Second Derivative Suggests Imminent Price Stabilization

Second Derivative Suggests Imminent Price Stabilization

At the risk of getting a little too technical and going off the quant deep end, I wanted to explore a different view of the Case-Shiller home price data that I haven’t shared on here before.

Typically when we look at the Case-Shiller home price data on here, we look at three things: The raw value (like change from peak, etc.), the year-over-year change, and to a lesser extent, the month-over-month change. Something we talk about occasionally but have never actually charted is the rate of change in the year-over-year change—the second derivative.

Here’s what that chart looks like:

Seattle Case-Shiller HPI 1st & 2nd Derivatives

Personally, I find this chart to be quite fascinating. I’ve annotated a few interesting dates of note:

  • March 2006: 2nd derivative passes into negative territory and stays there.
  • July 2007: Home prices peak (16 months after the 2nd derivative went negative).
  • January 2008: 1st derivative passes into negative territory (6 months after home prices peak).
  • August 2011: 2nd derivative passes into positive territory.

If price movement were to follow roughly the same trend that we saw on the way down, this data would imply a bottom in home prices this coming December.

I think it’s also worth noting that even before the tax credit was passed, the 2nd derivative had bottomed and had been heading back up for about a year. I find it quite interesting to see just how much the tax credit distorted the steady recovery that was already underway, shooting the 2nd derivative through the roof, only to have it collapse again, overshooting the trend that had been established pre-credit.

Before the bust, the 2nd derivative peaked in August 2005, nearly a full two years before home prices peaked. The bottom in the 2nd derivative came in December 2008 (there’s a spike down that’s hard to see unless you enlarge the image), but as I’ve mentioned before, the tax credit basically put real recovery on hold for its sixteen-month reign, so if we add two years plus sixteen months to the bottom in the 2nd derivative, we come up with a bottom for home prices right around the corner in April 2012.

Obviously this is not a rigorous, in-depth, multi-factor economic analysis. I’m not making any solid predictions based on this data, but I do think that the trends are pretty clearly heading in a direction that suggests price stabilization soon.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

61 comments:

  1. 1
    ray pepper says:

    “but I do think that the trends are pretty clearly heading in a direction that suggests price stabilization soon.”

    Apparently so does Bill Ackman. http://video.cnbc.com/gallery/?video=3000076571

    “go out and buy as many residential homes as you can and rent them at 9-11% yields as evidenced in many markets”

    But, then again buying homes at 80% from highs and when cost to build is 5-8x current values as evidenced in Az it doesn’t take a genius to think it maybe time to get toes wet..

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  2. 2
    Don says:

    So if I gather this correctly (bear with me) the second derivative is to yoy change as acceleration is to velocity. So what we are looking at here is the speed of change in those 3 categories and what it has managed to correlate to in the past 20 years.

    Things make better sense to me as physics. Now you just need to measure momentum (price * velocity) and moment of inertia (second derivative * house price) or how fast someone can expect the previous buyer to flip the house.

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  3. 3
    Scotsman says:

    Hot dang! I bought at the bottom- or close enough.

    That is until the bottom falls out of life as we know it. The good thing about home ownership is you can build a great bunker and not have to worry about being forced to move. ;-)

    I had been waiting for Obama to give me a free home, and those days may still come but probably not in a neighborhood I’d want to live in.

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  4. 4
    Blurtman says:

    RE: Scotsman @ 3 – While you are holed up in the bunker, squatters may be occupying the family room when TSHTF. Hope you have enough Tasty Cakes to go around.

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  5. 5
    Dave0 says:

    This is interesting. The value in my opinion of looking at the second derivative is it helps make inflection points clear. An inflection point occurs when the second derivative is zero, and the 1st derivative peaks or bottoms out. In the graph above, the 2nd derivative hitting zero is a bit delayed due to it being a 6-month average of past data. The true inflection points are when the 1st derivative is peaking or bottoming out. So, inflection points in the graph above appear to be:

    December 2005: Home prices switched from increasing at an increasing rate, to increasing at a decreasing rate. In other words, price appreciation began to slow.

    April 2009: Home prices switched from decreasing at an increasing rate, to decreasing at a decreasing rate. The Homebuyer Tax Credit caused price depreciation to slow.

    May 2010: Home prices switched from decreasing at a decreasing rate, to decreasing at an increasing rate. The Homebuyer Tax Credit expiration caused price depreciation to increase.

    March 2011: Home prices switched from decreasing at an increasing rate, to decreasing at a decreasing rate. The first sign that the rate of home price depreciation is beginning to slow, without influence of The Homebuyer Tax Credit.

    The next major point will be either the 1st derivative hitting zero (i.e. home prices start to increase YoY), or another inflection point happens, causing prices to decline further. It’s hard to say which one will happen, but right now the trend is point towards the former.

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  6. 6
    Pegasus says:

    Lots of noise…can we do a day by day? ;-) I doubt this year will be much different than a spring to summer bump and then the dump.

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  7. 7

    Whoa, Whoa, Whoa….Back Up to 2010 Tim

    The data from mid 2010 shows a big surge on your chart, yet it was meaningless by year’s end, it plummetted down as fast as it plummetted up. Sure there was a tax rebate impact in mid 2010, but at Seattle area prices, an $8K tax credit isn’t much to scream about or even factor in mathematically, except psychologically speaking…..

    Your chart shows about half the increase in the positive at 2011 year’s end [in comparison to 2010], yet has flattened out the last few monts with 1st derivitive data still negative. Don’t count your chickens before they hatch IMO.

    Similar 2010 RE pundit stabilization predictions that were wrong in mid 2010:

    http://www.thachrealestategroup.com/home-prices-stabilize-quarterseattle-real-estateseattle-homesrealtorwwwthachrealestategroupcom/

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  8. 8
    The Tim says:

    By softwarengineer @ 7:

    The data from mid 2010 shows a big surge on your chart, yet it was meaningless by year’s end, it plummetted down as fast as it plummetted up. Sure there was a tax rebate impact in mid 2010, but at Seattle area prices, an $8K tax credit isn’t much to scream about or even factor in mathematically, except psychologically speaking…..

    When it was passed, I didn’t think the tax credit would have much of an effect here for that same reason. $8k is a drop in the bucket compared to the price of a Seattle-area home, but it’s a pretty huge boost to most people’s day-to-day finances, and was clearly a massive driver of sales when it was in place.

    The data obviously shows that the psychological impact was huge. I addressed the big surge and fall during the tax credit right in the post:

    I find it quite interesting to see just how much the tax credit distorted the steady recovery that was already underway, shooting the 2nd derivative through the roof, only to have it collapse again, overshooting the trend that had been established pre-credit.

    The 2nd derivative moved above zero late last year without the help of an idiotic, costly pointless tax credit. I think that’s noteworthy and possibly meaningful.

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  9. 9
    Pegasus says:

    RE: The Tim @ 8 – Don’t forget that 8K could be leveraged at probably four times more or even more than that with a less than 20 percent down mortgage as long as they could handle the larger monthly payment.

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  10. 10

    RE: Pegasus @ 9 – IMHO the big thing about the 8k was that it allowed people to replenish their savings needed for the FHA downpayment, and/or pay for the expenses associated with moving into a new place (including furniture). That’s what made it attractive.

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  11. 11
    ARDELL says:

    The $8k was important because lots of the homes needed $8k of work and were “as-is” sales. The seller didn’t have money from equity to make the needed repairs or the seller was a bank or a short seller with a $0 or $2k cap on repairs. The $8k allowed people to buy a house that needed a roof, not by closing, but within 1 to 3 years. The $8k allowed people to buy a house that needed new carpet.

    In the hot market with plenty of equity, the sellers put on a new roof and put in new carpet before it went on market. During the $8k credit period the buyers had to foot that bill, and the $8k afforded them that opportunity. More “ugly” houses could sell to owner occupants vs investors, with an $8k repair or beautification budget in place, and available to the buyer, shortly after closing.

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  12. 12
    Scotsman says:

    Ah, but will this turn of events hold? Not to drone on, but the U.S. has once again set a record deficit and now borrows over half- $.54- of every dollar it spends.

    Turbo Timmy has added NO2, has the pedal on the floor, and is headed for the wall! Go Timmy, Go!

    http://www.zerohedge.com/news/us-budget-deficit-hits-all-time-high-february

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  13. 13
    David Losh says:

    RE: The Tim @ 8

    What I see is the spike in prices of 1998, which receded then spiked again. That second spike could have looked normal until 2005. Then we had three years of mania which ended in a crash.

    It wasn’t just housing though, it was a global economic crash. That’s something we have a separate thread for, because for some reason it seems not to be relevant to this discussion, but it is.

    Look at the chart. Back then, five years ago many people had huge equity positions in the family home. Today that equity is diminishing while stock portfolios continue to climb. Has the stock market doubled since the 2008 crash?

    Just to be clear, when you look at the chart what you see is unprecedented volatility in a market place, Real Estate, that has a tradition of being stable. The stability if further eroded by the number of housing units available, and that are being built today. Even more incredible are the number of housing units held off market by the foreclosure process. When you put it all together we have a housing glut.

    I would like to see some compelling evidence that shows that we could ever hit a bottom in the housing market given our new found ability to create housing density.

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  14. 14
    Blurtman says:

    RE: Scotsman @ 12 – Just digital entries, here and there, nothing more. The Fed can buy US Treasuries. As long as those credited with receiving the digital entries from the USG are cool, all is cool. There is no there there.

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  15. 15
    David Losh says:

    RE: David Losh @ 13

    That should have read “The stability is further eroded.”

    The way I see the time line is that in 1998 tech money began moving into the housing market. Stocks were doing well, and new millionaires were the talk of the internet. When there was an investigation into Microsoft, and monopoly ruling, more of the wealth looked at the stability of the housing market.

    Then some bean counter some place figured out that mortgages, and mortgage backed securities were easier to sell as investments.

    Boom we had 9/11, and panic drove people towards gold, and cash. To calm the masses the government began a home ownership drive. Mortgages, and housing construction fed off of each other to give us the feeling of wealth, and prosperity. That is when you see a spike like we have never seen before.

    It’s not the crash, or recovery that is the story, it’s the spike. We’ve seen crashes before in commodities, and housing, but I don’t think we have had a housing market bubble before.

    Coming back to a base line doesn’t mean anything. You can’t put the genie back in the bottle. We have had wild volitility in a market that is supposed to turn like a battle ship, not an F-16. It shakes the very premise of holding that asset.

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  16. 16
    Hugh Dominic says:

    The Tim, this analysis strikes me as spurious. Second derivatives are not de facto predictive.

    My company does analytics and you can hire us to try to build a predictive model using your data if you like.

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  17. 17
    Hugh Dominic says:

    By David Losh @ 15:

    RE: David Losh @ 13

    That should have read “The stability is further eroded.”

    The way I see the time line is that in 1998 tech money began moving into the housing market. Stocks were doing well, and new millionaires were the talk of the internet. When there was an investigation into Microsoft, and monopoly ruling, more of the wealth looked at the stability of the housing market.

    Then some bean counter some place figured out that mortgages, and mortgage backed securities were easier to sell as investments.

    Boom we had 9/11, and panic drove people towards gold, and cash. To calm the masses the government began a home ownership drive. Mortgages, and housing construction fed off of each other to give us the feeling of wealth, and prosperity. That is when you see a spike like we have never seen before.

    It’s not the crash, or recovery that is the story, it’s the spike. We’ve seen crashes before in commodities, and housing, but I don’t think we have had a housing market bubble before.

    Coming back to a base line doesn’t mean anything. You can’t put the genie back in the bottle. We have had wild volitility in a market that is supposed to turn like a battle ship, not an F-16. It shakes the very premise of holding that asset.

    Or better yet, you can hire Losh to come up with nonsensical explanations of your data like this.

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  18. 18
    David Losh says:

    RE: Hugh Dominic @ 16

    Really, how can you possibly get something predictive out of unprecedented data?

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  19. 19
    ray pepper says:

    Hugh, you don’t like Daves posts on this thread? I find them very comical..

    You can see the wheels are turning and thats all it takes to be a Seattle Bubble contributor………..

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  20. 20
    Ryan Littlefield says:

    RE: softwarengineer @ 7 – The tax credit does not get its fair shake on this blog, but its direct effect is clear from the 2nd derivative. (Talking about it soaring and plummeting is misleading – it shows that it had a direct effect to stabilize the prices – which is easily seen from inspecting the prices). The tax credit had multiple positive effects: 1) it served as grease between the cogs in the machine that helps the market find a soft landing and a stable point. 2) it directly put money into the hands of individuals, which was important at that time. Of course both these points are arguable and I suspect they will be argued here.

    My evidence for the first point comes from my own experience: My wife and I bought our house during the period with the tax credit. We put 20% down on our house and even though the tax credit amount to only 10% of our down payment, that was enough for us to commit (once we found the right house), instead of deciding to wait 6-12 more months for the price to drop that much “naturally” (and who knows whether the house we wanted would still be for sale). Our purchase allowed the previous owners (who happened to be a developer), to use the money to buy another property. And even better effect of the tax credit comes from our next door neighbors. The developer who owned our house was building a large house on spec behind us. Our neighbors who bought the house also bought the house during the tax credit, HOWEVER it was their second house. They were able to buy that house, because the people that bought their first home got the tax credit. So even though the $8k tax credit is small, since it is targeted to first-time home buyers (which presumably buy “starter” homes), it has a bigger effect, and then it allows the seller (who presumably was able to sell for more) to then buy their next house, and so on. Thus it serves as grease in the wheels.

    As to the second point, if the home-buyer credit was collectively applied to a bank bailout or expended to non-first-time buyers, it would have had less of an effect (see above) and have found its way into the pockets of people who did not need it. By putting it into first-time home buyers hands, all of the money goes into the economy. My wife and I could earmark that money so that we could make the necessary improvements to our house (upgrading the windows to double pane, and upgrading the electric service).

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  21. 21
    David Losh says:

    RE: ray pepper @ 19RE: David Losh @ 15

    What the Heck! Another whitey for some brilliant opinions about the housing market?

    Now that’s comical.

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  22. 22
    David Losh says:

    RE: Ryan Littlefield @ 20

    God bless you, you did help the economy. It cost us some tax dollars, but we can pay that back, over time.

    However, the tax credit did nothing to stabalize the housing market over the long run.

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  23. 23
    Pegasus says:

    RE: Ryan Littlefield @ 20 – The tax credit was a failure that did put money into the hands of some at the expense of the rest of tax paying America. I hold no grudge against you personally for taking advantage of a program that was legal but you don’t have a clue about how bad that program really was. We are paying for it now and will be for a long time. Whether you know it or not you were the rube in the great housing con game. You got to buy an artificially higher priced house that most likely was overpriced by far more than the 8K that you received. Your house is likely worth a lot less now than that 8K. It was not a freebie. It was bought and paid for with borrowed funds that we taxpayers will enjoy paying off for decades. The real beneficiaries were the sellers, who got a much higher price, developers who got to unload inventory that they were stuck with, banks that got out from under some bad mortgages and lets not forget our real estate industry friends who collected all of those commissions while the first time home buyer was led to the slaughter. Attempting to artificially support and inflate house prices in the midst of an economic collapse was insane. We are still trying to do it with other programs that the rest of us are paying for. It is not working while housing prices plummet but it sure is costing us a bundle. Enjoy!

    http://www.demiseoftheusa.com/wp-content/uploads/2011/03/Blindly-Walking-into-Hell_1.gif

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  24. 24
    ARDELL says:

    RE: ARDELL @ 11

    I guess some people are angry that their tax dollars paid for someone’s new carpet or new roof.

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  25. 25
    pfft says:

    By Scotsman @ 12:

    Ah, but will this turn of events hold? Not to drone on, but the U.S. has once again set a record deficit and now borrows over half- $.54- of every dollar it spends.

    Turbo Timmy has added NO2, has the pedal on the floor, and is headed for the wall! Go Timmy, Go!

    http://www.zerohedge.com/news/us-budget-deficit-hits-all-time-high-february

    the point though is why we have such a big deficit. it’s because government tax revenue collapsed.

    interest rates are low low low. the market has no problem with deficits. greece tried cutting the deficit. how did that work out?

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  26. 26
    pfft says:

    By ARDELL @ 24:

    RE: ARDELL @ 11

    I guess some people are angry that their tax dollars paid for someone’s new carpet or new roof.

    we all have something that the government does that we don’t like.

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  27. 27
    CabCity says:

    Hi,
    Hitting bottom is less of a concern to me. What I am curious about is how long the bottom will last with all the changed scenarios in our economy e.g outsourcing, millions of home under water, reduced salaries etc. Will we ever see any appreciation in housing at all?

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  28. 28
    David Losh says:

    RE: CabCity @ 27

    That is the question.

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  29. 29
    Ryan Littlefield says:

    RE: Pegasus @ 23 – I did not buy my house to make money and we plan to stay in it for a while, so who cares if we sold it today, whether it might lose some money. We bought it because we loved it, because we could afford it, and because we wanted the stability it afforded. In addition, with our dog the rents we were paying were almost just as high as the mortgage payment. So no thank you, we were not rubes.

    And to the comment above yours: whether the housing credit did stabilize the market is moot – no one knows what it would have done with out it. However, when you jump out of an airplane, you’re going to wind up on the ground, I would just rather have a parachute to slow my descent. The way I see the graph above is that house prices had been falling at about 7% YoY for about a year before the credit was implemented. And even after it expired, the prices never fell that fast again. Wherever housing bottoms, we will get there much softer than we would have. And even though getting there quicker would have helped some people A LOT, if would have hurt many more people an even GREATER AMOUNT. The housing credit provided enough negative feedback to the system, and could have even provided more IMO if it would have been extended in time.

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  30. 30
    pfft says:

    By CabCity @ 27:

    Hi,
    Hitting bottom is less of a concern to me. What I am curious about is how long the bottom will last with all the changed scenarios in our economy e.g outsourcing, millions of home under water, reduced salaries etc. Will we ever see any appreciation in housing at all?

    real wages are going up and we are in the midst of onshoring…

    as far as underwater homes go. what is your argument? if homes never appreciated because millions were underwater(meaning prices are down) then how did we ever get out of all the other price downturns? let’s take the reverse argument. if millions had a lot of homes equity would you use that fact to say that home prices will never fall?

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  31. 31
    David Losh says:

    RE: Ryan Littlefield @ 29

    You have debt, and the country has debt, because of the tax credit. That is money that will no longer be in the system.

    Your down payment is gone, and the tax credit you recieved is money you are financing with your mortgage payment. You can love the heck out of your house, but you now have a financial loss, where an investment has traditionally been.

    Millions of people have this loss of equity.

    In turn millions of people have new found wealth in stock portfolios. The stock market has doubled. So if your gains are paying off the house, great, but if you go further out than seven, to fifteen, years before owning the property free, and clear, the banks win.

    Ultimately the tax credit was a bank bail out, that did put dollars into the hands of consumers, but those dollars are financed, like a credit card, with a great interest rate, over 30 years.

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  32. 32
    johnnybigspenda says:

    RE: David Losh @ 31

    Actually the money IS in the system. It went to the seller.

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  33. 33
    David Losh says:

    RE: johnnybigspenda @ 32

    No it didn’t. It paid off the loan the seller had, to generate a new loan.

    The only way the Real Estate market is going to stabalize is if it is closer to cash. That is the theory of the foreclosure process.

    People here don’t like my long winded explanations, but the fact remains we are much further from a cash economy than I can ever remember.

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  34. 34
    jonness says:

    Judging from the unemployment trend, I think an ultra-wide Seattle bottom around next December is a definite possibility (but it’s not my most likely scenario). At the same time, rates could move higher making now a decent time to get your feet wet, if you’ve already held off and saved up a cash hoard. If you haven’t, then by all means take this opportunity to live frugally for a few more years so that you actually have the opportunity to own a home as opposed to renting it from the bank for 30 years and then dying.

    Hey, I learned a new one. You’ve heard of the “best and final offer” in multiple offer situations. Well, I found out about multiple offer situations where the agent simply chooses a buyer without opening it up for bids. It only occurs when the agent is representing both the buyer and the seller, but it’s a quick way for agents to make a hoard of cash by breaking a few rules. It’s great though, because it’s nearly impossible to prove. Why not double your money without having to do any additional work?

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  35. 35
    Pegasus says:

    RE: Ryan Littlefield @ 29 – I have no problem as to why you bought your house but you most likely paid a lot more than the 8K credit in an artificially inflated price. Now the credit is gone away and your house is likely worth less than when you bought and by more than the 8K. You don’t care about what it is worth and what you lost so if you were not a rube, and you know you really are, why not give back the 8K? We can use it.
    The rest of your post is nonsense fabrications trying to justify why you should benefit from someone else’s money and are based on fantasies designed to make one feel justified in taking advantage of someone else. When the tax credit sales ended the sales fell off from a cliff. That showed that those were primarily first time buyers that were enticed into buying at prices that should have been lower by more then 8K. If that makes you feel better in playing a part in that con and enables you to take the money without a thank you to those who paid for it without agreeing to pay for it, so be it.

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  36. 36
    whatsmyname says:

    RE: Pegasus @ 35

    Peggy, Why not give back your Bush tax cut? We can use it.
    And not all of us agreed to it.

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  37. 37

    By jonness @ 34:

    Hey, I learned a new one. You’ve heard of the “best and final offer” in multiple offer situations. Well, I found out about multiple offer situations where the agent simply chooses a buyer without opening it up for bids. It only occurs when the agent is representing both the buyer and the seller, but it’s a quick way for agents to make a hoard of cash by breaking a few rules. It’s great though, because it’s nearly impossible to prove. Why not double your money without having to do any additional work?

    What’s your source, because it sounds completely unbelievable.

    First, “highest and best offer” is typically only seen in REO situations. I’d be surprised that you would find an REO agent even willing to write up an offer for an unrepresented buyer. Too much potential for conflict that might sour their relationship with the client which gives them multiple listings per month. Not really a smart move.

    Second, it’s also a clear licensing violation, a violation of NWMLS rules, and if they’re a Realtor, a violation of ethical rules.

    I’ve seen agents do a lot of stupid things, but that would be really stupid.

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  38. 38
    MichaelB says:

    Seattle Bubble Readers Repent! The Bottom is Imminent! ….and here’s the chorus… “Bottoms love me, Yes I know, Cause a Derivative tells me so!”

    Derivatives…Haven’t they already caused enough problems for us in the USA?

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  39. 39
    Pegasus says:

    RE: whatsmyname @ 36 – When I start manufacturing baloney reasons as to why they were a good thing you can ask. I am in favor of eliminating the cuts and I won’t waste your time trying to rationalize why they were a good thing when we know they were not. You, pfft and Ryan must think the “Cash for Clunkers” program was a good thing, too. After all it benefited a select few, is being paid for by us taxpayers and I am sure Ryan can rationalize that government boondoggle, too.

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  40. 40

    By MichaelB @ 38:

    Derivatives…Haven’t they already caused enough problems for us in the USA?

    Excellent play on words. I tried, but wasn’t able to come up with anything even half that good.

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  41. 41

    RE: Pegasus @ 39 – The thing about both CFC and the 8k tax credit is that you didn’t really get the full amount of the credit. It’s just like how adding more prescription drug coverage for seniors increased certain drug prices, both those programs increased the price of what people were buying at the time. Unlike drugs, they also adversely impacted the selection.

    From a buyer’s perspective the 8k probably made more sense due to liquidity concerns, especially the lower end buyers.

    Finally, there is still a hangover from CFC in that used car prices are apparently still high, although I suspect that’s abating.

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  42. 42
    ARDELL says:

    RE: Kary L. Krismer @ 37

    Notice of Highest and Best was originally used for Corporate Relocation Properties. It is not a means to extract highest price. It is a notice to all parties that they are not the only offer on the table, and that at least one of them is acceptable in its current form.

    We started it because the first agent writing would call and say “do you have any other offers”, being told no. Subsequent agents writing offers may have made that very same call, except they were told yes. The first complained that they would have written their clients’ offer differently had they been aware that there were other offers, as the others did. Consequently it became customary for Corporate Relocation Inventory Homes to send out a notice of final and best to insure a level playing field.

    Notice of Final and Best was started to help the buyers, not the seller. It basically says (or is supposed to say) there will not likely be a counter phase, as we have more than one offer and at least one of them is acceptable without counter.

    As to looking only at the first offer and working it through before moving to the 2nd, it is fairly customary for some builders to do that. Saw it just last week. First in got first right, and it is any seller’s right to proceed in that manner if they choose to do so. It is more common with builders as they have more than one house to sell, and prefer that they both buy different homes. For that reason they usually choose not to pit them one against the other.

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  43. 43

    By ARDELL @ 42:

    Notice of Final and Best was started to help the buyers, not the seller.

    I would probably agree with that, because I don’t think it’s necessarily that good of a way for a seller to deal with multiple offers.

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  44. 44
    jonness says:

    By Kary L. Krismer @ 37:

    What’s your source, because it sounds completely unbelievable.

    Kary, I agree with you completely. My question is, what can a person (legally) do if he finds himself on the losing end of this situation?

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  45. 45
    jonness says:

    By ARDELL @ 42:

    As to looking only at the first offer and working it through before moving to the 2nd, it is fairly customary for some builders to do that. Saw it just last week. First in got first right, and it is any seller’s right to proceed in that manner if they choose to do so. It is more common with builders as they have more than one house to sell, and prefer that they both buy different homes. For that reason they usually choose not to pit them one against the other.

    That works for builders, but how unusual would it be with, say a Fannie Mae REO, for the agent to not pit multiple offers against each other and instead take the second or third, although highest $ initial bid?

    If not pitting buyers against each other on REO’s is a common occurrence, then the best strategy for bidding would be to submit your best and highest offer as your initial offer. If it rarely occurs, then the best strategy would be to submit an offer of, say 5% under list price, hoping you are the only bidder, and moving your bid up if you find yourself in a multiple offer situation.

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  46. 46
    whatsmyname says:

    RE: Pegasus @ 39
    While we disagree at a pretty fundamental level, I salute your consistency. It is pretty unusual in my experience.

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  47. 47
    Pegasus says:

    RE: jonness @ 45 – Don’t you understand we are on an elevator now where someone has pushed the “soar” button in real estate, it’s hot as a pistol and bidding wars are erupting everywhere? Oh wait that was the pump for last year’s market about this time. How did that work out last year in spite of many property depressing foreclosure sales being delayed because of fraudulent paperwork and mortgage interest rates were at historic lows? Remember that when you when you push your clock forward tonight because of daylight savings time you are also secretly activating the real estate hype and soar button. You have been warned!

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  48. 48
    ARDELL says:

    RE: jonness @ 45

    Had this conversation with a client recently, and many times in the past. There is no “right” of highest bidder to get the house. There is no legal right of any buyer to get the house, except as to fair housing issues.

    It is not uncommon in multiple offers for the seller, whether that be a Relo Company or an REO or a Private Individual, to choose the strongest buyer and counter that strongest buyer with the highest offer on the table. That highest offer could be yours. The seller then gets that price, your high bid, from the strongest buyer.

    What does “strongest buyer” mean? It could be type of financing, % of downpayment, the one who has the most competent Buyer’s Agent, the buyer who appears most sincere and hasn’t played “20 Questions” prior to offer. That last point is very important. Many say “it doesn’t hurt to ask…”, but that is NOT true. It hurts a lot to ask a crap-load of dumb questions prior to offer acceptance. It is not uncommon for that offer to be put at the bottom of the pile, as highest price is irrelevant if the buyer is “squirrely”.

    Your agent should protect you from giving the appearance of hesitation or lack of commitment. Choice of agent is also important, as the listing agent will also take into consideration the fact that the agent for the buyer appears to be clueless. Having NO agent can also be an issue, as often the Agent for the Seller puts a strong weighting on best agent for the job of helping the buyer to “proceed in good faith”. Whether or not your agent knows the lender you received the pre-approval from can also have an impact in multiple offers.

    Very often highest offer fails because the buyer did not play their cards correctly prior to acceptance. Once the seller has accepted your offer, there is usually plenty of time to ask lots of questions. Asking too many questions too early in the process can negate your offer as to equal consideration.

    I know that’s not what you want to hear, but many sellers rely on the agent to advise which offer is the “strongest buyer”, as we hear many things that are not on that paper offer. Many REO listings have instruction for the agent to “upload” only one of the offers…the one the agent chooses as best, all things considered and not merely as to price. That is not as common today as it was a couple of years ago. Still, highest price is not regarded as highly as some buyers would like it to be. Highest price that may not get to closing…is worth nothing.

    Who decides which is most likely to make it to closing? Often the agent for the seller, via advice to the seller, based on verbal exchanges made prior to offer. The buyer who insisted that his agent ask “the bank” if they are going to fix the floor squeak prior to closing, may have lost his ability to get the house in doing so. In multiple offers with equally qualified buyers at about the same price…we tend to split hairs. Best offer gets countered at highest price vs person with best price getting the house.

    Fair? The seller has the right to act in his own best interests, and that is not always the highest possible dollar on the table.

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  49. 49
    Pegasus says:

    By whatsmyname @ 46:

    RE: Pegasus @ 39
    While we disagree at a pretty fundamental level, I salute your consistency. It is pretty unusual in my experience.

    Hehehe, but I am “willing to learn”.

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  50. 50
    jonness says:

    By ARDELL @ 48:

    The seller has the right to act in his own best interests, and that is not always the highest possible dollar on the table.

    Interesting. So, it would be unusual for, say, a buyer with an initial offer 2% above list, using 3.5% down, to have the offer accepted without further negotiation while the agent completely ignores an offer 5% lower than list using 30% down? (neither buyer seems “squirrely”)

    Or would you expect this situation to be typical of a situation that brings about a best and final offer scenario?

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  51. 51
    Ryan Littlefield says:

    RE: Pegasus @ 35 – Since I have no intention of selling in the near future, I am actually taking advantage of lower property taxes. As far as giving back the $8k, I already did: I invested it into the local economy and bought the house. I am not making money off it, someone else is now. As far as you having a choice, you had the same choices as me, at the ballot box. Our government representatives have to listen to me just as much as they listen to you.

    We can have a philosophical discussion about the roll of government, but there are many reasons why an influx of money is beneficial. The “free market” concept that I am sure you worship is just a Platonic Ideal and does not really exist. In most cases, the externalities of business are put onto the general populace, and government has a roll in providing a correcting force, whether in the form of regulations or financial incentive and disincentives. And government, I believe, also has a roll for providing the “grease” that allows “free market” forces to take effect. The government pays for biomedical and scientific research that has had little immediate application, but provides a foundation for a marketplace. Good examples include cell phones and wi-fi. Space flight and green energy are current foci. By providing rebates that make this technology “artificially” competitive in the short run, it accelerates advancement in the technology itself, and becomes a good investment.

    Sure home sales ground to a halt after the tax credit expired, but it was not just from 1st timers not buying, again, people who already owned a house couldn’t move into a bigger house because someone else wasn’t able to sell their house to a first-timer. My parents in New Jersey had a lot of trouble selling their house even though they had a buyer lined up that was going to have cash, but that buyer couldn’t sell the house they were living in (free and clear).

    Government is always tipping the scales and there are many times that they should so that the playing field is fair (compensating for externalities) or to spur on a market that has come to a halt or needs kickstarting.

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  52. 52

    By jonness @ 44:

    By Kary L. Krismer @ 37:

    What’s your source, because it sounds completely unbelievable.

    Kary, I agree with you completely. My question is, what can a person (legally) do if he finds himself on the losing end of this situation?

    Well, first, you would need to have some evidence. The recorded sales price, listing history and a copy of your offer w/ proof it was transmitted to the agent should probably suffice.

    Next I would try to contact someone at the bank to make sure there wasn’t some other reason your offer was not accepted. That’s probably easier said than done, but if you accomplish that, and you’re right, you’ve probably cut off a great deal of future income for the agent.

    The places you could also complain are the places I mentioned. The NWMLS fines agents pretty hard, and your agent might even get a commission (not sure about the commission). DOL would also probably have a big problem with that, and at a minimum sanction the agent. Finally, if the agent is a Realtor, I believe you would file an ethics complaint with SKCAR (Seattle King County Assn. of Realtors). They also are likely to fine pretty heavily.

    One final point. VA (HUD) and now Fannie both use electronic submittal, so that the buyer’s agent submits the offer directly to the bank-like entity.

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  53. 53

    By ARDELL @ 48:

    What does “strongest buyer” mean? It could be type of financing, % of downpayment, the one who has the most competent Buyer’s Agent,

    If by type of financing you’re also including the mortgage originator, I would agree. Often the best offer is determined by those that the buyer has working for them–the mortgage originator and their agent.

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  54. 54

    By jonness @ 50:

    By ARDELL @ 48:
    The seller has the right to act in his own best interests, and that is not always the highest possible dollar on the table.

    Interesting. So, it would be unusual for, say, a buyer with an initial offer 2% above list, using 3.5% down, to have the offer accepted without further negotiation while the agent completely ignores an offer 5% lower than list using 30% down? (neither buyer seems “squirrely”)

    Or would you expect this situation to be typical of a situation that brings about a best and final offer scenario?

    Depends. If there’s no apparent concern with getting FHA financing on the house, then that offer would likely be taken. The seller doesn’t typically care how much you’re putting down, because it’s all cash in the end to them.

    A cash offer, however, possibly might be considered better because there are fewer contingencies. Now issues with appraisals, no work orders, etc.

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  55. 55
    David Losh says:

    RE: ARDELL @ 48

    That is an excellent comment.

    The highest, and best offer is an auction term. It was popular in the 1970s, and early 1980s for hotel conference room auctions. The term began being referred to as Real Estate wholesaling that had laws passed to protect buyers from what Jonness is talking about.

    Agents would double team the bidding process, usually with a straw buyer, so they could get a good deal. Some agents would dual agent the process, but that wouldn’t be very smart today.

    You are making the excellent point that is the highest, and “best” offer. What I tell buyers is to be ready to close. Once you pick a property get ready to inspect, and close. Pick a price you can live with, get your loan in place, and be able to close quickly. That’s what most sellers want to hear. They want a transaction that can close without a lot of games in the process. You can even low ball, if you are prepared to perform.

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  56. 56
    pfft says:

    By MichaelB @ 38:

    Seattle Bubble Readers Repent! The Bottom is Imminent! ….and here’s the chorus… “Bottoms love me, Yes I know, Cause a Derivative tells me so!”

    Derivatives…Haven’t they already caused enough problems for us in the USA?

    you are right. housing never goes up don’t you know?

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  57. 57
    ARDELL says:

    RE: jonness @ 50

    It would absolutely be “normal” for a 5% under list offer to be ignored. That is true often. Many sellers will refuse to counter a 5% under list offer even if they have no other offers. Offering 5% under list price is rarely a best strategy, unless you are able to work it verbally in advance of putting it in writing.

    I was looking at a property today that has been on market for 2 years with no price reduction in almost a year. I’m thinking 10% off list on that one. But I’d have to “work it” before putting it in writing.

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  58. 58
    ARDELL says:

    RE: jonness @ 50

    Regarding that last line…if they were the only two offers, the 2% over list would be accepted. The End. Notice of Final and Best often involves more than two offers. When there are only two offers and one is acceptable…you take it.

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  59. 59
    Pegasus says:

    RE: Ryan Littlefield @ 51 – Wow! Obvious you believe in big government. Does the taxpayer pay your or your spouse’s wages? “The “free market” concept that I am sure you worship is just a Platonic Ideal and does not really exist.” Sorry but I don’t worship the “free market” concept and it can’t ever exist as long as the government meddles with it can it? I also don’t believe in Adam Smith’s “Invisible Hand” guiding one. My belief in an “Invisible Hand” exists only to recognize there is one that appears to spank fools that believe that unrestrained greed benefits society. Unfortunately the governments role in regulating markets has become one of assisting certain elite elements in looting the rest of us. It is rapidly becoming a fascist society. This is done by the selective enforcement of rules, laws, political favors, etc. There is no rule of law. Regulators have become captive to the very industries they are supposed to regulate.
    You mention government doling out monies to stimulate different arenas such as green industries to make them artificially competitive. Most of those boondoggles are complete wastes of taxpayers money and the funds go directly into the pockets of a select few as a political payback. Take Obama’s solar industry investments. Before that it was the ethanol boondoggles, 25 years ago it was windpower programs, 30 years ago it was oil and gas tax shelters. Look how much money has been wasted on the Chevy Volt. The point is that all of these programs generally fail, normally are fraudulently or poorly run, enrich a select few, don’t create lasting jobs and are an extreme waste of taxpayer funds.
    They say the best cons are the ones where the rube never realizes that he was being taken. You need to open those peepers, its time to wake up.

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  60. 60

    By Pegasus @ 59:

    Sorry but I don’t worship the “free market” concept and it can’t ever exist as long as the government meddles with it can it?

    You might want to check out the Theory of Second Best.

    http://en.wikipedia.org/wiki/Theory_of_the_second_best

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  61. 61

    […] Next up, the second derivative. For an introduction to this particular view, hit the original post from March. […]

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