Altos Research Real Estate Insights

Today marks the launch of RealEstateVoices.com a "social news" site for the real estate market. The site is managed by the folks at Homethinking.com and looks very cool.

For those of you not so in tune with the internet geeky stuff, social news is a feature in the so-called Web 2.0 world where the readers of a news site rank the news stories. The more votes, the higher the prominence of display, the more attention a story gets. and so on.

For those of you not-so-interested in the geeky stuff, RealEstateVoices and its social-news ilk, like the pioneer Digg and the new Netscape, simply become a really easy way to discover the best news/insights/stories of the day as highlighted by your peers.

A front-page ranking on Digg will generate many thousands of visitors to publisher of the story. Very cool.

When the folks at RealEstateVoices asked me to contribute, I happy to oblige. I'll be working to contribute stories I find and helping to vote on the cool ones I see there.

If you're interested in keeping tabs on the real estate market, RealEstateVoices might be a fun way for you to play along.

The median single family home price in San Jose this week is $740,000. House prices in San Jose continue their gentle pull-back from this spring's high-water mark of $758,000. But the data are starting to betray something surprising: could it be? increasing demand?!

The short term Market Action trend for San Jose has turned positive. The Altos Research Market Action Index, you'll remember, is measures demand relative to available supply. MAI is trending UP in 11 of the 26 San Jose zip codes with more than 25 homes for sale. MAI is trending lower in 9 of the zips. A month ago, only four zip codes in San Jose were showing increasing demand trends.

A further observation is that these positive zip codes skew toward the higher-end of the market in San Jose. Here's a chart that illustrates the phenomenon. This shows how all quartiles of 95138 are turning up. Zip code 95138 covers the Evergreen neighborhood in Southeast San Jose. Lots of late 1990's development made this the highest-priced zip code in San Jose. Median Price in Evergreen is $1.4 million this week.

Market Action Index for San Jose 95138 September 25, 2006. Housing Supply and Demand indicator

Again, this is mildly unexpected for us. I had assumed that the low end of the market would continue it's tear. Prices in Evergreen are down from their peak of early 2005. Days on Market is up substantially at 72 and inventory is slightly higher than last year at this time. All this illustrates not a robust market but one where good properties, priced right are still moving.

To complete the San Jose October-December 2006 market projection, our hypothesis goes something this:

• Prices at the high end of the market have pulled way back from their 2005 highs. Enough so that some pent-up demand is testing the waters.
• Mortgage rates have stayed low and even dropped in September after the Fed stopped raising short-term rates. This is helping current deals close. Get-it-while-its-good.
• Meanwhile, at the low end, mortgage opportunities are tightening. Standards are increasing in the wake of a lot of bad publicity. So demand remains low and falling in the lowest-priced zip codes. Prices in this part of the market are 20% higher than last year. The bottom quartile could easily correct downward at the first sight of economic slowdown (which would arguably hit the low end of the market first.)
• But if mortgage rates stay low and assuming that we don't see significant evidence of an economic recession coming, expect this pent-up demand to keep prices at least stable in San Jose until next Spring's buying season starts again.

Sum it up this way:

The high-end professionals in Silicon Valley have a lot of confidence in their economy, jobs and outlook for the next few years. Money is still way cheap. Properties are much easier to get in to than a year ago. So you can see why an uptick in demand starts to kick in. Barring significant economic changes, we see the rest of the year playing out similarly.

In this week's most brilliant marketing move, team Sellsius has instigated a competitive blogathon between two of real estate blogosphere's most prolific posters. The contestants: Greg Swann at Bloodhound Blog vs. Ardell DellaLoggia at SearchingSeattleBlog (also of Rain City Guide) The challenge: 101 meaningful blog posts in 24 hours. The duel commences at 12:01am tonight.

The real estate blogosphere hasn't been this abuzz since the great Redfin vs. Zillow tequila shooter/jello wrestling match.

Clever Kevin Boer set up a futures market over at inklingmarkets.com to predict the winner. (I presume the winner is the either the first to the finish line, or the last one standing.) Usually, I stake out the contrarian position but today, I find that I've got to throw my inkles behind the favorite, Greg.

Ardell tends to be a long-form blogger, a constructor of augments, a teller of stories. Coherent logical development takes time however. She's only got 14 minutes per post - for 24 hours straight.

Greg, on the other hand, while a skilled story teller himself, has demonstrated a deft hand at the pack-a-punch-in-one-line type of blog post. The winner tomorrow will need more than a handful of these.

Make sure you take your position. I'm long the 'Hound.

post is in the top-10 picks of the week! Woo Hoo! Jonathon's take on relisting is pretty clear: No marketing BS excuses, it's "Just wrong."

Also of note in this week's carnival:

• Joel's thoughts on the local-focus-web.
• TrueGotham on the Housing Futures markets. I'm a big fan of using futures securities for bringing efficiencies to a market. Robert Shiller delivers a keynote on the topic in a couple of weeks at the Inman conference. I hope to grab a few minutes of his time to chat.

A few weeks ago, we introduced in our paid research three new statistics tracking the percentage of properties in a market that have been priced-reduced, re-listed, or flipped.

Re-listing is the tactic used by agents to re-introduce a property to the market. It gets treated as a fresh property. The tactic can sometimes frustrate buyers who have already seen a property. From our point of view, it's a really fascinating marker of real estate market and housing demand conditions.

Apparently, many MLSes had heard the same market feedback that pushed us to introduce the re-listing monitor feature. In September, the Northwest MLS which serves Seattle introduced member rules to expressly prohibit properties from being relisted (Story today at Inman News.) Also in September, the Silicon Valley MLS introduced a "continuous days on market" which measures the listing time across all the relistings. (Here's Kevin's take on relisting in Silicon Valley). From the Inman article today:

Northwest MLS, a regional MLS in Washington state, on Sept. 1 issued a notice to members threatening "disciplinary proceedings against agents and brokers who improperly cancel and relist properties or input meaningless price changes. Canceling and relisting is only permitted when there has been a substantial change in the quality or condition of the property."

The notice advises that price changes should only be entered into the MLS "when there has been a material change in the price of the property. Otherwise, canceling and relisting and inputting changes are deceptive and misleading marketing ploys, designed only to gain undeserved market exposure at the expense of other properties."

So is relisting a dirty, potentially illegal, trick? Or is it merely smart marketing? Is there such a thing as "undeserved market exposure?" If I'm selling a property, it's ALL deserved, baby. Furthermore, why now?

My take is that the re-listing phenomenon is intertwined with the current legal/monopolistic howling about the MLSes - born of the same parents, as it were. In an ironic twist, by aggressively addressing this relisting tactic, the MLSs may be building the case for their detractors. The logic goes something like this:

• Initially, MLS systems were simply books. Collections of the properties for sale. Everyone had a handy repository for the local properties.

• At that time, property marketing was all personal. Agents show a house. People walk through. Deals get done. Any impersonal marketing, say an ad in the newspaper, was done outside the MLS.

• The paper was the aggregator for whomever is marketing. No one cared if the local paper had FSBO ads along side properties that also happened to be listed with a Realtor, and therefore on the MLS, which was merely a back-end convenience for the Agents to use. No one had to game the MLS to get more attention for their property.

• Enter the internet. MLSs go online and instantly become highly effective marketing channels in and of themselves. Much more effective than a newspaper ad. And everyone gets it for "free".

• On top of that, the internet also opens additional marketing opportunities. Send me an email instantly when a new property meets my criteria. Put the listings on a map. Tell me about the neighborhood crime stats. Great stuff, if you're a home buyer.

• But this is where the trouble begins. You can change your ad in the paper. But is it wrong to change your listing? If the only way to trigger the "new listings" email to put my property in front of hundreds of potential buyers is to re-list it, I'm going to be tempted.

• Now, with the MLS as marketer, they have to fight competitive marketing channels. By blocking out, or even appearing to dissuade, competitive marketers, they invite the monopoly catcalls.
  

• Meanwhile, the MLSes want to be seen as an advocate of the consumer. So they crack down on this nefarious re-listing practice, effectively admitting that they are first and foremost a marketing channel, rather than being a central repository. They're painting the target on their chests. Bummer of a birthmark, Hal.

The duality makes for a catch 22. MLS as repository makes sense to centralize, like a stock exchange. But the MLS as marketing channel makes sense to blow wide open. The repository must have accurate data, be legally binding and consistent. But how do you reconcile that control in the face of external marketing necessities? One thing is sure: the re-listing tactic is merely a symptom of the greater challenge. Addressing the symptom may be desirable in the short term, but there is more pain to come.

Real estate commissions have been publicly criticized in major media publications and vehemently defended in industry trade publications,
but until now have not been analyzed to this degree. This report
considers the costs of doing business, marketing homes, agent-broker
relationships and agent incomes.

What are some of the report’s key findings?

• Agents who spend more on marketing are also those who earn the highest average commissions.
• In general, however, the amount spent on marketing is low regardless of the commission earned.
• Agents strongly report that sellers are applying more pressure on commissions.
• Agents
  are frustrated with competition from discounters and inexperienced
  agents and many feel that there is a pervasive lack of understanding of
  the costs involved to maintain a sales career.
• Web sites are a worthwhile expense for agents.
• Real
  estate agents rarely jump into the business as superstars. The number
  of transactions completed per year generally increases with experience.
  

Mike Edelhart, Inman's CEO, has promised to bring a deeper analytical focus to this often-anecdotal industry. This report is the company's first foray into that line of work. Fantastic move. In a world where all we have is New York Times sensationalism to go by, solidly researched insights are invaluable.

In other Inman News news: I'll be speaking at the Inman conference in Miami next month. Topic is market analytics. On the panel with me? The Zillsters. Also on the agenda is a presentation by Housing Bubble High Priest Robert "Irrational Exuberance" Shiller. Make sure you come check us out.

Hat tip to Sellsius for pointing out the report's availability today.

Here's a look at 16 zip-codes showing mounting pressure from the slowing housing market. We looked at Northern California and Seattle area zip codes with greater than 40% of the properties with price reductions. We also filtered for decreasing demand trends (measured by our Market Action Index), sufficient inventory, and median days on market (at least 7 weeks).

The result is one way to identify some at-risk bubble markets:

Some patterns emerge. High-end markets, even those close in, like Los Altos, Saratoga, and Redmond are showing their weakness. Outlier communities like Bodega Bay start to filter in. Worst, of course, is the combination of high-end communities far from the economic center - Pebble Beach and Carmel.

Note 1: We filtered pretty aggressively, exclusion from this list does not mean everything is rosy in homeville. You can draw parallels with similar communities that aren't on this list for one reason or another.

Note 2: Inclusion on this list does not imply market rout. In fact prices for these markets are UP an average of 2% year-to-date.

Just some important warning signs for our housing bubble vigilance.

When I cite stuff from Bear Stearns, I usually go for chief economist David Malpass. This week though, Fracois Trahan, Bear's chief strategist, weighs in on the housing market and the global implications of the Bubble. Trahan, whose job it is to plot optimal investment strategies is much less sanguine than Malpass, whose charge is simply to prognosticate on economic direction, I suppose.

Trahan's thesis is that the US real estate bubble burst will hit global stock markets hard through a chain reaction of consumer retractment, dropping the earnings of foreign firms send us our goods, leading to decreased global liquidity and lower stock markets.

A slowdown in the housing market would most likely have repercussions for the U.S. consumer, since housing wealth has been an important driver of this economic recovery... when the growth of homeowners' equity has slowed, so too has the rate of real consumer spending. Looking ahead... if housing slows, the consumer will likely slow as well... sooner or later, a slowdown in world trade weighs on global financial liquidity.

Contrast this with Malpass, who consistently downplays the gloom and doomers on the Bubble. Malpass' point is that the American consumer is marvelously wealthy and well positioned with locked in mortgage debt, but variable rates on savings to actually benefit from rising interest rates.

So why the seemingly contrasting Bubble takes coming from top guys at Bear? Well the answer lies in your preferred scope and scale. Trahan the Strategist is fundamentally addressing the question, Are stocks a good place to invest in the next 18 months? While Malpass the Economist tries to answer, What is the likely state of the US and global economy from here on out?

So I'm going to chalk up the union of analyses as my favorite scenario for how the Bubble plays itself out. Clearly we're at a housing demand crest. Any significant deflation of the Bubble has global equity market repercussions for what could be several years. But underlying economic health suggests long term strength, not some kind of Road Warrior apocalypse.

Catherine Myers, a Realtor with Alain Pinel in Walnut Creek and a brand new client of ours, emailed me yesterday with this great news:

YOU WOULD NOT BELIEVE THIS!! Just from the first chart I had on my site, I just got a listing appointment for a near million dollar house! Wow!

While I'll gladly take credit for bringing in this lead, the fact is that Catherine is a classic example of a Realtor using technology to her advantage. She has been nurturing the site and it's visitors for years, developing and adding information. Real-time market statistics are just a latest example. It's not a spectacularly flashy site, just straightforward and chock full of good local information.

Chris at the Tomato evaluates this week some of the more sophisticated lead generation techniques. His advice is sound. But methinks most of us need to step back and think first about the analog analogue.

Internet lead generation is just like it's offline, face-to-face cousin. You're reaching out, communicating with your (potential) clients. Listening. Being approachable. Being the trustworthy expert. When you do these things, people respond. When you do these things online, people respond.

Catherine clearly communicates this to her audience through her site.

The evidence is the business it generates for her. If your site isn't generating leads for you ask yourself how your approach to your site development compares to your offline efforts. The styles should parallel each other closely.

And, especially if you're in the market for a home in the Walnut Creek area, go check it

We find it deeply satisfying to hear that smart people are benefiting from our work. We had two mentions from high-profile writers over the weekend.

• Venture Capitalist and prolific writer Paul Kedrosky, who has been posting on the housing bubble on his blog for some time now, mentioned Altos Research (this post on our flipping and price reduction stats) in an article for TheStreet.com over the weekend. Paul's post on his own blog is here.
• Blogging pioneer, entrepreneur and now Netscape.com GM, Jason Calcanis, is in the market for a home in California. Nice to hear we're providing him with some good insights.

This week the Silicon Valley Leadership Group released its second annual "study" showing the Bay Area as the worst among major global tech hubs. From the San Jose Business Journal

For the second year in a row, the Leadership Group has ranked Silicon Valley last among U.S. tech centers in its measure of quality of life and business encouragement indicators.

Raleigh-Durham-Chapel Hill, N.C., comes in first among domestic rivals by the Leadership Group's measure, which is based on unemployment rate, the percentage of people able to afford a median-priced home, traffic congestion, 8th-grade math achievement, cost of electricity and state taxes.

Seattle comes in second, followed by Denver, Austin, Texas, and Portland, Ore. Denver was new to the list of comparisons this year, as was Philadelphia (6), Washington, D.C., (7), Chicago (8) and New York (10). Boston was ninth and San Diego was 11th, next to last.

Furthermore, the group puts us behind a dozen international cities, places like Bangalore, Tokyo, and Dublin as well.

I understand what the group is trying to do. They're trying to motivate policy, make sure we don't grow complacent or arrogant. Maybe swipe a little tax money for their pet projects. But I question the tactics and I deeply question the methodology of the press release study. (I can't find any full explanation of the methodology on the group's web site.) California's tax system is indeed ridiculous, but no where in the press coverage is that a focus of the group's call to action. Housing is expensive, but no where do they call to increase supply.

The conclusion that the "quality of life and business encouragement" in the Bay Area is lowest is due, as far as I can tell, to high housing costs. The group admits they don't measure things like weather, environment, or culture, which is fine,
but realize that mean temperature alone makes my house worth a good
chunk more than, say, Chicago.

It seems to me that the group is measuring the symptoms of massive success and remarkably amazing quality of life and business encouragement. Homes cost a lot in the Bay Area because smart, hardworking people from all over the world want to live here and they get rich doing so. end. of. story.

Let me share a few anecdotes about why these conclusions are crazy and counter productive.

I frequently use the free WiFi at the Red Rock cafe in downtown Mountain View. There is no place in the world like this. On any given day you can overhear people negotiating A-rounds, recruiting developers, hacking away on Ubuntu, etc. It's 5 minutes from Google, Microsoft's SV headquarters, start-up lawyers, venture guys, not to mention countless start ups themselves. Teeming is the only way to describe the businesses being encouraged here. We're talking start-up-nerd heaven. Maybe you can find a cafe in Cambridge that is as "encouraging to business" as this place, but I doubt it.

Contrast this to some of the "better" places to live and do business in the group's study:

• I've done extensive work in India. Let me tell you that Bangalore is a remarkable, exciting place right now. But any city where you find a family of four on the same motorcycle (oh yes. the 2yr old straddling the gas tank) and you have to watch out for the goats in the trash bins outside the office, has a long way to go on quality of life issues. I once asked a friend's 13 year old daughter who had just returned to India after four years in Silicon Valley which she liked better. Her reply "well, in the US I had to drive to see my friends. In India I can just go downstairs and they're all right here in the street." Proximity to friends is indeed important. Also the 8th graders do better on math tests. That's why we should encourage the import of people after they've gotten their EE degrees.
  
• Seattle is number 2 on the list. Lots of great opportunity and innovation power Seattle these days. The Microsoft mother ship is a glorious asset. Paul Graham has captured eloquently the factors that build a great tech center and Seattle in my opinion is as well positioned as any place in the world to replicate the Silicon Valley success. But Paul points out that success takes a long time and Seattle is about 15 years behind Silicon Valley purely in terms of fermentation time. (It is notable, too, that Paul didn't write How To Be Raleigh-Durham.) In the next 15 years though, watch Seattle home prices approach California. It's not a symptom of a problem, its a symptom of success. Rock on. (Barring some ironic twist of global warming fate, California homes will still have a sunshine-premium.)
• BTW- there is nothing in Tokyo's tax structure, housing costs, traffic, or employment rates that suggest it could possibly rank higher on this group's study, but apparently it does. Math scores again?
  

Of course the group readily admits "Our strength is in innovation, research and design," available venture capital is four times the nearest competitor.

The bottom line is that the SVLG is out for some headlines. But if you are out to start a company, especially a tech company, my thoughts for you are simple: Housing costs are a tiny price to pay until you get rich yourself. Go elsewhere at your peril.

Update: this story got Dugg yesterday. Digg it again.

Been meaning to catch up with some recommended reading:

• Oliver at Seeking Alpha and Joshua at BiggerPockets both have thoughtful takes on the Housing Bubble as a function of the Lending Bubble. As I've pointed out before, it's clear that creative financing options have been a key driver of our Bubble. But don't kid yourself - sclerotic lending options mean inefficiencies and higher costs. So shifts that reduce the cost of (or increase the flexibility of) borrowing are fundamental improvements that allow costs to be transfered to the real asset, not the transaction. Bubble notwithstanding, this is a good thing. And it's a secular shift: transaction costs down...house prices up. The fact is these financial innovations have been coupled with relaxing standards and a gambling mentality. The big hopper makes our housing bubble. Let's not throw the baby out with the bathwater.
  
• Surprise! The Boulder Market is Hot! My take: Economy? solid. Affordability? high. Quality of life? one word: powder. Immigration from Northeast and California? unstoppable. Mix. Enjoy.
  
• Here's my best opportunity in a long time to link to GapingVoid. I consistently invoke the Hughtrain when talking marketing strategy with my Silicon Valley compatriots. Amazing how many still need hand-holding.
• TransparentRE on the continuing evolution of the lead generation business. The broker angle is one I hadn't considered before, but it makes sense.
• Joel likes our partnership with Homethinking. But Joel, ahem, ixnay on the ompetitioncay with the 800lb orrillagay! Seriously, we don't see our company or service as competitive with Zillow. Let's call it "partners in spirit." We are both working to get better information to more people about the real estate market. And there's no reason that any of Zillow's API users couldn't also leverage ours for complementary information. (in case you're interested, anyone can drop our real-time price charts on your site. More details on our API forthcoming.)

Have you checked out HomeThinking.com yet?

If you're a REALTOR you should. Homethinking could be a great marketing channel for you. The company has a ranking technology to help consumers find great agents in their local market. Agents are ranked
through a combination of customer feedback about the job they did,
their home sales history, and their current property listings.

If you're in the home buying or selling market and don't yet have an agent, you definitely should. Simply search for the town you're interested in and up pop the agents. You can easily see what they've sold and any customer reviews. Very useful stuff.

Homethinking is a great Web 2.0 version of lead the lead generation business that HomeGain, Housevalues, and others pioneered. For agents, you don't pay a dime until the lead contacts you. These leads will be a lot hotter than those that come in via most lead gen channels. These are the folks that want to make contact. In my opinion, this opt-in lead generation model is infinitely better than the old way. It means a lot fewer leads, but a better connection for everyone involved. I applaud Niki Scevak and his team at Homethinking for the great pioneering work.

OK- so why the glowing review? Well, as of today, they're a partner site for us. (And all our partners are rock stars, of course.) We're supplying real-time price charts on all their Northern California map search pages. Homethinking users now get better information than they can get anywhere else. Cool stuff. Check it out.

With my posts about San Jose median home prices for our Inkling market, I've been trying to uncover a different interesting tidbit about the San Jose real estate market each week. This week is a fun one: Flipping. Buy-low and quickly sell high.

First things first: This week the median price in San Jose inched down again to $748,000. If you look at the 90-day rolling average of home prices in San Jose (the chart is always at the right side of this blog page) you'll see a clear crest, although prices are not falling through the floor. Inventory is stable the last few months.

But that brings us to today's market tidbit. We've introduced, for all our researched markets, three new stats.

• Percent of homes with price reductions
• Percent of homes relisted to reset the property's Days On Market (first touched on in this post)
• percent of homes being flipped.

Cool, huh? This last one is fun. (I need to get out more, I know.) We're defining a "flip" as a property coming back on the market within 90-days at a higher price. You can argue this definition of course, because some flippers lose money. But in our stats, those properties will get captured as price reductions.

So how are these three indicators of market activity looking in San Jose this week?

• 42% of homes on the market in San Jose have had their price decreased
• 21% have been relisted merely to reset the Days On Market
• 4% are currently being flipped.

In our paid research, we can actually break out how the properties at the high end of the market are faring with reductions and flips vs. those at the low end. Some of our investor/developer clients really dig this insight. Currently 4% of properties on the market right now in San Jose were bought earlier in the year at a lower cost. So these are developer spec remodels, basically. Given the current trend of price reductions, I'm going to assume that the price increases are a function of improved property, not just time. I see this as a good trend. Massive home improvement of the past decade is an often overlooked factor contributing to rising prices. So often we want attribute price appreciation to the Housing Bubble, we forget that properties change.

I'm actually a huge fan of remodeling for real estate investment in Silicon
Valley. When you can get $400-$800/square foot, why not add a space at
$250 per? (Median price per square foot in San Jose is $476 this week, in case
you're wondering). So even in a declining market, we should have some
amount of flipping happening in Silicon Valley. Although a pure flip
would be one without any improvements in the meantime, I suppose.

Links:

Inkling Markets

San Jose research

Update: with the benefit of a few hours sleep and a morning latte, I realize that the passage below looks a little harsh, personally, on Glenn. I want to caution in advance that I don't at all mean to imply an insult to Glenn. I used the quote from Gitomer a bit ham-handedly as a emphasis on the marketing message, not as a personal attack.

The New York Times jumped on the real-estate-commissions bandwagon on Sunday with this piece that makes Glenn Kelman at

But the real story, unfortunately missed, is one the Robbie powers into at Rain City this week. There is massive, still untapped, opportunity for technology to change the real estate game. For new agents and firms to emerge as next generation winners. So many problems to be solved. Price is only one, not-so-interesting axis. The real story is in the consumer experience, and how technology innovations vastly improve it. The ever eloquent Marlow points out in Robbie's comments "...real estate sales is still a cult
of personality. It’s still about who you know..." The agent's personality is the foundation of the consumer experience. Technology is the extender of the cult.

To Glenn I say, "Good for you. Nice press. I'm sure your site got a huge bump in traffic this week. But you blew it." Why isn't the headline "People Love Buying Homes with Redfin"? and where are the quotes that tell us "people are so happy working with us that the discount is just gravy." The fact is that Redfin has really compelling tools for real estate buyers. But no where in the article does it mention what a great site it is. Just Glenn vs. the REALTORS. ugh. That's a death spiral, my friend, and you don't have to be in it.

Sales guru Jeffery Gitomer puts it this way, "if you have to compete on price, You Suck!"

We all invoke financial services as the analog for real estate. What isn't commonly noted is that as technology swept through the financial services biz, two things happened: prices went down (e-trade et al) and prices went up (hedge funds). Why did prices go up? The same reason they always do. When you provide more value to a customer, you can (and should) charge more. I for one am looking for the real estate agents/brokers/sites that blow away their clients so completely with service, that they're happy to pay more than 6%. Those are the innovators to watch.

Full article analysis, with usual aplomb, by Greg at Bloodhound Blog:here and here and particularly here.