Tuesday, April 26, 2011

Foreclosure Side Effect: Bidding Wars

A story in today’s Journal shows that the housing market is so broken that home prices are falling amid more competition for homes.
The factors feeding the competition stem from the fact that many traditional homeowners can’t or won’t sell, leaving deal-hungry buyers clamoring for bank-owned foreclosures. The trend is apparent from a range of statistics, which we highlight in an interactive graphic. But another telling one is the “sale-to-list” ratio, or the difference between a home’s final list price and its sales price. When sale-to-list is flat, it’s a draw for buyers and sellers: No discount to finalize the deal, and no extra profit amid competition. If it goes up, sellers have the advantage; if it goes down, buyers are getting a discount.
In other words, a rising sale-to-list ratio could be called, as Yale economics professor Robert Shiller said, a bullish indicator. So it’s something of a surprise to see such a bullish sign in cities hit hard by foreclosures.
But four of the top 10 markets for foreclosure resales were also in the top 10 nationally for median sale-to-list in February, according to Zillow, the online real estate portal. El Centro in Southern California, for example, was the only metro area with an even “1” for median sale-to-list; it also ranked second among metro markets in foreclosure resales. Nationally, Zillow puts the median sale-to-list at a buyer-friendly 96%, meaning buyers are getting a “4% discount.”
That’s down from May and June of last year during the tax-credit rush. To be sure, the number is seasonal, and is expected to rise in the busy spring and summer months and fall in the slow winter.
This dynamic is also fueling some major markets like San Francisco and Seattle, according Redfin, the online brokerage based in Seattle. “That is the curious dichotomy in the data – that you will see a market where prices are falling in most counties, but at the same time sale-to-list price is actually increasing,” Glenn Kelman, chief executive of Redfin.
Consider San Francisco County, which had a flat sale-to-list ratio in March, up slightly from the prior month but slightly below the year-ago number. The Bay Area overall saw month-over-month increases in the mean sale-to-list ratios in six of 12 counties for single-family homes, even though the latest S&P/Case-Shiller index shows that prices are still falling. But foreclosure resales, which tend to sell at bigger discounts, accounted for about one-third of transactions in February, according to Zillow.
These contradictory numbers are being driven by brokers like John Lee, of Pacific Union International in San Francisco. Mr. Lee estimates that about three-fourths of his listings these days are bank-owned homes.
Lenders give Mr. Lee tall orders: Sell the home in a month within 5% of the initial list price. “I have to meet those criteria, otherwise I don’t get any more assignments,” Mr. Lee says. Banks grade him on these deals, so he’s developed a system of “30-day” pricing that is a bit below market to entice interest.
Earlier this year, Mr. Lee sold a home on 34th Avenue in San Francisco for $655,000 after he initially listed it for $515,000. It was a foreclosure and Mr. Lee asked for only all-cash offers. “We knew that we priced it a little bit low because it was all-cash,” he said. There were 17 bids.
That price would fall into what Mr. Kelman called the “sweet spot of affordability” for the Bay Area that sparks buyer interest — $500,000 to $800,000. There is, in places, even a shortage inventory, he said, making it like the mall after Christmas: “all the remainders that no one else wanted but not much else new on the shelves.”
These numbers could also suggest that sellers, involving foreclosures or not, are ready for more realistic pricing so their listings don’t languish. But George Graham, chief executive of Concierge Auctions, a real estate auction firm based in New York, said sellers can be a hard group to persuade on this point. “Time is not your friend,” Mr. Graham said. “By the time you are done lowering your list price 30 or 40 percent, your house is worth less and you’ve been carrying it.”