Mining for Data - Part 8

Looking at the sales statistics from Realist.com, and the statistics from the same neighborhood, over the same time period, from the CRIS MLS, reveals some startling discrepancies. The mean sales price rose from $60,600 in 2001 to $73,000 (rounded) in 2006, according to the Realist.com figures -- a 20% increase. The MLS data, however, shows a decline from a mean sales price of $57,000 in 2001 to $39,300 in 2006, a 32% decrease. The Realist.com data shows an increase in the predominant (mode) sales price from $62,000 to $80,000; the MLS shows a decrease in the predominant price range. How could there be such a discrepancy?

Remember our assumptions from Part 6? We assumed that each transfer shown by Realist.com was the only transfer of the home that year. When we look at the MLS data and cross-check with the Auditor's sales histories, we find that a large number of the sales that are in the Realist data set are "flip" sales -- homes that sold earlier in the year as foreclosure and REO sales, and which were then resold at a much higher price by the investors who initially bought them.

The "flip" sales, for the most part, do not show up in the MLS because of a simple law of economics : real estate agents work on a commission basis and do not take on listings which they cannot sell on the open market. The majority of the "flip" sales are private sales made to buyers who do not understand the market, do not understand the terms of the financing that they are undertaking, and are not getting their money's worth in the deal. You can sometimes see these homes in the MLS as expired listings that failed to sell at their list price and went on to be sold for MORE THAN their open market list price.

If somebody offered to sell a home for $60,000 and nobody would buy it in a 60 or 90 day marketing period, would you pay $75,000 for that house? There seem to be people who are that stupid. There seem to be appraisers who are willing to value the real estate at the contract price regardless what the market as a whole is doing. There seem to be lenders who are willing to finance such deals. There seem to be securities investors who are willing to put such mortgages in the portfolios of 401(k) plans. Would you buy a stock or mutual fund that was based on such securities?

The situation is ready-made for a bookie. It is possible to examine the sales histories of many of these homes, drive by them to examine their physical condition, and then make a bet as to how long it will be before they are in foreclosure again. In fact, as I sorted through the sales data (and you probably saw it as well, if you did this exercise), some of these homes have been foreclosed two to three times in the past six years!! Some of the investors have bought a home from the bank, "flipped" it to a gullible buyer, and within the six year period, bought it back from another bank and "flipped" it again!

Maybe it is time for the Kingston Trio to redo "Tijuana Jail" with new lyrics?

Government statistics for real estate sales generally follow the path of the stats derived from the Realist.com data. To be sure, Realist.com DOES include all the sales, including the foreclosure/REO transactions, in the full report sheet for each property. It is the cumulative sales search that only reports the final price for the year in the search results. That is only logical; there is no practical way to report the multiple sales in a search which has fixed start and end time parameters. It is the negligence of the statistician, however, whether he be a bureaucrat or an appraiser, that is responsible for the misreporting and/or misinterpretation of the data.

Next -- finally -- a recap and conclusion.