October 2006 Archives

Notes on Housing Stabilization

Barry Ritholtz:

Barron's Alan Abelson cites research by Merrill Lynch's David Rosenberg regarding the recent "stabilization" in Housing. It turns out that the only thing which is stabilizing is inventory -- but at extremely high levels.

To get inventory numbers down to a balance between supply and demand requires a 10% drop in home prices (and hence, more sales), and a 20-25% drop in new Home Starts.

A Closer Look at New Home Sales Data

Barry Ritholtz:

Yesterday's increase in New Home Sales caught some economists by surprise. I look at those sorts of numbers suspiciously.

Any time I want some insight into any particular datapoint, I find it instructive to go to the actual government source's website, and simply click around. If you do this with a skeptical eye, you may learn some really interesting facts.

That's what I did with the New Home Sales yesterday, simply looking at the release and trying to figure out what they were really saying thru the bureaucratic jargon and legalese. You don't need to be a forensic accountant (but it couldn't hurt).

Here's what I found:

Complaint filed with FTC over Zillow Service

John Cook:

Zillow.com has landed in the hot seat over claims that its home valuation tool is inaccurate.

The National Community Reinvestment Coalition, a Washington, D.C.-based nonprofit that promotes equal access to credit and capital for underserved communities, has filed a 12-page complaint (PDF) against Zillow with the Federal Trade Commission.

It says that Zillow's valuation "mechanism is highly inaccurate and misleading to consumers, including the general public, as well as to real estate and financial service providers." The NCRC also notes -- citing its own audit -- that Zillow is off the mark with its home value estimates more than two-thirds of the time.

"Zillow is placing the American dream of homeownership at risk for countless working families," says John Taylor, president and chief executive of the NCRC President in a prepared statement (PDF). "For a company that represents to consumers that they are the 'Kelley Blue Book of Homes,' this is a very dangerous situation. We call upon the FTC to intervene and ensure that Americans receive accurate appraisals and valuation information to protect the single most important investment of their lives: their home."

Seattle-based Zillow, which is backed with $57 million in venture capital, calls the allegations "groundless."

Real estate keeps boomers busy, study finds

Kenneth Harney:

Rename them the real estate boomer generation: A comprehensive new demographic study reveals that the 78 million Americans born in 1946-1964 have a passion for owning real estate unlike any other group in the nation's history.

Consider these findings:

• Ninety-six percent of all boomers believe that owning a home is a very smart financial investment, and nearly four out of five of them now own homes. One in four boomers owns other real estate besides a primary home -- including one or more vacation or seasonal retreats, acreage or income-earning property.

• The value of boomers' primary homes varies sharply by geographic region. Overall, the median market value of their homes nationwide is $181,700. But in the Midwest the median is $143,400, in the South it's $147,800, in the Northeast it's $215,000, and in the West it's $359,100. One of every 14 boomer households in the Western states owns a home worth $1 million or more.

Why Fed Might Keep Rates on Hold

Greg Ip:

Investors looking for a road map to the Federal Reserve's next moves on interest rates often look to 1995.

At the time, the Fed had raised interest rates steadily after a long period of unusually low rates. With the U.S. economy slowing, it paused for five months and then started cutting rates.

Many investors have been looking for that cycle to repeat itself and expect the Fed, which last raised interest rates in June, to begin cutting rates at some point in the next few months.

This year differs from 1995 in ways that suggest the Fed could stay on hold longer. One is that interest rates are lower now than back then. Another is that Fed officials' tolerance for inflation is quite different today.

U.S. Home Prices May Fall But Drops Will be Mild

Brian Blackstone:

U.S. housing prices may decline "a little" within the next year, but any such drop is likely to be mild and inconsistent with a bursting housing bubble, according to a paper written by a Federal Reserve economist.

Based on an analysis of housing futures and options and derivatives of housing-related company shares, "market participants expect home prices to decelerate sharply or actually decline a little within the next year," wrote J. Benson Durham, an economist with the Fed's monetary affairs division. However, the anticipated drop in prices "is mild compared to some estimates of the purported overvaluation of the housing market," he added. The paper, dated September, was posted on the Fed's Web site Thursday.

The Big Business of Second Life

PaidContent:

Second Life operator Linden Labs is doing very nicely, thank you very much, earning most of its revenues from land rentals: rates are $20 per acre and $195 per month. Land mass is growing at 8 percent a month and currently stands at 60,000 acres, and brands account for five percent of real estate sales. Linden Labs doesn’t release revenues figures but Second Life’s parallel economy is estimated to be worth around $500,000 each day and to be growing by 15 percent monthly. A Congressional committee is investigating whether virtual assets and incomes should be taxed.

Title Insurers Paid Thousands for Lavish Gifts for Referrals

Joseph Treaster:

The insurance companies that sell coverage to protect against problems with land titles on homes and other property are coming under new regulatory scrutiny.

In a report issued yesterday, Washington state regulators said that title insurance companies there flouted laws by spending thousands of dollars on pro basketball tickets, shopping trips, cocktail parties, boat trips and golf tournaments, in exchange for customer referrals.

The recipients of the lavish gifts, the regulators said, were bankers, builders and representatives of real estate companies. The insurers, who say that the laws governing such referrals are unclear, will not be fined.

“The real shocker was the scope and extent of the abuse,” Mike Kreidler, the insurance commissioner in Washington, said in a statement. “We sure didn’t expect to find that all the major players in the greater Seattle title insurance market were routinely breaking state laws that limit and restrict the use of incentives and giveaways to steer business.” The agency’s report was released after an 18-month investigation.

Washington Insurance Commissioner Mike Kreiderl's news release & report

Vikas Bajaj:

The Federal Trade Commission said yesterday that five regional real estate listing services had agreed to treat listings from discount brokers no differently than those from traditional agents.

The commission also said that it would pursue administrative cases against two Detroit multiple listing services. It says the two services either do not allow discount brokers’ listings or refuse to send them to other real estate Web sites.

The announcement suggests that regulators are making headway in their campaign to deal with practices in the real estate industry that they say have reduced competition and supported high sales commissions.

More than a year ago, the Justice Department sued the National Association of Realtors, the large trade group for real estate agents, charging violations of antitrust rules. That case is still pending.

More from the FTC.

Ex-Homestore CEO Sentenced

Alex Veiga:

The founder and former chief executive of online real estate listings company Homestore Inc. was sentenced Thursday to a 15-year prison term and ordered to pay a $5 million fine for his part in a scheme to defraud investors.

Stuart Wolff, 43, was convicted in June on charges of insider trading, lying to company accountants and federal regulators, and conspiracy in a scheme to inflate online ad revenues at the Westlake Village-based company.

U.S. District Judge Percy Anderson scheduled a hearing for Nov. 13 to determine whether Wolff will have to pay restitution and if he will be able to remain free on bond pending an expected appeal.

Homestore shareholders lost more than $100 million when the company's stock price fell in 2001 on news of the federal investigation into the company's irregular accounting practices.

Mark Nadel:

While real estate brokers have long set their fee as a straight percentage of a home’s sale price, this formula is an anomaly and a primary reason why such fees may be inflated by more than $30 billion annually. Although competitive pressures ordinarily produce a fee structure reflecting costs, real estate broker commissions are strangely unrelated to either the quantity or quality of the service rendered or even to the value provided. Rather, this fee has been based solely on the price of the home. (It is as if tax preparers set their fee as a flat percentage of a client’s gross income, irrespective of how difficult the return was to prepare or how much their efforts saved the taxpayer). Oddly, not only is there no evidence that it is any more costly to sell higher-priced homes than median-priced properties, but it is possible that the opposite may be true! Furthermore, the straight percentage fee formula creates little incentive for real estate agents to provide home buyers or sellers with additional value.

The article analyzes five elements of the traditional residential real estate broker rate structure, the most important of which are: 1) setting fees as a percentage-of-sale-price, 2) letting the seller’s broker set the fee received by the buyer’s broker, and 3) refusing to unbundle the price of a full package of services. After explaining the conditions under which such rate elements would be justified, this article finds that those conditions do not generally exist in the real estate brokerage market. Moreover, it identifies more than a half dozen harms that the rate elements cause to home buyers and sellers. For example, buyers are often not alerted to attractive homes because the rate structure leads traditional agents to intentionally avoid showing them. Meanwhile, many buyers do not even consider negotiating the fee paid to their broker because the rate structure causes them to believe their brokers’ services cost them nothing.

After this criticism, the article suggests that consumers would benefit most from a fee-for-service approach – combining flat fees, hourly fees, and bonuses, including percentages of extra value created – and it identifies currently available examples of some of these options. After reviewing eight reasons why incumbents are able to protect the current structure, the article suggests six new disclosures that might undermine the industry’s protectionist practices.

Real Estate Sales Data / Press

Barry Ritholtz:

Yesterday's Housing data is producing some pretty ugly headlines today; If the market chose to ignore the data, let me remind you that this is the last week of the quarter, so anything can (and will) happen.

Here's how its being played in the WSJ:

"Yesterday's report also confirmed home prices are coming under pressure. The median sales price of an existing home was $225,000 in August, down 1.7% from a year earlier. That was the first year-to-year price decline since 1995 and the second sharpest in the nearly 40 years the data have been collected.

Prices fell faster for condominiums than for single-family homes. In August, the national median price of a single-family home fell 1.7% from a year ago to $225,700. The median price of an existing condominium fell 2.4% from a year earlier to $223,200. . .

Falling prices have a flip side. If their homes are worth less, consumers may feel less wealthy and therefore spend less on goods and services, a worrisome trend for the broader economy. "We have to acknowledge that this is a clear risk to the consumer," said Haseeb Ahmed, U.S. economist at J.P. Morgan Chase & Co. In the short term, he said the recent drop in gasoline prices should offset the effect of declining home values."

Realogy Steps out on it's Own

Vikas Bajaj:

The job, which Mr. Smith has effectively held for the last decade, has grown tougher and far less glamorous of late. Realogy — which owns Coldwell Banker, Century 21, ERA, Sotheby’s International Realty and, in the New York area, the Corcoran Group — was spun off from Cendant in late July at the end of the hottest housing boom in decades.

Since then, Realogy’s shares are down about 10 percent. Sales of existing homes nationally have fallen more than 10 percent from last year’s record-setting pace and prices declined nationally in August for the first time in 11 years.

Some analysts say that the company’s decision to buy back nearly 20 percent of its shares may be a prelude to an acquisition by a private equity firm. They note that residential real estate companies have never found a comfortable home on Wall Street, because it is easier to manage the cyclical businesses under private control, especially during downshifts. (A tender offer by the company for its shares and a recovery in housing-related stocks, however, has helped push the company’s shares back up in recent weeks.)

Bajaj's comments regarding going private are interesting. Leon Black's Apollo Investors funded NRT initially and I would not be surprised to see the same thing happen with Realogy.

Yahoo Finance on Realogy.

Real estate downturn hits real estate agents

Rob Kelley:

There wasn't just a boom in real estate over the past decade - there was also a big boom in real estate agents.

Floods of people across the country applied for real estate licenses, attracted by record sales volumes and seemingly non-stop price gains.

During the boom's peak from 2002 to 2004, the National Association of Realtors (NAR) saw memberships soar 26 percent. Today, over 1.2 million Americans call themselves Realtors.

But the exuberance couldn't last forever: the NAR forecasts existing home sales to fall 7.6 percent in 2006. Agents, who work on commission, are already beginning to feel the bite.

'Human Directionals' Twirling for Your Attention

Jennifer Sharpe:

People twirling signs are becoming an increasingly common sight at real estate openings and sandwich shops across the country.

Producer Jennifer Sharpe investigates this flowering of what in the business are known as "human directionals" and some of the truly eccentric people who make a living doing a very odd job.

Privacy Concerns Regarding Real Estate Websites

Benjamin Brayfield:

Consumers might have thought they had refuge on the Web, browsing real estate listings and locating properties without being hassled by agents' sales pitches. They found the Web a quiet place where no one peppered them with questions about their salary, their savings and whether they pay their bills on time. They got to look at photos, take virtual tours, and few sites even demanded as much as their time.

Think again.

The customer service and sales software engineering company Livehelp.com is among providers of software that notify agents when you are on their websites, even if you don't give them any information. It tracks what pages you visit and how much time you spend on a site. The software also allows agents to launch real-time chat windows so they can contact you and "offer help."

In addition to software programs that automatically open pop-up windows and send unsolicited e-mails are others that kick in when a consumer enters his or her e-mail address on a website to view its information

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