Inverted Pricing Cascade Showing up in Austin Real Estate Prices

by Steve Crossland, REALTOR in Austin TX on October 31, 2007 · 27 comments

I ran a CMA (Comparative Market Analysis) the other day for someone. The CMA revealed what I call an inverted pricing cascade. That is, when looking at the pricing of the Active, Pending and Sold listings, the lowest average prices and prices per square foot for this particular neighborhood started with the Active listings, next was the Pending, and then the Sold listings were the highest priced. This is a symptom of a neighborhood where prices are dropping.

Normally, in a rising market, it’s the other way around; Actives are priced higher, followed by Pending, then the actual Sold listings have the lowest prices. This is because as homes sell, the sold prices justify higher listing prices and thus the Actives and Pending lead the market in pricing. Each home that sells for a higher price justifies the next listing to be priced higher, and thus prices move up over time. The result is, when I scan a “rising market” CMA report and move down the page looking at the pricing of each category, I see a “cascade” of price ranges, falling from the Active (highest priced) to the Pending (middle priced) to the Sold listings at the bottom. When it’s headed the other way, I call that an “inverted” pricing cascade.

So what does it mean if this normal progression is turned around? It means, plainly, that the average price for the neighborhood I was looking at is headed down. It means, as a seller or listing agent, you have to look at more than just the Sold pricing, you have to look at the Active and Pending listings and wonder why it is that your competition is all priced at what seems to be BELOW MARKET (based on Sold comps), yet none of them are selling. It means you have to get underneath your competition in pricing and above your competition in condition.

I ran CMA stats for many other neighborhoods, and this inverted pricing cascade is not widespread, but I did find other neighborhoods where it exists in varying degrees. Other areas are still showing strong sales and rising prices. If it spreads though, we could see prices flatten out in coming months, especially if the demand remains weaker due to buyer pessimism and stricter loan standards.

Is this good news or bad news? Neither. The market is what it is. Buyers have a bit more breathing room than last summer, and sellers have to be a bit more flexible if the home is not already priced right. The homes priced “in the market” are fewer than the homes priced “out of the market” overall, so there will be a rise in failed sales efforts, as I’ve already documented in a recent blog article. But a lot still depends on location, price range and condition.

{ 27 comments… read them below or add one }

1 shireen November 1, 2007 at 7:27 pm

Is no one commenting on this post because it is just too, too, depressing?

Right now, the biggest thing holding us back from buying is the stress over selling our current home! I’m in central Austin and would be buying in another part of central Austin — certainly this market is nothing like SoCal but things are sitting, prices are flat or falling. I see lots of flips just sitting, and poorly marketed, poorly priced house sitting and sitting. I can’t imagine anything selling right now for more than it would have fetched in June or July.

So we are on the sidelines, sitting and waiting til spring.

2 Steve Crossland November 2, 2007 at 6:58 am

Hi Shireen,

Well, I wouldn’t say it’s depressing except for someone who bought in the last year or two at top dollar and needs to sell right now, and is in an area where prices are flat or falling. It’s also not bad news at all for buyers who may be looking to buy now. Normally, a buyer would have reduced inventory to look at during this time of year, but at present, there are a lot of homes on the market and less compitition from other buyers for those homes. The data doesn’t say we’re in a “buyers market” overall, but I do think some neighborhoods have very good opportunities for buyers right now.

Steve

3 Steve Crossland November 2, 2007 at 9:11 am

> I’m in central Austin and would be buying in another part of central Austin

I forgot to add, in your situation, you can reasonable expect any sales price discount that you have to give on the sale of your current home to come back to you on the purchase of your new home.

Steve

4 Observer November 2, 2007 at 10:22 am

Steve, signs of it happening were everywhere. You shouldn’t be surpriced. Austin is (was) not immune from what is happening nationwide. The REAL house prices already went down big time thanks to the depreciating US dollar. Have you noticed the increased prices on almost everything imported you’ve been paying in the last couple months?

5 Martha November 2, 2007 at 1:09 pm

This is my first time posting on this website, but I am getting worried and want to hear what others are thinking. We also live in central Austin (Brentwood) and want to sell our home in the Spring, take the profit, and buy something newer and bigger in a better school district (probably in SWW or 1N). But should we make our move now…before prices start to drop in central Austin? Should we sit on the sidelines and wait until spring or make our move immediately?

6 Steve Crossland November 2, 2007 at 1:36 pm

Hi Observer,

Actually, the sign are not “everywhere”. Check the area by area breakdown in the 3rd Quarter Market Update below. There are still, many, many areas in Austin that are performing wonderfully. So yes, the macro signs are there, but it’s still very much a market that depends on the area, price range and neighborhood to determine whether things are slowing or not. For example, look at the sales numbers and days on market for Area 10N and 10S in South Austin. Look at the Central neighborhoods.

http://crosslandteam.com/blog/2007/10/22/austin-real-estate-market-sales-update-sept-2007-and-ytd/

Hi Martha,

Your area (MLS Area 2) is doing fine. And as I reminded Shireen above, the prices are relative, so if you’re moving up and have to discount your home somewhat, and you’re enjoying the other side of that equation as a Buyer on your replacement purchase, you actually come out ahead in a move-up scenario.

This is a tough market and environment to write about as a Realtor. On the one hand, when I point out that there are many rays of sunshine beaming through the dark clouds (areas 10N, 10S, Southwest Austin, Central Austin,), it can be viewed as typical Realtor cheerleading (e.i. – it’s always a good market), but that fact is, it’s true that Austin is doing very well. Slowing, yes, doing poorly, no.

On the other hand, when pointing out the downsides of a market, people can say “see there, even the Realtors are saying it’s slowing down, so it must be doubly bad”.

The fact is, there are a lot of homes on the market at present that are not going to sell. And there are a lot of homes on the market that are indeed selling fast, and for good prices. Some homes are selling for less than they would have 6 months ago, some for more. It’s truley a mixed market at the moment.

Steve

7 avid reader November 2, 2007 at 3:03 pm

Love your blog Steve, longtime reader. I can’t speak for other areas, but things still seem to be booming in Northwest Hills and Westover Hills where I live (the northernmost section of 1A). I’m not a realtor and don’t have access to all of the stats, but I walk around the neighborhood a lot and watch listings pretty closely. Prices are definitely up and houses don’t seem to sit for long. Good news so far – I can remember walking around my old neighborhood (Lakewood) in 2002 and 2003 and cringing at the reductions and all out fire sales. Let’s hope that doesn’t happen again, at least not on that scale.

8 scott November 4, 2007 at 9:48 am

I strongly feel that buyers and sellers act enmasse nowadays, far more than years past. And..thats a very bad thing, BTW.
Years ago, if you needed to buy, up, down, whathaveyou, you just did, and followed, at most, your own advice, perhaps
a few trusted friends and associates, and your agents. It got the job done, and was like that up to about the time
when the web became a source of market data. Move ahead to the present, and we also have a plethora of cable “flip-it”
shows as well. Now, we evidentally can’t make a personal decision unless we consult soothsayers, astrologists, experts
on the web and cable, RE blogs, and so on.
The prob with that is when things take a downturn RE buzz-wise, the mass of RE actors, buyers AND sellers, freeze up.
They can’t act upon their own volition or hunches anymore, and wait for the media mass buzz to tell them the coast
is clear, nows the time to buy, sell, etc. If thats the case, we are all a hostage to local and national RE media, which is sad.
Not only is all RE ultimately local, all RE decisions are ultimately personal and unique, like every individual home purchase.
The more we rely on outside sources for info, the less we are able to act. If we freeze up, we just mirror the national
and local media, which is simply an aggregate of a sum of many personal choices, each germane and unique in its own
way.
To sum, if you feel its time to sell or buy, and you aren’t doing it primarily for investment purposes, do it. Trust your
hunches. It will work out fine. If you are selling or buying solely FOR investment purposes, you should treat it as any
portfolio of stocks, bonds, etc., and pay a trusted financial advisor who follows such trends, including housing, full-time.
Don’t try to figure it out yourself, as you will be overwhelmed by the info, good/bad/indifferent. There is no objectively
“right” time to buy/sell a home. It varies for all, in every circumstance, regardless of what other folk are collectively
doing, or what the RE buzz on the net, print, and cable de jour is.

9 Steve Crossland November 4, 2007 at 11:39 am

That’s well said, Scott. I think it plays out in many life decisions we make nowadays. Our Dads and Grand Dads (and Mothers and Grandmothers) and beyond, trusted their gut feelings and personal intuition about things much more than the individuals of today. We often seek absolute affirmation and justification for decisions we make prior to making them. Life can’t always work that way.

As I tell my real estate investors, you can operate under good, sound guidelines and rules of thumb, but the market will often make you a fool or a genius 5 years down the road, regardless of your best though out (or poorly laid) plans.

Or, as I put it sometimes to real estate investors, “you don’t get to find out if you’re smart or not until 5 years from now”. That’s because one bad tenant and a torn up property can blow your speadsheet out of the water.

Steve

10 scott November 4, 2007 at 1:23 pm

Thanks, Steve.
The only thing I may add is that we are probably going to go back to that older, better mentality of trusting hunches
per investors AND owner-occupants. Analysis-paralysis is a cumbersome mode of action in all realms of life, including
real estate. Isn’t most of life itself a hunch, when it comes down to it? Selecting a mate, getting married, job choices,
major purchases, having kids, etc. all come down to hunches. We look for confirmation after the fact, but, ultimately,
if we waited until we were absolutely certain things were on the one, we would not be able to take a step outside in the morning. We can crunch stats or data for days, but all actions, including home purchases, all come down to a simple
hunch.

11 Danny November 5, 2007 at 1:44 pm

Residential mortgages were harder to get than at any time in the 17-year history of the Fed’s survey of banks’ senior loan officers, the Fed said today. I agree that the Austin RE market is not in a bubble, but it will suffer the same fate as other markets because it is difficult and costly to obtain financing.

12 scott November 5, 2007 at 5:02 pm

Dan,
It will be slow all over the US. Some places will be slower than others, however, a slight twist in the “all real estate
is local” phenomenon. California, Nevada, Arizona, and Florida are essentially frozen in place. Could be many years
before they get back in balance, much like the late 80′s. Texas is very attractive to business, and will continue to
grow. It may be least affected here.
The RE craze was not a normal situation. I’ve been selling RE since ’95, and it was quite normal up to about ’99.
It was not a “cool” industry, and still largely consisted of empty-nester females and semi-retirees, because it
was slow moving. Few people made fortunes selling real estate then, be it agents OR investors. No flip-it
cable shows, no hot internet sites, and realtor.com was just getting started in the late 90′s. I remember when
folks would come in the office just to get MLS sheets, which seems so antiquated when I think of it. Out of nowhere,
around 2001 on, everyone wanted to try their hand selling real estate. We had lots of kids with college degrees
doing it, when with hindsight they should have been boning up on a career, seeing what has happened. We ended
up with far too many agents, investors, and cable shows. NOW, we are just going back to normal outside of thein
states I mentioned. Austin should remain a relatively vibrant RE market, as well as the rest of Texas, which is
experiencing a long awaited and deserved renaissance. We will probably lose a few agents and small-time
investors, but it will be much better and healthier for that…….

13 ARZ November 5, 2007 at 10:41 pm

The talk to “trust your own gut feeling” in my opinion is wishful thinking. After all, we are college educated, well-informed bunch unlike our grandparents. We treat everything in life in a scientific way. The old guards know how to keep their body lean by work work work then eat a lot of red meat to keep up, we know how to be fit by calculate calories of each meal we eat, then go to gyms for hours each week. It’s not a simply a different universe and different rule of game.

In the end, it’s just a game. Some play gracefully and most suck at it.

I still don’t understand why everyone keep saying Texas is great for real estate. It’s really not that great if you look at the appreciation rate in the last 20, 30, 40 years. It’s lag way behind most coastal states. It may look good for short term investors, but for those who plan on live in the same house for a while, I don’t quite know how well that be.

14 scott November 6, 2007 at 3:16 pm

Texas marches to its own drummer. Almost like its own ecosphere, it booms and busts on its own dime, in its own time.
Right now, it is relatively solid compared to most of the US RE wise, ironically because it indeed did not boom like
the rest of the US RE-wise 2001-2006. Now, almost by default, it is comparatively affordable, and is attracting many
buyers, from relos to investors. The not really great last 30,40,50 years thing doesn’t hold water. National RE
has traditionally kept up just ahead of inflation, around 2.5-4% a year at best. Only a few cities on the coasts
beat that, and in California’s case they lost value in the late 80′s with the defense cutbacks and high tech fallout,
taking it 10 years to regain value. RE was never seen as an investment like it is now till recently. Frankly, until
around 2001, few buyers knew or cared about any national or regional appreciation rate, and all re decisions were local.
We will be going back to those days soon.

15 Observer November 6, 2007 at 11:03 pm

Scott, US dollar is in a free fall. Almost 15% drop in value for the past month. 1 canadian dollar = 1.10 US dollar as of today. Are you still saying Texas RE “is solid” ? ;-)

16 scott November 7, 2007 at 5:42 am

There are some really bad macro issues per the US dollar and all that. The US financial sytstem has not been
minding the store for years, floating debt, and absorbing recirculated dollars from asia to prop up that aforementioned
floated debt. The US real estate market, through its lending system, is obviously wedded to the former. I think you
are infering that Texas real estate is not impervious to these issues. No doubt it is wedded to those same macro
issues, but, again, not to the extent as some other states, like the ones I mentioned. In a land and times of storms,
you can say they are simply on the highest ground while the financial problems work themselves out. Texas RE
prices never boomed like the coasts during 2001-07, so they simply are less exposed than other places to the fallout.
You simply can’t fall if you don’t rise. Texas also has the most vibrant and growing job market in the US right now,
with good jobs, from manufacturing to financial. The lending crisis will have an effect, but, again,not the death-knoll
effect it will have in other areas. To sum, NO real estate is SOLID in the US, if you define solid as being 100% immune
to macro issues. It will slow, and has been slowing, but nothing at ALL like you see in many other areas. I don’t think
residential RE should be considered merely as an investment anyway. It is really nothing but a place to live.
Commercial, industrial, retail and office RE are the classic investment vehicles. We are simply going to go back to
the old school thought of RE being a place to live. Cable flip-it shows will seem hilarious years from now, just like
we laugh at polyester suits in the late 70′s. To sum, yes, Texas RE will be affected by macro financials, but the least
of the US because of its solid footing prior to the sub-prime fallout. The sky is not falling yet, here in Texas……

17 Steve Crossland November 7, 2007 at 12:54 pm

Hi Danny,

> I agree that the Austin RE market is not in a bubble, but it will suffer the same fate as other markets because it is difficult and costly to obtain financing.

I don’t agree with “suffer the same fate” because part of the suffering of other areas is a result of huge price run-ups. We didn’t have that here in Austin.

ARZ,

> After all, we are college educated, well-informed bunch unlike our grandparents.

Yes, but you’ve heard of “analysis paralysis” haven’t you? I think there is a lot of that nowadays. I other words, more intelligence doesn’t always result in better decisions.

Observer,
> Are you still saying Texas RE “is solid” ?

I think it is. I hear your worries, but I’m still buying.

Scott,
> We are simply going to go back to the old school thought of RE being a place to live.

Yes, I think a lot of “investors” lost their shorts and won’t be dabbling anymore. Investing in real estate is risky. Many people should NOT invest in real estate and I’ve told many a prospective buyer that. On the other hand, real estate has created more wealth than any other vehicle, and continues to do so.

Steve

18 scott November 7, 2007 at 1:00 pm

most excellent discussion, folks!

19 Observer November 7, 2007 at 6:41 pm

Scott,
> We are simply going to go back to the old school thought of RE being a place to live.

I wish it would be that way. Everybody (except speculators) would benefit from it. But unfortunately people’s mindset has been changed in the past several years and most of the people are looking at their principal residence as an investment (at least as a long-time one). It wasn’t buyers who told themselves: “Buy now or will be priced out forever” or “RE always goes up” ;-)

I hope you’re right about your vision on Texas RE. I am a homeowner too and wouldn’t want to find myself upside down on my house in the next few years down the road.

20 ARZ November 8, 2007 at 2:08 am

“real estate has created more wealth than any other vehicle, and continues to do so”

Well said. I think the current US dollar depreciation is a sign of diminishing such wealth through hidden means. We simply had way too many millionaires in this country that became millionaires by doing nothing (maybe updated their kitchen count for something, but the return of investment is way too high here).

So, to “rob” away people’s millions, make their millions worth much less is probably the most straightforward way to do so.

21 Ray November 8, 2007 at 11:24 am

The media plays most people like they are puppets. Some totally unqualified ‘journalist’ with zero real experience or understanding of a subject cuts & pastes and dresses up an out of context news wire feed from another totally unqualified ‘journalist’ in another state, or possibly even another country…and suddenly thousands of readers of such learned (joke BTW) local publications as the Statesman enter panic mode – it must be true if it is published. In this way, an erroneous train of thought gets moving en mass like mass hysteria taking hold and very often it is for absolutely no reason at all or even the complete opposite of reality. The sad truth is that the factual content of news in news media is a distant second priority to advertising, including paid for fake news advertorials, these days.

Concerning local realty: A new million dollar home of modest size sold very recently in 78704 not far from Zilker park. Is that a sign of a buyers market? No, it’s a record high price in that area I am pretty sure.

22 scott November 8, 2007 at 2:17 pm

I would say its more like the power structure in the us uses the media like personal puppets. If they need to fan the
flames of fear to justify more “pigs at the trough” Halliburton contracts, all the media is at the waiting to toss out
the usual boogieman suspects. When the financial sector wants to rip off the public, they tout home buying as the
best investment in the history of the republic, and the media comes out willingly with flip-it shows and sundry
glamorizations of Mcmansions and such. After Citigroup and friends can’t rip off the public anymore by selling
sub-prime garbage wrapped up in a bow to foreign investors, then the media willingly comes out scaring homebuyers,
as the game is over and no more easy money can be made by ripping off consumers with alternative loan products.
The media is the puppet, and the talking head anchor is its tangible representation. Not the public, if we choose
not to listen this time. The american public does not NEED a media to tell them what to do with their kids, what is
safe, what to buy, when to buy, etc. They can do quite well by working under their own hunches. The american
public can and should think for its OWN self!

23 mare November 10, 2007 at 9:43 am

>> “I would say its more like the power structure in the us uses the media like personal puppets. If they need to fan the flames of fear to justify more “pigs at the trough” Halliburton contracts, all the media is at the waiting to toss out the usual boogieman suspects. When the financial sector wants to rip off the public, they tout home buying as the best investment in the history of the republic, and the media comes out willingly with flip-it shows and sundry glamorizations of Mcmansions and such. After Citigroup and friends can’t rip off the public anymore by selling sub-prime garbage wrapped up in a bow to foreign investors, then the media willingly comes out scaring homebuyers, as the game is over and no more easy money can be made by ripping off consumers with alternative loan products. The media is the puppet, and the talking head anchor is its tangible representation. Not the public, if we choose not to listen this time. The american public does not NEED a media to tell them what to do with their kids, what is safe, what to buy, when to buy, etc. They can do quite well by working under their own hunches. The american public can and should think for its OWN self!”

I don’t necessarily agree with this. I think the biggest issue with the media is not simply incorrect information, but too much of it from different sources, dressed up to look favorable or unfavorable. One PhD says low-carbs diets are fine, while another says they’re terrible. Two different sources, which are highly educated and respected in their field, draw two different conclusions. So, who do you believe? This sort of thing is everywhere. With two (or more) different camps pulling the puppet strings, things get confusing real quick. Real estate analysis is no different.

I suppose that there is one good quality about the media. It’s fairly predictable.

24 scott November 12, 2007 at 7:25 am

Those “info nuggets’ you see on your local news about this being good or bad for you is generally produced by independent production companies who sell their 2-minute segments to local news stations across the nation. One called IPV or something like that supplies the lions share of them. They are paid as well by vested interests to produce the content, which usually retroactively tries to “prove” that their product is healthy, or the competitions is bad. This actually filters down to the university research departments, who are subsidized in kind to carry out these “studies” in the first place.

You really have to focus on the fact that even national news organizations rely heavily on this fabricated “non-news” for content, to realize how little is actually generated by the station you are watching or paper you are reading. Finally, news about what is good or bad for you, or alarmist news fabricated to scare, per housing market trends, simply sells newspapers/generates ratings. The sum result implies that most folk would be better off not reading newspapers or watching television.

25 John Stroker November 12, 2007 at 12:38 pm

How is Tarrytown holding up in value for the average range home (700k-1.2) in that neighborhood? Has that held up, or slowed as well?

26 shireen November 12, 2007 at 4:42 pm

Steve can give you a more authoritative answer but as long-time Austinite and interested observer of real estate, I can tell you that Tarrytown is holding up quite well!

I have noticed a few properties that need updating come on the market at sub-600K prices and they have all been snatched up fast!

Houses may be staying on the market longer in Tarrytown but I haven’t seen any overall price drops.

27 Steve Crossland November 13, 2007 at 3:46 pm

> How is Tarrytown holding up in value for the average range home (700k-1.2) in that neighborhood?

Hi John,

It depends on what you call “slowed”. The newspapers call it a slowing market when the number of sales drops. I call it a slow market when prices stay flat or drop.

For Tarrytown, which is most of the 78703 zipcode, here are some stats:

2006 YTD through Oct 31
Number Sold = 269
Average Sold Price = 638,957
Avg Price per sqft = $264
Avg Days on Mrkt = 80

2007 YTD through Oct 31
Number Sold = 218
Average Sold Price = $723,467
Avg Price per sqft = $287
Avg Days on Mrkt = 75

Conclusion = The 78703 zipcode is holding up well. Homes are selling faster and for higher prices than last year. But that’s looking only at the homes that actually sold. So, there’s a qualifier here.

There are, at present 104 Active Listings and 31 Pending listings in the 78703 zipcode. That’s too many active listings given that 218 sold the first 10 months of the year. 104 are NOT going to sell in the next 30 to 90 days. A lot of those homes on the market today are not going to sell. The ones that do sell will, ironically, will still sell for more than they would have a year ago.

Steve

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