Matthew Ferrara, Philosopher

When Will Housing Misinformation Stop?

Poor REALTORS! The misinformation campaign about the housing market continues with yet another announcement of a “drop” that is entirely meaningless. When will real estate brokers take control of the information story?

Yet another announcement is making the media rounds today, lowering confidence and confusing the consumer. Trulia (amongst others) released data today indicating that home “slashed” prices for homes “on the market” last month. The media, untrained in either or real estate, is churning this report as if the “market has dropped” once again. Even financial networks are making the mistake of saying this latest price reduction continues to “wipe out” billions of homeowner equity.


Let’s pretend you go into your backyard and, using materials acquired with your credit card, build a dozen birdhouses. You then place those birdhouses on a table in the town square, and set a price for them. After a month, a few people have stopped by but nobody has purchased. So you reduce the price of three birdhouses by 30%. Suddenly, purchase those three birdhouses, while the other seven remain unpurchased.

Does this mean all of birdhouses – including the overpriced ones –  were “on the market” last month? Of course not.

The error in this story – and the current housing reports – is that the entire supply of inventory was “on the market” in the first place. In fact, it was not. Homes that are overpriced are not “on the market.” Homes with signs in front of them are not “on the market.” Overpriced supply represented by advertisers and entered into a MLS database or website are not “on the market.”

Nothing is “on the market” unless and until a buyer shows up and purchases it.

Basic economic theory requires both supply and demand. Markets don’t come into being both parties come together, until a buyer purchases (or at least makes an offer to purchase) something from a given supply. The mere collection, and marketing of products – houses, computers, cars, whatever – only constitutes supply. Unless buyers show up – with demand – and actually purchase, it’s a mistake to call the supply and advertising a market.

This might seem like a fine point, but it’s a critical one. Most MLS and real estate portal sites are not markets. They are databases. Portions of their data represents the market. But it’s not the supply prices.

Only offered prices represent the level of the market. That’s because offers only occur at the equilibrium point between sellers and buyers. And that’s where the market occurs.

Reporting seller pricing – and its ups and downs – is an exercise in misunderstanding markets. It’s closely tied to the erroneous tracking of another market statistic: days on market. Most MLS and portals calculate days on market as the time since the property was listed by a REALTOR to the current date. But if nobody has been making any offers, can we really say the home has been on the market for those days?

Not a chance.

Markets operate on the principle of price equilibrium. Prices require demand and supply. Reporting only on the prices of supply tells only half the story. Housing oversupply might be depressing prices – but only of sold homes – not unsold ones. Price adjustments on unsold homes are a normal market mechanism, because sellers have imperfect information and their emotions often override more reasoned price considerations. It happens in every market, boom or bust. A drop in seller price guesstimates only indicates their proper correction of pricing judgment. What’s more: falling prices for houses “for sale” but purchased with little or no money down doesn’t mean a loss of anything on the seller’s part. In many cases, certainly not equity.

A real drop in the market can be measured by comparing prices that induced offers this month to prices that induced offers last month. That’s where the “market” levels exist.

Why does this point matter? Three reasons: First, misinterpretation of price reductions as a drop of homes in the market harms consumer confidence. It conflates demand with price. Actual buyer demand may not have changed at all (the price of sold homes may be holding steady in the same markets, which it is in many places). Second, equating price reductions with a loss of market value – Trulia says nearly $34.8 million was “slashed” as if it was lost – is another fiction. If an $100 overpriced birdhouse gets no offers, but $50 ones sell quickly, did the seller really lose $50? Not necessarily, especially if the house was initially acquired with no real cash. Even short-sales don’t cause sellers a “loss” because in most states, there is no recourse: sellers don’t pay the lost different or get taxed on the forgiven (short) principle.

Yet it’s the third reason that this market misinformation is particularly harmful to the housing industry, regardless of boom or bust. Misrepresenting seller price reductions as a loss of market value validates the practice of overpricing by sellers. It makes it seem like initial seller prices were somehow “market” prices, and that it’s only some “dysfunction” of the market that is causing them to lower their asking price – and lose value. Economists – and real estate professionals – know this is a fallacy. It is an error of pricing in booms, and it’s equally an error of pricing in recessions. If the real estate industry is ever going to clear current supply, and pursue better practices in market creation in the future, it’s time to stop reporting fictional measurements as actual market changes.

  • Rmb

    Home asking price reductions in Little Rock Arkansas, or Miami Florida, or Oakland California mean little to and have no affect on sellers and buyers in Lowell Massachusetts. They only affect people in Lowell, who have a similar type, size, quality home which is competing on the real estate market. Go local for you information, make a choice because it is right for you and your situation. If you are going to live in a home for five years or more go ahead and buy, if you think you may have to sell, for whatever reason, in 2 years rent. It is that simple.

  • Anonymous

    I think the #1 peddler of home sales misinformation is none other than the NAR itself. I think they should quit issuing forward looking statements and just give the monthly #s of solds.

  • Funny question to pose to NAR – when isn’t it a good time to buy? lol – I like your other article about there is no national housing market. Everything is hyper-local, house by house & neighborhood y neighborhood. Great way of explaining how you need to find the proper yard stick to measure these “stats” by.

  • Interesting points, although here in the Phoenix market the sales prices have dropped 7.9% since the tax credit expired. In addition, inventory is up10%, pending volume is down 25% and we are definitely seeing mass price reductions. With that being said…. median home sales price is back to December of 2000 – IT IS A GREAT TIME TO PURCHASE IN ARIZONA!!

  • ThomasMcCombs

    Matthew: It is a bit of a stretch to say that if a buyer has not bought (or at least offered to buy) then there is no market in that product. You are using a very narrow definition of “market” and one that does not help to understand the meaning to the term, at least in the real estate area.

    If I have 5 cabbages to sell, and I offer to sell them for $1.00 each, and then only one buyer comes along and buys one of them, you seem to be saying that the other four are not on the market.

    If I buy those five cabbages for $2.00 each and record this on my balance sheet as $10.00 of inventory, what happens to my inventory balance when it becomes clear that they are only worth at most $1.00 each? Maybe even less than $1.00 since there are no buyers at any price?

    I would suggest that I have just lost at least $1.00 somehow. And the fact that I may have borrowed all the money to buy those cabbages does not matter. Nor does it matter that I might not have to pay back the lender for this loss. Ask the lender if he does not feel that he has taken a loss.

    Your reasoning, IMHO trashes all possibility of a useful understanding of markets. Your definition would substitute the term “clearing house” for market.

    The art of marketing is all about creating a market where none currently exist or in strengthening a weak existing market.

    It is a common concept that value is only real when a transaction has taken place. I say “nonsense”. For example, if I bought a house three years ago for $300,000, and If a market analysis last Sept 1 shows my house is worth $300,000, but a new analysis this Sept 1 shows that value at $200,00. I might well feel that I have lost $100,000.And I think a lender would agree and will base a new loan on this year’s analysis. My personal balance sheet would show a loss of $100,000.

    I could go on, but you get the idea.

  • Thomas, thanks for your thoughtful reply. Here are a few things that come to mind: First, marketing is not about creating a market (IMHO, and from my experience). Marketing is about learning what consumers want and then bringing to them the products/services they want at the prices they are willing to pay. Marketing doesn’t create the market, but learns about what might create a market. It’s an important distinction (at least for me).

    If you sell one of your five cabbages, then you had a market for ONE of them. The one that sold. The others may have been “available” or “priced” or even “advertised” but there’s never a market without both supply and demand actually occurring – ie, a transaction occurring. This is critical – in my estimation – because it’s the difference between houses “sitting” for sale, and those “selling.”

    Simplify the example: no matter what it cost to make the cabbages – $1 or $1 million – if no buyers ever show up and actually buy them, you have no market. This is what stock brokers actually understand, because they are market MAKERS, not market-ERS. They bring producers and consumers TOGETHER to CREATE markets. That’s how economic theory works.

    As for balance sheets, they are accounting tools, not economic tools. That was why “mark to market” accounting was distorting the “market values” of products that were NOT being sold. The value of a thing is ONLY what a consumer is willing to PAY for it – and it only occurs WHEN PAYMENT OCCURS. Everything else is a figment of our imagination, including many accounting tricks like “balance sheets.”

    Guess I’m just not willing to say that offering/advertising is the same as selling….

    But I greatly enjoy the conversation! Thanks for stopping by!

  • This is a great discussion. Pricing is a strange thing, because if price were the only issue in selling homes, realtors would not be needed – but that is a discussion for another day.

    When reviewing information on the national level, one must keep in mind that most “experts” are not really very skilled and most analysis is extremely shallow. Either the preparer of the information does not have the skill to dig deeper or there is a general belief that the consumer does not want or does not understand more complex analysis. But this is probably true with just about any type of information today.

    Focusing on actual selling prices, median and average, over some period of time is the only way to get a “feel” for what is happening in an area. And even in these cases, the numbers do not always reflect what is happening, since one-off sales can skew numbers. A perfect example is when the media wanted to “shock” everyone in July that prices dropped 30% nationwide compared to July a year before, but did not mention that sales were UP YTD and so were prices (of actual sales) and then what happened in August – sales were slightly up again, and so were prices – but that did not have the same shock value for TV.