Seattle Bubble

I received a question recently from a reader that can basically be boiled down to “does record-high inventory really equate to the ‘larger selection’ that real estate agents have been touting recently?” Here is their reasoning for asking:

Let’s say (just making numbers up here) that during the boom years 10 houses with your parameters come on the market every week and stay there for two weeks before becoming pending sales. On average there are 20 houses available at any given time. Now let’s say during the pop sellers don’t like what they are seeing and decide now isn’t such a great time to upgrade after all. Now, only 5 houses with your parameters are coming on the market every week and they just sit there. Suddenly, the average number on the market sky rockets.

After a month, your 20 house baseline has doubled. But do you really have a better selection? Sure, you will get less competition if you want to make an offer. And, if you fly out to visit and have to buy this weekend, there is more to choose from. But, if you are taking your time and have a span of months over which to shop - fewer houses have come on the market so you actually have a poorer selection.

In order to investigate this, I went back to the inventory analysis methods that Deejayoh pioneered in his February post “What happens to listings?”

First, let’s look at the boom years of 2005 and 2006:

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The dashed lines represent three-month rolling averages. You can see that during 2005 and 2006, the number of new listings averaged between 2,500 and 4,000 per month, while the number of stale listings averaged around 1,500 to 3,500 each month. 2005 had an average of 3,471 new listings a month compared to 2,019 stale. In 2006 the averages were 3,246 new and 3,034 stale.

In other words, in 2005 and 2006 there was generally more new stuff on the market each month than old, which I think most people would equate with having a good selection.

Now let’s look at 2007-Present:

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During 2007 and 2008 (so far), the number of new listings has averaged between about 2,500 and 4,000 a month, which is pretty similar to 2005-2006. The average for 2007 was 3,416 new listings a month, and the average for 2008 so far has been 3,729.

The big difference between 07-08 and 05-06 is the number of stale listings, which since the second half of 2007 have shot up to between 5,000 and 7,500 a month. 2007 had an average of 5,322 stale listings a month, and January through May of this year, the average has skyrocketed to 6,958, over 3.5 times as many as the same periods in 2005 or 2006.

For those that are interested, I also generated graphs of this data for 2001-2002 and 2003-2004.

So to answer the reader’s question, I would say that while there is technically a larger selection of homes on the market right now, it is also true that the amount of new listings coming on the market each month is essentially unchanged, meaning that those that are taking their time and have already ruled out the existing inventory have no more (or less) selection than they would have in 2005 or 2006.

While I’m not making judgements about the quality of the selection, the bottom line is that during the “boom years” people were buying just about anything, as evidenced by the low number of “stale listings” each month. Now that the easy money has dried up and market psychology is beginning to shift, stuff that would have easily sold in 2005 or 2006 is just sitting. For those that are out there shopping for a home right now, I can see how the ever-increasing number of stale listings does not look much like a “better selection.”

Data Source: NWMLS

As a follow-on to Tim’s post yesterday about the practice of relisting properties, here is a look at what has been happening to inventory over the past few years, and how the trends have changed over time.

The questions “what is happening with all of those listings” and “how many sellers just give up?” have come up a number of time from readers. The latter question is particularly interesting - because it might tell you something about seller psychology. Logically, one would expect sellers to rarely pull listings in an up market. The rising tide is probably lifting all boats. But in a down market, what happens? Will sellers start pulling listings because they expect prices to go up soon and want to wait out the dip? Will they keep their homes on the market because they need to sell, or because they think things will be worse if they wait?

The NWMLS reporting on inventory is decidedly opaque. They report homes sold, pending, added, and active. What they don’t tell you is how many homes remained on the market, or how many sellers just gave up and took their homes off the market. However, if one looks across months, some pretty basic algebra allows you to back into how many homes are de-listed versus left on the market.

• You can get to delisted inventory as follows: [(Beginning inventory + New listings) - (Pending listings (sold) + Ending Inventory) = Delisted]. Take the available stock less what is either sold or left over, and it tells you how many homes disappeared from the listings that month without being sold…
• Armed with that, you can calculate how many homes stayed on the market as follows: [Beginning inventory - Pending listings (sold) - Delisted = Stayed]. Take the total starting inventory, and subtract those that sold or gave up, and all you have left is the stuff that stayed on the market!

Using those formulas applied to the last 9 years of inventory data, we can peer inside what has been happening with listings before and during the boom:

On the left axis, we have the average number of homes delisted, sold, added, and staying on the market for each year from 1999-2007. These are displayed as stacked columns, with the reductions from inventory shown as negative, and the additions/remaining inventory shown as positive. On the right axis, we have average inventory throughout the year displayed as the black line.

What you can see on this chart is that new listing activity and sales activity were remarkably even across the past 9 years. New listings averaged about 4500 homes per month, plus or minus no more than 500 units. Sales averaged about 3,000 homes per month and again were typically plus or minus less than 500 units (2005-06 were +~700). Based on the consistency of this data, it appears that the bulk of the of the variability in average inventory levels is driven by whether sellers choose to stay on the market or give up.

During the period for which I have data - the average ratio of delisted/stayed was 1:3. In other words, sellers were 3 times as likely to stay on the market as they were to pull their listing. However, the average is deceiving. Over the course of the boom, this ratio has fallen steadily: from just over 1:2 in 1999 to the current level of 1:5, where it has been from 2003-07. Sellers psychology during the boom years appears to have shifted to where they have been over twice as likely to “ride it out” than they were previously.

I don’t know what the long term averages are, they could be higher or lower. Either way, it will be interesting to see if this behavior changes significantly as the market slows down.

A few people pointed out this national story that ran on last night’s Nightline: Buyer Beware: Unsold Homes Are Often ‘Re-listed’.

It’s a tactic called “re-listing,” which is legal and more common than you think.

“Re-listing is just refreshing the home on the market,” Niece explained, “making the home look like it just came on the market.”

“When you re-list a home, you know, it’s still been on the market for X amount of time, but a buyer that comes in with another agent very likely won’t know,” Niece said.

Here’s how it works: Niece cancels house listings when they reach 70 days on the market, and then re-lists them as new, with 0 days on the market.

Here in the Seattle area, the NWMLS began tracking Cumulative Days on Market (CDOM) in the summer of 2006, but I believe that information is available only to agents with direct access to the MLS (though since I don’t have such access, I could be mistaken). As regular readers may recall, we had an ongoing discussion about pulling homes off the market and relisting them to appear “fresh” back in January 2007. It was finally explained to us that while canceling a listing and relisting it (without a change in price) is against the rules, writing a short contract with the seller and letting the listing expire, then relisting it is 100% permissible.

From the description given in the Nightline story, this appears to be exactly what the agent in Minnesota is doing. And just like in Minnesota, despite CDOM being tracked in the NWMLS, this tactic will still result in a listing appearing on the home search websites as “new.”

Apparently it’s still legal for multiple listing services to engage in what would in any other industry be considered blatant false advertising. This doesn’t seem likely to change anytime soon, so it’s always good to keep this in mind if you’re browsing the online home search sites looking for a deal in a slow market.