Some Data I Just Don’t Understand…

Maybe they're checking Redfin's mobile app...

I think this might be a bleg (that would be a blog/beg) for help in making sense of some recent buyer data. Some of this just makes so little sense to me that I’m asking the Notorious community for assistance.

The buyer data comes from Redfin. I’m focusing on it because I know Redfin’s corporate culture is data-driven, and because the folks there are really good at data. They constantly survey their customers, they take pride in their NPS-derived customer satisfaction surveys, and pretty much have been data junkies from day one.

Given that we’re only looking at buyer survey data from one brokerage, and a fairly unique one at that, it isn’t clear how much weight we could/should put on the data. But it’s something. If you’re aware of any other brokerages (NAR’s survey is a bit too broad/diffuse, and I’d like to look at broker-level surveys) who have this kind of buyer data, I’d be interested in knowing about them.

So let’s get into it.

The Redfin Buyer Survey

I’m not going to copy the whole thing — go ahead and read the post in full, as I think it’s worth reading. The basic conclusion that Glenn Kelman comes to is in a different post that is also worth reading in full:

Basically, the point is that the real estate market has bottomed out. That very well may be true, although I’m not completely sold on it, for reasons discussed previously.

But since Glenn based his conclusion on the Buyer Survey, I looked through it. And here are some of the more interesting answers.

Image Property of Redfin

Note that this chart doesn’t have to add up to 100%, since respondents can check multiple answers.

A full 20% — one out of five — of Redfin’s buyers said they have better job security. Another 16% said they got a pay raise, enough to warrant thinking of buying a home. 12% said they have increasing confidence.

Where is this land of job security and raises? Who are these buyers? Despite “official” unemployment stats looking slightly better (and by that I mean, the patient is out of intensive care, but hardly the picture of health), all indications are that most of the improvements in the unemployment numbers are coming from people simply dropping out of the labor force. That is to say, they’ve given up on finding another job.

Who are these buyers that are getting raises, feel like they have better job security, and have more confidence? Are they all in the Washington DC suburbs? It’s the only explanation I could come up with.

Then we have this:

Chart property of Redfin

The most unusual datapoint here (which I asked on one of the posts) is that only 2% of Redfin buyers are Investors. We know from NAR stats that investors were responsible for some 30% of all sales in 2011, and anecdotes with real estate agents in CA, AZ, and even NY/NJ area suggest that investor activity is a big part of the buyer demand out there.

But there are a couple of other interesting data points.

First, 48% of Redfin buyers are renters who are looking to become homeowners for the first time ever. It’s unclear what the demographics of this group are, but I imagine we’re talking about the 30-something young family crowd here. How are they getting financing?

The Mystery of Financing

We’ve all known about (and NAR has been complaining for years about) lending standards that went from nonexistent to financial proctology exams. Saving up for 20% downpayment is no joke, even if house prices have dropped significantly. And that assumes you don’t run into other problems like debt-to-income ratios.

I also have to imagine that most young people (late 20′s, early 30′s) who are in a position to even consider homeownership are going to be white-collar college graduates, rather than Starbucks baristas or blue-collar Burger King workers. Which means most of them are going to be saddled with record student debt loads.

Barry Ritholtz of Big Picture, an influential finance blog, is in the midst of writing about the real estate market. In one of his posts, he wrote about this precise issue:

In the real world, the home buying process begins with two key financial factors: The potential buyers down payment, and their ability to qualify for a mortgage.

In today’s world, most American families are cash poor and debt rich. They are deleveraging, not saving. They simply do not have the $40,000 that is the standard 20% down payment on the median priced US home.

Those that do have the extra cash must then meet the next hurdle: Qualifying for a mortgage. This means they must have a good credit score, not be carrying too much debt, have a steady income, etc. (Even those that qualify must then make sure that their house appraises at the sale price, but that’s a latter discussion).

I have to think that most of these first time homebuyers are relying on FHA loans, which only require a 3.5% downpayment, instead of the 20-30% that “traditional” loans may require. Indeed, usage of FHA loans for purchases have soared from around 4.5% in 2005 or so to 38% in Q4 of 2011.

Two Concerns About FHA Loans

First, they’re getting more expensive and harder to get, as the FHA tries to get out of funding nearly four out of every ten home purchases in the United States. As the HUD spokesperson says in the article, “It’s a way of protecting consumers from getting into loans they ultimately can’t afford.”

And apparently, the FHA is concerned for good reason:

What the press release didn’t say, however, is what percent of properties backing FHA-insured mortgages in its database were in a negative equity position (it gave the number, but its database does not include all mortgages). CL was nice enough to give me that figure – according to CL, 31% of the properties in its database backing FHA-insured mortgages were in a negative equity position in December. That compares to 21.8% for properties backing non-FHA mortgages.

Almost a third of all FHA loans are underwater, which isn’t that difficult to imagine, since the buyer only has 3.5% equity in the house at start. Prices dropping by a mere 5% would put that house and that loan underwater. With the stigma against foreclosure all but gone, what stops these young buyers from just walking away from the mortgage?

This applies to the 48% of Redfin buyers who are current renters, but want to be first-time homebuyers. What about the 7% who are living with mom and dad, or freeloading off of friends? Who are these young people living at home and wanting to take the jump to homeownership? How are they getting financing?

Could Be Just Redfin

As Glenn notes in conclusion, the survey may reflect the unique demographic profile of Redfin users:

The high proportion of renters among our customers may just reflect the tendency of Redfin’s buyers to be young. But I think it also shows that in a market in which prices may be near a bottom, the people who want to buy the most are the ones who don’t also have to sell.  My guess is that there is probably a broader youth movement among American home-buyers.

But that broader youth movement is what concerns me the most.

They’re the hardest hit in the Great Recession. They have record breaking student loans, but are facing the bursting of the higher education bubble (where the good jobs that supposedly would have allowed them to repay their student loans just aren’t materializing), an employment market that might require them to move, never-before-seen gender gaps inhibiting family formation, and a changing home finance environment.

Oh yeah, and they’re competing with cash-rich investors (some of them vulture funds with billions in assets) for the lower end of the market that would be the properties they are most likely to be able to afford. (There’s your multiple offer, low-inventory problem right there.)

In Which I Ask for Help

So help me out here. The premise of the optimism throughout the industry right now appears to be that there is a large cadre of young professionals who are flush with cash, who are getting raises, feeling far more secure about their jobs, who think home prices aren’t going to go any lower who want to buy now when rates and prices are at historic lows.

Is this what you’re seeing in your markets? Are your first-time buyers really feeling more confident these days? Have any of your own buyer data you can share?

-rsh