Is the National Association of REALTORS Pending Home Sales Index a Leading Indicator of Existing Home Sales?

The National Association of REALTORS began releasing the Pending Home Sales Index (PHSI) back in December of 2004 as a leading real estate market indicator. I did a previous post to indicate the relationship between pending home sales and mortgage rates and thought it would be interesting to see if the PHSI really can be used as a leading indicator.

As you can see from the chart, it appears that the PHSI is fairly accurate. What is interesting is to see how at certain times like the May-July period the Pending Home Sales Index is relatively flat while the existing home sales data shows a significant jump and what appears to have been the peak. This may be due to a combination real estate listings selling so quick that they are never marketed as “pending” and MLS GIGO.

What I find more interesting in view this is the time since August the consistent gradual decline of the pending index vs the much steeper decline of existing home sales data. The extended decline of pending should point to even lower existing home sales the following month (which is what happened as Jan existing home sales data was down to 6,560,000 units but not charted as still missing Jan. PHSI data).

If the pending home sales data starts to flat line or even increase (possible in the coming peak sales months) than we should see a reversal in the existing home sales volume as well.

Will it happen? I am not sure… but your thoughts and theories are requested!

Data Sources: PHSI Data | Existing Home Sales

REALTOR.com vs. Zillow.com

As things are settling now since the Zillow launch it will be important to see who will win the consumer eye-ball fight. REALTOR.com recently received 100 million in funding to do something... but I don't know what yet but it better be good as Zillow is probably just getting started, considering some recent news.

Zillow seems to be holding it's own ground after the first few weeks. In fact according to Alexa (I'll let you be the judge on how accurate this is, we'll need to wait for com score and other research) Zillow currently seems to be ahead of REALTOR.com... not bad for a start up.

It still a little early to see what the real impact will be but I can say that For Sale by Owner Center has already seen Zillow data being used by both sellers / buyers in initial negotiations. As I mentioned before, I believe this empowering of the consumer will only give traction to the FSBO movement.

What do you think... can or will Zillow bump REALTOR.com from it's top spot our will Zillow willow?

Should You Trust Zillow Property Value Estimates?

As the entire world already knows, Zillow launched yesterday. The very first thing that I estimate over 500,000 people did (when the site was not down… maybe a great marketing ploy?) was enter their home address to see what it was worth. (BTW - nice IP to mailing address collection tool, but that’s another post). Most users were either pleasantly surprised or disturbed by their estimates.

The general public who knew nothing about Zillow until yesterday were impressed (unless their estimate was lower than anticipated), yet most who have been following Zillow appear to be initially under-whelmed, until you consider the long term possibilities… again another future post.

I spoke to a lot of friends who looked up their places and found estimates that seemed fairly accurate while others appeared to be dramatically off. This got me thinking about how accurate can it be and should people take the estimated value as gospel. So a few hours later, here are the results of my small test.

The Accuracy Test of Zillow Estimates.

First off, let me say that this is a very small random sample. In reviewing the Zillow site, they claimed they were best at the mid range properties on the West coast. So I based my random sample on the following:

25 Properties that were listed for sale by REALTORS on my local MLS and sold between 2/01/06 - 2/07/06. I took the mid-range (in California) of $500,000 - $700,000 for various cities in the San Gabriel Valley and western San Bernardino and Riverside Counties. I obtained the data via my MLS. I also removed the High and Low to give a more accurate average.

I then plotted the listing price, sold price and the Zillow estimated value data on a chart.

Here are some highlights of my test.

It appears that Zillow is in fact within its claimed margin of error. In fact it appears (from my small sample results) that they are typically off by 2%.

There was some major discrepancies where Zillow was either high or low by over 21%. I removed these anomalies from my sample data but here are the properties in question in case you’re curious. (Note I did not do further research to see why such a big swing and why both properties where in Monterey Park)

Property | Zillow Est. | Listed Price | Sold Price | Error Margin
438 Sefton Monterey Park, CA | $794,134 | $638,000 | $615,000 | 129%
3054 S. Addrienne MP CA | $397,137 | $539,000 | $505,000 | 79%

As you can see from the results, overall they were pretty good. Would I take this as gospel… not. I would not suggest clients to price their home exclusively on the data Zillow provides but a combination of Zillow results and active and current listings from both realtor.com and homepages.com where available.

A trend that I do see this creating is prospective home sellers ordering property appraisals before listing their homes for sale. This only makes senses and it’s incredible that it’s not more common place considering how many real estate transactions blow up for this very reason.

The biggest issues I see with Zillow (which is obvious) is that it does not factor in certain aspects of a property such as specific location, views, improvements, lot slope, etc. that will make a specific home more valuable than another… but this is expected. As for traditional track housing, it’s pretty good.

The real reality of this tool is that it does a better job than most real estate agents can do at presenting the information in a clear, concise manor that is easy to understand to the general public. This will lower the overall perception of the value of the REALTOR, which will most likely lead to long term decreases in real estate commissions. This appears to be what Zillow had in mind.

Real Estate “Super Consumers” will become the norm. They will spend months understanding the nuances of the community they are interested in buying or selling. They will know crime rates, property values, school district information, job rates, etc… better than most REALTORS in their own communities. This consumers will be able to demand lower real estate transaction fees.

I also think that it is one of the biggest advances in real estate in years (although AVM have been around for at least 5 years, it was not publicly available for free and on this scale) along with current mapping technologies such as Google Maps, Google Earth and what A9.com is doing. I think that it will be a boon to the “for sale by owner” community as they are now armed with both pricing tools and easy effective advertising for their real estate listings.

I believe that FSBO market will gain some serious traction over the next few years (easily reaching 20% market share like in Madison Wisconsin) because of these “super consumers”. I also predict that the national average real estate commission will come down to 3% total but hey, time will and I’ve been wrong before.

Download my PDF paper & chart of this test

If you have any real life data samples, please post them here. We are looking for recently "Sold" listings & the Zillow Estimate, to make a running list of how accurate or flawed Zillow is.

Are REALTORS afraid of the FSBO Market… scared enough to spend $25 million!

Yesterday, the NAR announced a new $25 million Public Awareness campaign with ads targeting the newly (politically correct)coined “unrepresented sellers” or commonly known as FSBO. I’m surprised that this did not get more attention… considering the other issues the NAR currently has with the DOJ.

Here is a quote from their press release…

“One of the new spots, called “Don’t Try This At Home,” explains how choosing a Realtor® to sell a home is a smart financial decision since home sellers make more money when they rely on the expertise of a real estate professional. Homes sold by a real estate agent sell for 16 percent higher on average than those sold by an unrepresented seller, according to NAR’s 2005 Profile of Home Buyers and Sellers.”

You can view this commercial from the NAR website which requires FLASH.

You don’t spend $25 million on a image problem… unless your concerned about it! What I gather from this NAR spend is that the 2005 Profile of Home Buyers and Sellers may have also shed other information that the NAR did not anticipate… maybe a growing trend towards FSBO?

I discussed this in detail from my previous homebuyer profile post but here are some of my general thoughts…

A) The FSBO market is much greater than the NAR wants to admit as most would consider the “$399.00 Flat fee for MLS listing” model… really is a FSBO… as they are “unrepresented” by the REALTOR from the negotiation point of view. The fact that these types of listings are most likely factored into the NAR figures, as “represented” by a realtor does not paint a clear picture of how big the FSBO market really is.

Do you think the NAR is using the new term “unrepresented” because they don’t want to reinforce the branding of the term “FSBO” or “For Sale by Owner”?

B) NAR touts the figure that.. “Homes sold by a real estate agent sell for 16 percent higher on average than those sold by an unrepresented seller” but as I indicated before, many of these FSBO transactions are inter family deals, which are purposely discounted… this was quoted from Inman News…

“13 percent of sellers conducted transactions without the assistance of a real estate professional in 2005. Of those, about 39 percent of the transactions were "closely held" between parties who knew each other in advance, up from 32 percent in 2004, the association reported.

Now if 40% of the sales are “Closely held” don’t you think that these figures should be left out of the figure “16% higher…”? This is an obvious spin of the facts.

C) Also, if you have 5 million more sales to factor into your average… there will be a lot more high-end properties included, which will artificially skew the average.

Here is what I’m fairly sure of… the NAR would not be spending this money if they did not feel threatened!

You would think that they would be focused on the general image building considering the issues with the DOJ. Maybe they know that they won’t win that fight, so might as well go after the FSBO market before it gains too much traction, especially as the real estate market cools and home sellers become much more concern at preserving their “equity” at time of sale.

What I also read into this, is there is more of a focus on “Selling” vs. “Buying”… which I assume they (the NAR) feel that the real estate market will be slowing and there will be significantly more homes for sale… with a fair portion trying “FSBO” before possibly listing with an agent.

So my theory regarding $25 million NAR spend is quite simple.

Real estate market cools off, sellers become much more aware of the “costs” of selling as they don’t have as much equity due to slowing appreciation and negatively amortized mortgages. They explore other home selling options such as selling by owner before immediately listing with an agent. As property inventory on FSBO sites build, homebuyers continue to explore these sites looking for real estate listings. Especially considering that sites like For Sale by Owner Center.com offers better search experiences like map searches, satellite views, date listed, rss feeds and provides the actual property addresses unlike Weichert and other real estate sites, which are designed to create leads for their agents.

As more and more successful real estate transactions occur and the FSBO market starts to gain traction nationally as it has in Madison Wisconsin, REALTORS will need to defend their value position (with something other than the current “scare tactics”).

Home buyers will realize that they are only being shown properties which offer a commission vs. the entire inventory of available homes as quoted by a REALTOR in Madison who does not show the 20% of available homes for sale in Madison because they are FSBO. This according to a quote on the NYTimes article on FSBO Madison. This will frustrate homebuyers and allow other real estate service companies and FSBO services to fill the service void left by agents.

Although, I may seem anti-REALTOR, I’m really not and I don't think people are either. I do believe that most people don't spending $35,000 in real estate commissions to get their home sold but everyone is willing to pay for the service.

I do think that a large majority of the real estate community has difficulty in changing a flawed business model. As proof with the all the bus benches advertising REALTOR’s and the lack of Internet advertising by local real estate companies in their area. Although the NAR reports that 77% of homebuyers are on the Internet… the agents are not there yet?

Until agents learn how to charge “home buyers” for their services… we are in for some big changes and the NAR will need to continue spending money advertising. This will make Madison Avenue happy and Madison Wisconsin FSBO’s even happier!

Is a Real Estate Housing Bubble coming to Your Neighborhood?

Yesterday, the NAR released it PHSI, which I believe is the best leading indicator we have of what the real estate market is actually doing. I created a chart, which I will continue to update on a monthly basis for you (subscribe to my RSS feed to receive automatically).

What is interesting is that the actual drop in Pending Home Sales Index should have been lower than the reported 5.5% national drop over last year but the South came to the rescue. As you can see from this chart, the area’s real estate markets that most people are concerned about – West & Northeast, have fairly sharp declines. I believe The South may be bucking the cooling trend due to the “Katrina” effect on housing, limited supply, high demand. I’m not sure why the Northeast had a slight increase (maybe someone can comment).

As mortgage rates continue to climb and mortgage underwriting standards tighten, I suspect you will see bigger drops in the pending home sales index, which lead to drops in the actual existing home sales, then finally leading to drops in actual home prices. Hence the reason why the NAR states that there is a “cooling” trend and not a “pop”. As time progresses you should see their statements change. The most important factor is mortgage rates, as is demonstrated for this chart I posted yesterday. You can clearly see the inverted dance between mortgage rates and home sales.

The main factor that could cause a sudden bursting of the real estate bubble is jump in mortgage rates of .5% or more (for the West and Northeast) in combination with the tightening of mortgage underwriting guidelines on the “stated income” and “interest only” loans.

Pending Home Sales Index... Continued Cooling Trend Visible

Today, the NAR released it's Pending Home Sales Index data, which is a good leading indicator of what the real estate market is doing. I reviewed the data and it cooling but I decided to chart it to give a real picture of the real estate market. As you can see... the real estate market has been slowing since a peak of mid August 05.

I indicated in my previous post regarding this data, there is a significant cooling trend of the housing market. Lower pending sales = lower actual closed sales next month. This does not take into effect home prices but lower sales volume will eventually point to lower home prices.

If you are thinking of selling your home in the near future, pricing your property correctly the first time, will become more important than ever as prospective buyers will have more inventory of homes for sale to select from, thereby increasing the competition between real estate listings.

Data Source: National Association of REALTORS Pending Home Sales Index

Chart by: Jessie Beaudoin, For Sale by Owner Center.com