Archive for July, 2006
Because I’m too stupid to sleep, I wrote software to parse my MLS feed into customized XML feeds for the real estate aggregators. I have Trulia.com done (because I want to play with their free maps API) and I have what I need to do Propsmart.com. Google Base, too.
What do I need?
If you know of a real estate aggregator, hit me with a comment or an email, if you would. From where I am now, I’m maybe 15 minutes a feed to add new ones. Tower of Babel, but it is what it is. I’d be grateful if you could tell me who I’m missing.
I wrote this earlier today as a response to a comment, but I think it warrants a post of its own.
Here’s the Cliff’s Notes: After a huge run-up in home values, so far the Phoenix-area residential resale real estate market has given back four percent from the peak in December of 2005. We have a surfeit of inventory, but I suspect that many sellers are loosely-motivated. We have a completely normal number of buyers buying a completely normal number of homes in a completely normal number of days on market at a completely normal level of discounting on price. The idiot newspapers cannot stop comparing current conditions to the middle of the boom, but if the current market is compared to 2003, it becomes clear that, except for the surplus inventory, we are in a relatively normal market.
Whatever might happen in the future in the Phoenix real estate market, it is clear that, after more than two years’ worth of predictions of imminent doom, our oft foretold Armageddon has not yet come to pass. These facts are documented here. The blockquoted matter is snipped from the remarks of my interlocutor.
What makes you so certain that the majority of individuals who are re-selling at the moment are “loosely motivated” as you say?
First-hand experience and peering into the MLS. The surge in inventory started about September of 2005, and, from the beginning, I had the strong impression that many of the sellers were owner-occupants looking to cash out at the top of the market. When I show, I see a lot of homes that are not market-ready. A significant number of homes aren’t even available to be shown.
It seems that this housing run-up has featured a lot of speculation from “flippers” who bought as an investment and plan on selling for a profit.
I do not have this impression. Certainly most of the homes I’m showing (and most of those I represent) are owner-occupied. I have investors with homes for sale right now, but none at fire-sale prices. To the contrary, my investors are doing very well.
For what it’s worth, most mainstream media reports on the Phoenix real estate market are factually dubious, at best. A big chunk of my effort in this weblog consists of debunking the real estate pages of the Republic.
Do you want to see the wave in real numbers? Our May Market Basket report documents how completely normal our market is on the buyer’s side. June’s sales: 7209 properties sold in 67 days on average. June 2003: 7409 properties in 67 days on average. Many of the people who have swooped in here are badly behaved (how utterly awful of me to point this out, having seen it all over the place), but, much worse, they’re badly informed.
You acknowledge that there has been an “anomaly” of growth during the past 15 months. However, many homes have nearly doubled in price during the past 15 months to arrive at their current price. If these past 15 months have been anomalous and we are seeing a correction of the market, wouldn’t this correction, be, err, rather severe with some homes losing nearly half their value?
Hide and watch. You’re timing is wrong. The boom was from 06/04 to 09/05, with the peak in values coming (from our numbers) in 12/05. Through 06/06, the homes we track have given back 4% from that peak. Values were up marginally in June for Market Basket homes. Will they go down from here? Possibly. Will they go down much? I doubt it. If you subtract the loosely-motivated sellers — the ones who will stay put if they don’t get their price — the Metropolitan Phoenix resale market may be close to being balanced. Certainly the days on market for the homes that sell argues that it is.
How long will it take for this correction to finish correcting itself?
Ask me after it ends. No one can predict the future, no matter how loudly they they shout, how much they swear or how big a crowd they run in. I have what I consider to be sound reasons for believing the long-run future of the Phoenix real estate market to be bright.
Glen Creno of the Arizona Republic catches sight of The Mole:
That’s especially true these days in metropolitan Phoenix’s post-boom housing market, where nearly everything has reversed since last year’s frenzy. The number of homes for sale on the Arizona Regional Multiple Listing Service increased nearly four times from June 2005 to last month, when it hit a level nearly double what experts consider healthy. Last year, homes sold in about three weeks. Now, it’s about triple that.
Some of the post-boom market figures are closer to historic Valley norms, but many homeowners had their assumptions of what a house is worth and how quickly it should sell recalibrated by the buying craze.
If you can get your mind past the sad fact that the Republic has never heard of a year before last year, it’s actually a fun article about the added value Realtors can bring to their clients.
That sounds like a late-night TV pitch, but it’s actually possible in residential real estate. Housing is distinct from other investment vehicles in important respects. Unlike securities, real estate is a hard asset with an enduring intrinsic value. There are huge tax benefits accruing from owning real property, either as an owner-occupant or an investor. Most significantly, real estate can be leveraged up to 100% of its value.
Yes, you can buy a home with “nothing down.” Through the masquerade of a seller concession, you can even roll the closing costs into the loan, so that you can take possession of a rental property with absolutely no money out of pocket.
Why would you want to do this? Because the purpose of investing your money in real estate is not to own it but to profit from it. Real estate investment books are filled with bad ideas — never buy a cash-flow negative property, buy the cheapest home you can find, buy four-plexes in challenged neighborhoods, pay ahead on your mortgage to increase your equity. These are all terrible ideas because your sole objective should be cash-on-cash return: How much money did you take out of your pocket at the start of the investment, and how much money did you put back into your pocket at the end.
Is a cash-flow positive property a bad thing? No, but a home that is cash-flow negative — if you can afford the negatives out of other sources of income — can be a much better cash-on-cash investment.
Buying cheap is usually a terrible idea. The money from real estate investing comes from appreciation, not rents. Unless you convert the property to a higher and better use, what starts cheap usually stays cheap.
In the same way, buying multi-family properties or other homes in bad neighborhoods is unlikely to be a winning strategy. Your ratio of rents to costs may be better, but your appreciation will almost certainly be worse than buying in a more-avidly-desired neighborhood.
And paying ahead on your mortgage is just dumb no matter where you buy. With a 100% leveraged property, every penny of appreciation is 100% cash-on-cash profit to you. If you have any excess cash, you should be using it to buy more properties.
So what kind of investment property do you want? In the Phoenix area, the best-performing rental homes are newer homes in highly-desired middle-class suburban subdivisions. Unless you put a huge amount down, the properties will surely be cash-flow negative. They will not be cheap — on the order of $200,000 to $250,000 right now. Obviously, we only want to buy single-family housing, because we want for our rental to be surrounded by owner-occupants, and because we want to sell to owner-occupants on the way out. And I don’t even want to think about paying ahead on the mortgage.
There are a lot of houses like this for sale right now. For the most part, the sellers aren’t desperate, but if you’re willing to shop, you can pick up a deal. Alternatively, you can buy a home subject to a lease in place, which solves your first problem as a landlord.
I’m representing a house like this right now — I’m doing another one on Thursday. The seller of the first house bought it in January of 2005 for $136,000. We’re selling it for $200,000, with the seller conceding back three percent for closing costs. His marketing costs plus closing costs on both sides will run to around eight percent, total, so his net on the home will be around $48,000 — after only twenty months in what people who don’t know any better insist is a terrible real estate market.
But we’re not worried about his money, we’re worried about yours. If we buy that house for nothing down, we’ll call your initial outlay $1.00. Your mama always told you can’t get something for nothing, and spreadsheets don’t like division by zero. We’ll pay 7% for the 80% first loan, 10% for the 20% second — your mileage may vary. That’s $15,200 a year in debt service. We’ll pay the real life numbers for taxes, insurance, maintenance and HOA fees: $2,428 a year. We’re going to collect $1,000 a month rent for the life of the investment, even though rents should go up. We’re going to hold vacancy at 10% even though it’s less than that now and is trending downward. In other words, we’re not going to kid ourselves about anything. These are real life numbers with no blue-sky assumptions.
Annual net income is $10,800, allowing for vacancy, while expenses are $17,628. Your negative cash flow before taxes is $6,828 — $569 a month negative cash flow. This is where the investment-book authors freak out, but think of this this way: If you had an IRA or some other paper investment, what would your monthly negative outflow be? Your goal is to own a leveraged asset that will produce the greatest possible cash-on-cash return. A tenant can offset some of your costs, but you will not make nearly as much money, cash-on-cash, on a cash-flow positive rental.
Here’s good news, though: At tax time, more than half that negative goes away in depreciation. If you have chattels in the house like a refrigerator, washer and dryer, those can be depreciated on an accelerated schedule, for even more tax benefits. You’re now down to about $274 a month in negative cash flow. If your spouse glares at you, I’ll be happy to explain why we’re doing this — as many times as necessary.
For the sake of this discussion, I’ve assumed a fairly soft long term rate of appreciation — five percent, where the Phoenix area has historically averaged six percent. The people who are convinced that the sky fell yesterday will not be moved, but the rate of appreciation matters a great deal in determining when we’re going to sell this house.
When would that be? When we get to the back side of the depreciation schedule. We can only depreciate 80% of the original purchase price, so, as the value of the home escalates, we lose some of the tax benefit of the asset: It’s worth $300,000, which should be worth $240,000 in depreciation, but, because we bought the home for $200,000, we’re only able to take $160,000 in depreciation. The point at which it becomes more profitable to sell and reinvest than to hold is bright-line determinable, and we should sell when we get to that point.
Let’s call it eight years. The property will be worth almost $300,000, and we’re going to have to pay taxes plus marketing costs of about six percent on the way out.
Net cash to the seller? $26,802 — after everything, including all the negative cash flow. How much did you put in? Oh, that’s right, a buck.
I don’t expect people to take me on faith. This entire scenario is documented in this spreadsheet. There is a lot more about investement strategy on our investments page. I have investors who have made hundreds of thousands of dollars in highly-leveraged real estate investments. A few are on track to become millionaires by investing other people’s money. And while no one can promise future appreciation, the residential real estate market in Phoenix — reports of its demise to the contrary — should be robust for a long time to come.
The BubbleBrains swooped in en masse today, having only just now discovered my 21 reasons to bank on the Phoenix real estate market. Courage, confidence and competence are often found together in a solitary soul, but cowardice, cowering and impotence — these are the attributes of character of men who run in packs. I am more than libertarian enough to let them go to hell in their own way, but it seems only common courtesy to point the way. So I sent them hither and thither — blithering Bubbleheads lathered up into a dither. Now that’s just good, clean fun.
Seth on belief, profoundly.
I live in Safari, an exceptionally adept tabbed web browser. In consequence, I can pile up page after page of stuff, each crammed with semi-organized tabs, that I intend to deal with later. Well, fast is the new slow and later is now — at least for the moment.
My initial thought on why each would do this: By opening up Zestimates and Zindices to the masses, Zillow is following in the foot steps of major players like Amazon and Google…build an API, let others innovate off the technology, and then acquire the best of breed. Remember, they recently picked up an extra $25 million to “broaden their product offering”. As far as TruliaMap, it’s likely an attempt to win over agents and brokers who haven’t warmed up to the idea of their website being crawled and scraped. Now, they get a cool widget for their website and Trulia gets access to more listings.
Galen Ward at Rain City Guide has more, including sightings of the Great Kong, the 900 pound gorilla that is Google. And: Will brokers embrace Trulia’s maps?:
In other news, Trulia is now letting you post their listings on your site. They say it’s for agents and brokers, but do agents and brokers really want to steer people away from their web sites? If a visitor clicks on More details… they are whisked to the listing agent’s website. I predict that it will mostly be used by bloggers and non-real estate people.
I guess a significant problem for Zillow at the moment is credibility. Some suggest that Zillow’s “Zestimates” are way off base, but since they’re still in beta, it’s probably slightly premature to be overly critical at this point, notwithstanding the near $60 million they’ve got in seed money.
In fact, for the reason I named, Zillow.com cannot ever produce a reliable evaluation of a house. This is not a matter of refinement, it’s a fundamental defect in the epistemological model they’re working from. If a real estate licensee quoted a guesstimated value on a home that had burned down, this would be constructive negligence at a minimum, and possibly actionable professional malfeasance. Despite it’s complete and irreparable inability to do what it promises to do, Zillow has a number of things going for it:
- We like internet companies, so we forgive them when they’re painfully dumb
- As with public schoolteachers, we’re especially forgiving of people we want to like
- An epistemologically valid home evaluation is either irksome — from a Realtor — or expensive — from an appraiser
- We want to believe what we want to believe regardless of the persistently intrusive facts
The idea of collective-error-masquerading-as-truth is baked into the Web 2.0 cake, so Zillow.com may yet have the last laugh: If enough contracts are based on inherently invalid Zestimates, Zestimation could become all that remains of property evaluation.
What Zillow is gambling on, and I think correctly, is the power of lowered barriers to transactions in the real estate markets. More transactions will happen with more information that makes buyers confident they are getting a better deal than the seller — the speculative and necessary (“we need a bigger place”) aspects of real estate can be accelerated by a few percentage points to create fairly huge increases. The long tail has always existed, especially in commodity markets. Network technology made it accessible for many more buyers and sellers. There is substantial value in connecting people to markets that were obscured by geography and distribution limitations or scarcity of information before.
In this case, most real estate sales are local, but a networked market with comparables easily accessible, like Zillow offers, the number of properties considered will almost always be greater. More choices and more buyers translates into increased average sales, not necessarily higher prices for property but somewhat more frequent sales. Ask a realtor if by increasing the number of transactions they handle in a year by two or five percent isn’t a windfall. In that extra activity, there’s enough profit to make Zillow or its competition a very nice profit if they do not first race to eliminate their margins.
Wow… If you sell beer in bottles and cans, you will sell more beer than you did when beer was only available on draft. The demand for beer is significantly — but not infinitely — elastic. Is the demand for housing sufficiently elastic to justify these claims? This seems very unlikely to me. There is a growing elasticity in the marketplace, but this mostly an artifact of Baby Boomers in the their peak earning years buying second homes, retirement getaways and investment properties. Moreover, there is certainly no dearth of Long Tail information available to home-buyers.
The Real Estate Bloggers cite what they think is an outstanding editorial in USA Today. Mostly it’s a rehash of the complaints raised in June’s rant by the Consumer Federation of America, a Ralph Nader-affiliated anti-business lobby. All of this is served up with The San Francisco Treat in a CNET news.com feature by Declan McCullagh, and all of it would have a great deal more merit if it were not so breathlessly over the top.
Believe it or not, there’s more, but while later might be now, now is by now much later and I’ve got work to do. I leave you with plenty of good stuff to read.
Catherine Reagor of the Arizona Republic actually acknowledges that comparing this year to last year may not be an ideally-informative strategy:
Although the Valley’s housing market is definitely slowing, comparisons to last year’s frenzied sales pace and appreciation gains aren’t a perfect indicator. During 2005, metro Phoenix home prices soared 50 percent and houses were selling within days.
We call this tactic The Mole, in honor of Dr. Evil (who now runs a BubbleBlog from which he hopes to extract milllllllions of dollars). The alleged news is that new-build permits are down from last year. Big surprise. The actual news is that 29,943 have been pulled in the Valley through the end of June, which would have been a record-setting pace were it not for last year. Irresponsible reporting? You bet. Alas, we have no other kind in Phoenix.
SureClose delivers every listing, sale, closing and/or loan file — and every document — online and on CD-ROM at closing. Your staff simply faxes or scans your files & documents to your secure, branded SureClose? web site. Files are then available 24/7 for review and management enterprise-wide.
Not faxing, scanning and uploading with a form, but the rest of it: Every doc on-line in a secure web site available to principals, their vendors and the brokerage, all ready to be dumped to a CD-ROM at the end of the transaction. Bullet-proof access to all documents for our clients and bullet-proof uploading and maintenance for the Realtor, all through the power of PHP.
Can’t beat the price — and the funny part is that our really good programmer is off having a teenager’s summer…
…about Trulia.com casting their net of free map-mash-ups all over the place? How about Redfin.com? Unless they have another fish in their pocket, they are now head-to-head competitors with ZipRealty.com, HelpUSell.com, Assist2Sell.com, etc.
Bottom-feeders of the world unite! You have nothing to lose but your investment capital!
Color me grateful, but one benefit of the Trulia/Zillow free APIs for Realtor web sites is that we should see the end of the sleazy practice of making dewy-eyed anonymous-by-preference Google-borne immigrants fill out a form to search the MLS listings.
This crap is straight out of Dan Gooder, but, just as less is more, Gooder is worse. Acolytes of The Church of Seth know better. Interruption marketing (what Trulia and Zillow plan to do) is bad, but hostage-taking is insufferable.
It’s strictly a matter of serendipity that Seth Godin has the same first name as Cain and Abel’s other brother, but here is a Golden Rule more precious than gold itself: If the tables were turned, how would you want to be treated? If you — out of curiosity or because you want to invest in another town or because you want to move your widowed mother into a better neighborhood — visit another Realtor’s web site, do you want to surrender your personal details just to surf the local MLS? If not, then why would you do this to your own potential clients?
Luckily for the rest of us, we probably won’t have to wait for the Gooderites to discover a better morality. The TruZillow sites will be free — as Stewart Brand always wanted them to be — and the sites that continue to cower behind Berlin Wall-like contact-info forms will be neglected.
And — it just occurs to me — the Truliactive and Zillowized sites will probably be linked from Trulia.com and Zillow.com, which has SEO implications. And now I’m interested…
Buyers scurry, afraid of buying at the height of the market.
So why aren’t builders running scared? Because the underlying principles of a good market remain sound in the midst of the market fears. While nationally, the industry has cooled to “more sustainable levels,” according to the National Association of Home Builders, “The Bureau of Labor Statistics reports strong job gains in many of the fastest-growing states, with 37 states exceeding their pre-recession peak levels of employment in 2005.”
The group recently released a mid-year housing report on its real estate trends website, HousingEconomics.com. A cooling of the market this year will still result in the third highest level of housing starts in the last few years.
That’s why you keep seeing building projects going up. Definitely, not as many houses are being constructed in 2006 as last year, but the NAHB report points to several positive market growth indicators in various regions across the country.
Job growth is continuing upward. Unemployment is dropping. Businesses continue to expand and economists across the country continue to estimate that the need for more housing will stretch beyond the current inventory surplus.
The National Association of Realtors still is holding to 2006 being another very strong year — the third highest on record. NAHB members are still bull on the housing market. What we’re seeing in ’06, it seems, is a transition year. For buyers who have no choice but to buy because of social or lifestyle reasons (birth of new baby, marriage, retirement, in-laws moving in, new job, relocation, etc.) they will buy now and unwittingly pick up a great deal.
For buyers who are too skittish about the market, they will miss a financial boosting opportunity. In markets where it has normalized (D.C., Miami, Chicago, Phoenix) buyers who buy based on rock-hard solid economic evidence, will be excited in a few years that they bought a house low and now stand to earn a handsome profit a few years later.
A devastating argument. Read the whole thing.
…but don’t let’s lose sight of the important things: The Main Event of The World Series of Poker starts today.