Keep Your Eye On The Card - Bad Real Estate Data

This post is a little bit rambling, but that is because the problem of “Bad Real Estate Data” is broadly based.

Here is an interesting fact. A huge portion of the data that is put out about the housing market comes from real estate agents or people who have a vested interest in the real estate market. If you pay attention, you’ll notice that many of the real estate related news items come from the National Association of Realtors (NAR), the Mortgage Brokers Association (MBA), regional groups such as the California Association of Realtors (CAR), or other such groups. Today’s L.A Times talks about rising rents; the only source of data cited in this article is a “survey of larger apartment complexes by RealFacts, a property research firm.” According to RealFacts.com, RealFacts gets paid by, “owners, developers, brokers, management companies, lenders and trade associations.” So this entire article is based on data from a company that makes its money from real estate interests. Nice reporting L.A. Times. I guess that’s why you didn’t bother to tell your readers about the real estate bubble before it popped.

Here is another interesting fact: the data they put out may not tell the whole story. For example, data on house prices put out by the NAR only covers homes sold by Realtors, which is a trademarked designation. Not all real estate agents are Realtors. And not all homes are sold by Realtors or agents of any sort. As a matter of fact, when housing bubbles pop people are less likely to use an agent or Realtor, and are more likely to sell their homes by themselves (FSBO – For Sale By Owner). Why? Because when people have little or no equity in their homes, they may be forced to write a personal check for the 6% agents’ commission rather than just have it taken out of their huge profits by the escrow agent. When people consider writing a $30,000 check to an agent on a $500,000 house, suddenly that money becomes real.

So following this logic, if people who have little or no equity are more likely to sell their own homes, and are therefore less likely to be counted by the Realtors, then the home price numbers that are put out by the Realtors are likely to be skewed toward homes that have not fallen as much in value. i.e. the Realtors’ sales prices are overly optimistic, and actual average prices are lower.

And here is another wealth of misdirection. According to the California Association of Realtors, in December 2007 the Median Days on Market was 67.2 while the Inventory of Unsold Homes stood at 14.5 months. How, you might ask, is it possible that half of all houses sell in just over 2 months, and yet there is a one year and two month backlog of homes on the market at current sales levels? The answer is market manipulation. Real estate agents will cancel a listing and then relist the same house a day or week later. When they do this, the house shows up as a new listing with zero days on the market. The reason they do this is to deceive buyers into thinking it is a new listing, and to hide the fact that the house may have been on the market for months or years. This happens all the time. Watch in your neighborhood for signs that vanish and return in a few days. Since it is much harder to hide the total number of homes listed, there is a huge discrepancy between Days on Market and Months of Inventory. Days on Market is always rosier, and is the number that real estate agents like to promote. This practice could be stopped by the Realtors’ Associations, or by state regulation, but nobody seems to care about giving buyers the truth.

In your own home research, it is hard to figure out how long a house has actually been on the market, but something you can do is to put quotes around the entire street address of the home and plug it into a Google search (for a favorite of mine, search "1082 10th Street" with the quotes). It is very common that old listings will come up that way. It still might be hard to figure out how long it was on the market, but as in the case of my example, you will learn that this house was listed for at least the following four prices:

$2,099,000

$1,975,000

$1,799,999

$1,749,000

If I was interested in buying this house, I would like to know that the price had been cut by at least $350,000, which probably wouldn’t show up in the listing if the house had been relisted several times with different agents, as this one was. Of course most of us have more modest tastes and budgets, but info like this could help you save a mint.

Now for one last source of intentional misdirection (there is an endless supply, but nobody wants to read an endless post, and I don’t want to write one.) If you pay close attention to the statistics that come out weekly, monthly, quarterly, and yearly you will be frustrated to find out that the powers that be, in order to keep you from keeping track of reality, release fundamentally different numbers at different times. For example, they might release year-over-year changes one month, then release month-over-month changes the next. They might release year-to-date once, and year-over-year next. They might release average (mean) data once, and median data next. They might release existing home numbers, followed by new home numbers, followed by total home numbers. They will report new home starts, new housing permits, days on market, market inventory, mortgage refinance applications, new purchase mortgage applications, new home sales, existing home sales, new home prices, existing home prices, affordability indices. If you mix and match different types of houses, different time periods, and different geographic areas, it is almost always possible to put out a positive, or less terrible, spin. What is frustrating is that newspapers and other news outlets don’t catch on to this. So they report apples/oranges data that you cannot track yourself.

The point of all this is to trust your eyes, trust your brain, do your own research, pay attention to the data sources and definitions, and never fully trust somebody who gets paid a commission to sell you something. And feel free to check my numbers.