Contradiction in the Housing Market is Keeping Prices Low
There is a gaping contradiction in housing market data, such that one person could read two news reports and come to diametrically opposed conclusions. According to one source, “The main frustration in the market right now is a lack of inventory…Buying a home is ultra-competitive. ‘There are frustrated buyers who have written 10 offers on 10 different homes to no avail. There are listing agents working with the banks who have to deal with five to 30 offers on each of their properties.’ ” Low inventory should correspond with a robust housing market. According to a recent Mortgage Calculator post on housing prices, however, this is not the case: “Last week also witnessed the monthly release of the oft-cited Case Shiller index, which registered a decline of ‘only’ 18.1%, compared to a year earlier.”
The only way to reconcile price declines with low inventory is to understand that the market is being manipulated. According to a recent report by Glen Kelman, CEO of Redfin, “The market has become distorted so much that it is ridiculous to pretend that it is a free market. It is instead an oligarchy, controlled by the government and the banks to limit price drops, which in turn frustrates consumers and limits price recoveries.” In other words, despite the “weak” market, banks are working to reduce competition, such that you would think we were in the middle of another bubble. “Banks selling a home don’t trust one another’s credit. They reject appraisals for a price that a buyer is willing to pay. They’re slow to put homes on the market, but aggressive about pricing other sellers out of the market, even as buyers are frantic to strike before the tax credit expires.”
According to Kelman, there are a few key ways in which the market is currently being distorted. First of all, banks are deliberately hoarding inventory, so as to avoid recognizing losses on foreclosed properties for as long as possible. In addition, potential sellers are also neglecting to put their homes on their market, knowing full well that they can’t compete with the banks on price. As a result, “Banks have effectively become the sole supplier of homes for sale in many distressed areas…Supply and demand have been slow to find a new balance because there is an enormous backlog of homes that could be sold, and most are not being put on the market.”
Secondly, real estate agents may also be hoarding listings, in order to ‘double-dip’ on the sale. “Several eagle-eyed consumers recently noticed that listing agents are accepting an offer on a listing literally one minute after it debuts on the the market.” The likely explanation for this phenomenon is that selling agents are waiting until a buyer they represent comes along, before they are willing to close the deal. In this way, they can collect a commission on both ends of the transaction.
Third, “Banks refuse to accept what the market tells them is a fair price for a home.” The concern is that homes will appraise for a lower value down the road, leaving the bank to eat the difference. “Rather than risking that a loan will fail because of the appraisal, the banks take a lower offer from an all-cash buyer. What this means is that the market establishes a price for the property and the banks on both sides of the deal — the one selling the property, and the other lending money to a would-be buyer — refuse to believe it.”
According to Redkin, the solution to this problem is for the government to “require that banks receiving federal assistance put homes up for sale within nine months of taking ownership or account for the current value of the homes on their balance sheets, or have the government extend this year’s $8,000 first-time home buyer tax credit to allow time for more listings to hit the market.” In addition, conflicts of interest with listing agents must be eliminated, in order to allow competitive bidding. Ultimately, these inconsistencies will probably iron themselves out, once the market recovers.