Imagine what would happen if the state of Massachusetts or your city or town imposed a real estate transfer tax of $50,000 on each transaction? Consumer outrage, right? Maybe even widespread opposition within the real estate industry?
Yet, during 4Q2013, bidding wars became so common in Cambridge MA that one in five real estate transactions sold for $50K or more over it’s asking price. In both 4Q2009 and 4Q2010, only one home sold for more than $50K over asking price in the People’s Republic of Cambridge. In the past twelve months, bidding wars $100K or more over asking price have risen three fold, from 1 in 35 properties in 4Q2012 to 1 in 13 during 4Q2013. Stunning!
It’s not clear. But entering into 1Q2014, the stage is set for the problem to become more acute. As shown in the image above, inventory is down by two-thirds in the People’s Republic turned Puopon Republic. In fact, an “On-Market SnapShot” revealed just 33 listings on 1/9/14, down from 93 on the same day a year earlier. And the most expensive listing has nearly doubled, from $3.95M last year to $7.25M this year.
Is it ironic or hopeful that all of this happening in the backyard of one of the nation’s leading consumer advocates, Senator Elizabeth Warren?
In April 1997, when a public hearing was held in the state house to impose a real estate transfer tax to create affordable housing in Massachusetts, the opposition was led by the real estate brokerage industry. More recently, the industry doesn’t seem interested in the financial burden and risk bidding wars transfer to individual buyers and the overheated housing market.
In 2014, those risks could become more costly because of a changing housing market. As Real Estate Cafe has blogged recently, increased interest rates have shrunk purchasing power by 18%, month-over-month (MOM) sales are down for the fourth months in a row, pending sales prices have been down MOM two months in a row, and multiple bids are reportedly down, too.
So what’s the problem: if demand and prices are falling, won’t bidding wars disappear, too?
What’s going on behind BLIND bidding wars?
It’s a complex discussion, but here’s a preview of four underlying issues:
1. As we have written in the past, bidding wars are BLIND and currently unregulated;
2. Market psychology in real estate is slow to change, so fear of loss may extend beyond the threat;
3. Our hypothesis is that designated agency has covered over conflicts of interest that can drive bidding wars to unprecedented levels of frequency and cost.
4. When agents hide listings, through a practice known as pocket listings or whisper listings, buyers may be manipulated into overpaying for properties because of an artificially low level of inventory.
We’ll write more about each of these issues in coming blog posts and invite your insights. Until then, we’ll bullet point some stats from our recent analysis of MLS sales, begin asking questions, and invite discussion and possible solutions.
How big is the problem?
- During 4Q2010, just 10 sales or less than 6% of listings in Cambridge sold for over asking price; last quarter, it was 115 properties or nearly 60% of listings – a stunning ten-fold increase!
No wonder bidding over asking price have become the new normal in Cambridge. But is it normal, or are buyers being manipulated by conflicts of interest?
- As previously noted, more than one in five homes sold in Cambridge during 4Q2013 sold for $50K or more over the asking price. Fifteen of the 41 sales involved an in-house sale: four were handled by one agent (a dual agent) and eleven others involved two agents working for the same brokerage, presumably as designated buyer agent & designated seller agent.
- During 4Q2013, 3 of 4 bidding wars that sent winning bids $300K or more over asking prices in Cambridge involved an in-house sale.
What’s the bottom line: Overall during 4Q2013, there were 193 residential transactions in Cambridge; 115 sold over their asking price. What was the total additional cost to homebuyers involved in blind bidding wars: a staggering $7.8M. That was one business quarter in one town in one state. Doesn’t that raise a lot of questions?
Time for an investigation or at least a discussion?
Beyond the costs and opportunity costs to individual buyers, are complex questions with widespread public policy implications: “What impacts are conflicts of interest having on the housing market?” The question extends beyond individual budgets, to the composition of communities, and potential cost to tax payers who are insuring 90% of mortgages; even beyond the legal obligation of real estate brokerages, to the games agents play and the potential for a bidding war backlash, regulatory reforms, or worse, lawsuits. The discussion is much too complex for one blog.
Who voice should be included in the discussion? Should a regulatory agency or Senator Warren’s office host a series of public hearings, or should consumers and consumer advocates host them ourselves, unconference-style?