QUERIN LAW: Why National Housing Stats Are Meaningless

Introduction. For most Portlanders, Zillow and Case-Schiller should mean very little.  Why? Because Zillow’s metrics don’t purport to be “fair market value,” or even an “estimate of value”. No,  Zillow calls it a “Zestimate” – and readily admits that its figures are based upon publicly obtainable data.  The more data, the more ostensibly accurate – and vice versa.

For example, in Seattle, Zillow’s home base [where presumably data is rich], its median margin of error is 7.3%.[1]  A 7.3% margin of error in data-rich Seattle doesn’t strike me as a ringing endorsement of their analytics.  What does this say about their “Zestimates” for Drain, Oregon?  So, for example, a $200,000 Zestimate for your Seattle home could be off by over $14,000 – not an insignificant sum.  In fact, I would venture to guess that if an appraiser were off by that margin, we might call it actionable negligence.

Case-Schiller has a different set of reasons why its figures have come under attack for reliability.  First, it only considers repeat sales of the same property. So a new single family residence selling today is not a data point for Case-Shiller.  Now that we’re slowly coming out of the housing crisis and seeing new construction, I would think these new home prices would certainly stand for something. Secondly, it only includes single family detached residences, not condos and townhomes.  Hmmm.  In metro areas across the country, this was and still is a significant source of housing stock.[2]  Third, its data sample is from only twenty cities nationally – and not the most populous – representing just 9% of the total population. Fourth, the data relied upon is dated.  It publishes on a 60-day basis; i.e. a value today could be based upon a closed sale of nearly two months ago.  And remember, if the home was financed, the actual transaction was signed up perhaps 45 to 60 days earlier.  A closed short sale could easily have been based on an offering price six months earlier.  In other words, the Case-Shiller May figures reflect what a buyer was willing to offer four or more months ago.  In short, Case-Shiller does not report in “real time.”  Even Zillow, with a 7% median margin of error is taking pot-shots at Case-Shiller, saying that its numbers “…won’t cut it.”  Pot meet Kettle….

In truth, one cannot expect anything more from valuation techniques that are based on algorithms from 30,000 feet.  So what good are these figures in the first place?  Well, for the press, they are the grist for many articles, and can be used to support almost any theme – from gloomy to giddy – that a reporter may wish to promote about the state of the real estate market. And like Hamburger Helper®, vacuous information acts as filler, giving faux heft to the daily newspapers as they flounder in a sea of red ink.

Real-Time Valuation Information.  Clearly, the best, most reliable, and most predictive information for Portlanders comes from our local Regional Multiple Listing Service, or “RMLS™.”  Why?  Because it is based on real numbers from real transactions [not a concoction of logarithms and extrapolations] reported within two weeks of the close of the prior month’s sales transactions. Here is a sampling of the data developed by RMLS™ that is worthy of note:

New Listings for First Quarter 2013 (7,976) 

• 86.1% were “non-distressed” i.e. they were not bank owned, and were not short sales, where the gross sale proceeds were insufficient to pay for the costs of closing and removal of liens;
• 8.7% were short sales;
• 5.2% were bank owned or “REO” properties.

Closed Sales for First Quarter 2013 (4,870)

•  77.8% were non-distressed;
• 11.2% were short sales;
• 11.0% were REO.

How do these stats compare to those in the 4Q of 2012? [If we’re looking for real-time trends in our local area, these numbers should mean something.]

New Listings for Fourth Quarter 2012 (5,436) 

•  78.9% were non-distressed;
• 12.0% were short sales;
• 9.1% were REO.

Closed Sales for Fourth Quarter 2012 (5,880)

•  77.2% were non-distressed;
• 12.3% were short sales;
• 10.5% were REO.

As I have pointed out previously [here], September, 2012 was the first month that the RMLS™ price stats showed an increase over the same time the prior year.  Until then, the Portland Metro market had been dropping in almost every good metric, since September 2007 – five years!  Using a very basic analysis, what we should want to see is more sellers in the marketplace with home equity, and less with negative equity or homes that have gone back to the bank and re-emerged as REO sales.   By that standard, here is what we’ve seen over the six months comprising Oct-Dec, 2012 and Jan-Mar, 2013:

• New Listings went from 5,436 in 4Q 2012 to 7,976 in 1Q 2013 – an increase of 2,540 listing, or 46.7%
• Closed sales went from 5,880 to 4,870 – a decrease of 1,010 sales, or 17%

What does this say, if one is looking to spot trends?   Here’s my “back of the napkin” analysis:

• The 46.7% increase in listings is a real vote of confidence by sellers.  They sense that the timing is right, and they see that property values are increasing locally and inventory is extremely low. This bodes well for sellers entering a seller’s market.  Confidence is infectious, and once it spreads, homeowners catch the same bug, and decide to list and sell their property now, rather than wait for the very “peak” of the market.
• What about the 17% drop in closed sales? In 3Q 2012, slightly over 21% of all listings were short sales and REOs. That combined number dropped to just below 14% for 1Q 2013, a 50% decrease.  Of late, the price point for short sales and REOs was such that there has been an investor feeding frenzy, with lower priced homes flying off the shelf.  The fact that there were fewer closed sales during the first three months of this year over the last three months of 2012 tells us something we can clearly see in the listing stats; the sale of distressed properties – and distressed property buyers, especially investors, is dropping off.
• The only way to improve the sales numbers is for more equity sellers to get into the marketplace.  Right now, inventory is at historic lows, which means more buyers are competing for fewer and fewer listings. And as short sales and REOs subside, so will the investors.
• This thesis is supported by the fact that 4Q 2012 was the lowest of all four quarters last year for equity listings, i.e. 4,289, compared to 7,172 in Q3, 7,735 in Q2 and 5,604 in Q1, 2012. This tells me that as short sales and REOs were being consumed by investors throughout the entire year, equity sellers stayed on the sidelines over the Thanksgiving and Christmas Holidays 2012 – not an unusual stance, since equity sellers frequently occupy their homes and don’t want the interruption during that time. The January-March 2013 rebound in new listings, i.e. 7,976, was comprised of fewer short sale and REO listings, which suggests that equity sellers are gradually appearing in the marketplace.

While this is very good news, our overall economic recovery is tepid and tentative in the eyes of all but those who refuse to see.  [Bad news that is not getting worse is not “good news” – it’s just less bad news.]   It seems – to me at least – there we’re just one big crisis away from a relapse.  Where could that come from?  There is one likely source that most pundits are clueless about; the Oregon foreclosure fiasco visited upon us by our fiends friends in the Big Banking industry.  For those who have been watching this slow motion train wreck, they may have a hint of what I’m referring to. For others, it may come as a surprise – especially the columnists who report that the worst is behind us, based upon nothing more than the theory of some economist or professor ensconced in an ivory tower above the fray of reality.

Here’s my concern: In mid-July, 2012, the Big Banks got hit with a hard left jab, followed by a roundhouse right; i.e. the mandatory foreclosure mediation law, and the Niday decision.  The net result was that the Big Banks realized they really didn’t like the non-judicial foreclosure law they lobbied hard to get in 1959, and followed for the next 50 years, until they got caught abusing it during the foreclosure circus crisis years, 2007 – 2011. So they abruptly stopped doing non-judicial foreclosures and cancelled the ones that were pending.

Since the fall of 2012, virtually all the Big Banks have been foreclosing Oregon homeowners judicially.  This is a process that not only costs them [actually the investors who own the loans today] millions and millions of extra dollars, but comes close to tripling the amount of time it takes to foreclose a property; that is, from the day of service of the summons and complaint to the day the sheriff sells the property at auction can take a year or more.  This delay is not because the legal process actually takes that long to complete, but because the lawyers handling them can only work so fast – which isn’t very fast, since they don’t have the benefit of using the [now] out of work robo-signers from Florida and elsewhere, to dummy up documents, signatures, and notarizations, in order to expedite the foreclosure process.  [I suspect that Oregon attorneys working in the handful of foreclosure mills here are well aware of the risk to their license should they try to take some of the shortcuts of those before them, like attorney David Stern in Florida.]  

Now, Oregon has a new “mandatory mediation” law[3] [discussed here] that will require the Big Banks to offer borrowers in default an opportunity to meet and negotiate with an authorized bank representative or agent for some foreclosure avoidance measure, such as a short sale, deed-in-lieu, modification, etc. If the bank can’t produce to the court in its judicial foreclosure proceeding a certificate verifying that they complied with the new law, they simply cannot foreclose their borrower. This, coupled with the uncertainty about what the Oregon Supreme Court will say in the Niday case – a decision which may not be far away – means that the Oregon foreclosure process today moves about as fast as the sap from a fir in Forest Park.   We can only guess how many folks are queued up to be foreclosed, but have not become an official statistic because they have not been sued in court; how many will partake in the law entitling them to negotiate with the bank; how many will put their homes on the market to short sell; and how many homes will come back onto the market in the form of REO sales.  This is the real “shadow inventory” and very difficult – if not impossible – to ascertain, since the banks aren’t talking, or when they are, it’s about as believable as Lance Armstrong on Oprah.

Until we get a handle on the real numbers of folks that can’t be counted because they have not formally been served with a complaint in foreclosure, even Nostradamus would have difficulty predicting whether we are witnessing a true, honest-to-goodness rebound in the real estate marketplace, or just the calm before the storm.