, and rating the seller.  Ebay simply provides the ecosystem that makes all this possible, and intervenes to deal with disputes and fraud.  Buyers and sellers do all the work, and the only benefit they get is the ability to buy and sell stuff — a great benefit, to be sure, but nowhere near the benefit that Ebay gets of being a multi-billion dollar company.

Craigslist provides not only a platform for buying and selling goods and services, but also for matching employers and employees, renters and landlords.  Again, the community does all the work.  The founder and majority owner of Craigslist, Craig Newmark, could be a multi-gazillionaire many times over, but has chosen to settle for merely millionaire status.  Again, its the owner to whom the economic profits accrue.

We can argue all day — and we have been — about whether Active Rain is worth $30M or not.  What we cannot argue with is the notion that, whatever its monetary value, it rightfully accrues to its owners, not its contributors.

Tags: Active Rain, Craig Newmark, Craigslist, Ebay, Industry, Move.com, NAR

Mr. Arrington, Please Stick To Your Knitting

Michael Arrington, founder and editor of tech blog TechCrunch, piles in on the Move.com vs. Active Rain dustup in a highly entertaining post entitled Highly Entertaining:  Realtors Suing Realtors.

His summary of the controversy is well done.

His grasp of the real estate industry, however, is not, as evidenced by the post title itself.

Active Rain is not a Realtor, or Realtors.  It is an Internet startup.  Its product is a blogging ecosystem for real estate professionals.

Move.com is not a Realtor, or Realtors.  It is an established Internet company, affiliated with NAR, which itself is also not a Realtor, or Realtors, but an association of Realtors.  Move.com’s products, until recently, specifically did not include a blogging platform.

Fairly predictably, Mr. Arrington could not resist the opportunity to take yet another swipe at the real estate industry, though it is hard to argue with one of his statements:

…a lot of people have had negative experiences with realtors and wish there was [sic] a better way to buy and sell houses.  And whenever we write about how screwed up that industry is, the realtors come out and start trolling in the comments.

Ok, I admit, I was one of those trollers.

Tags: Active Rain, Industry, Michael Arrington, Move.com

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