Howdy Redfinnians!

It's time for the monthly round-up of everything that moved in the real estate market! The short story is that the real estate market is stagnant, mostly because home-buyers can't get credit, and sellers can't get enough money for their house to pay off the bank.

The Case-Shiller index published on Tuesday showed home prices increasing across the board in May 2010:

But that doesn't tell the story of what has happened since then: sales volume for existing homes declined 5.1% in June, and we believe prices in most markets are now stagnant or declining. We particularly worry that California prices are over-heating: annual increases of 13% in San Diego and 20% in the Bay Area don't seem sustainable.

But a lot has changed since May, which Case-Shiller hasn't accounted for yet. Sales have been declining due to a hangover from the federal tax credit that expired April 30. Tax-credit deals were still closing in May, but not many in June.

New Home Sales Bounce 24%

We argued last month the hangover will last all year, there has been some positive news: the number of new contracts signed by home-builders bounced from an apocalyptic low in May, to increase by 24% in June. Since new-construction contracts take months to close, this increase is an early indicator that demand isn't in free-fall. That said, we'd feel even better about it if the Commerce Department didn't have a habit of lowering each month's estimate in a subsequent re-statement.

A Lull in Closings, But Early-Stage Demand at Redfin Stronger Than Ever

In our business, the number of customers signing offers is down 40% from one frenzied week during the tax-credit peak, but up 6% compared to the last four weeks. What's surprising is that the number of folks touring properties is at historic highs -- normally this late in the summer, early-stage activity begins to decline. The buyers we're working with now are in no rush, so demand will take a while to recover.

Many of our more languid buyers complain that the quality of listings on the market just isn't that great, mostly leftovers from whatever didn't sell this spring. We're certainly seeing sellers making more concessions at the inspection, so long as you get a contractor to provide a reliable estimate. But we're also putting more listings on the market than ever, also unusual this late in the season.

Foreclosures Continue to Decline: Have Banks Lost Their Nerve?

Another reason listing quality will improve is that foreclosures, while still high by any historical standard, have begun to decline, with a 3% drop in foreclosure filings from May to June. This data is also mixed, with increases in some states as others decline, and conflicting claims from different data providers about the nationwide trend. What we have noticed is that even when there is a foreclosure filing, banks aren't always going through with it, instead encouraging troubled borrowers to sell their own home in a short sale. In Seattle for example, June foreclosur e filings increased, but much faster than foreclosure auctions. We've also noticed anecdotally, that the historically miniscule number of borrowers who worked out a payment plan with lenders has modestly increased.

It will take us years to work through the supply of foreclosed homes -- and years for sellers who want to sell to see prices that will allow them to pay off their mortgage -- this will slow a recovery, but long-term we think we're beyond the hemorrhagic increases in distressed inventory that drove the big price drops in the market.

Buyers Can't Get Credit

The problem now is fewer buyers. Unemployment is nearly 10%. And even though money is cheap, most people can't get it. It will be years before folks who've gone through a foreclosure or short-sale will be able to borrow again, and lenders are punishing borrowers with a credit score below 740. Cash investors are responsible for more activity than usual, exploiting what is essentially a credit arbitrage opportunity in the low-end market, getting bargains because many of their would-be competitors don't qualify for a loan.

Interest Rates Still Low

Until a lot of consumers jump into the market, we won't see any major price increases. Many folks in the real estate industry believe that nobody will get off the dime until mortgage interest rates take their first nasty jump. Last week, rates reached historic lows of 4.56%:

And that's a wrap on another newsletter. As usual, we'll post this sucka up on our blog for public comment, or you can just write back with private questions. I try to answer every one.

Best, Glenn

Glenn Kelman | CEO, Redfin

Howdy Redfinnians!

The real estate market has fallen asleep in a lawn chair, and we're here to tell you all about it! Below is our monthly roundup of everything that moved in the market...

April's real estate newspaper showed up on our doorstep this morning in the form of the Case-Shiller data on U.S. home prices -- it takes the economists that long to sort out the data. As we predicted, April home prices increased from March almost across the board, with the lone exception being New York. The biggest increases were in San Francisco, Washington DC, Portland and Atlanta.

Why are we not surprised? Well, the federal first-time home-buyer's tax credit required home buyers to be under contract in April, and to close by June. We expect sales volume and home prices to increase through June, and probably longer in California where there is also a state tax credit likely to last through July.

But after that, we're almost certain the market's going down. Outside of California, the number of people visiting our website is still high, but as we immediately noticed in May, they're visiting less frequently. Fewer customers are touring properties, and fewer are making offers. The only increase in activity outside of California has been an uptick in customers listing homes; this has been a good development, as old inventory has been piling up that nobody wants to buy.

Now, the Problem is Weak Demand

The first confirmation that demand was off came last Tuesday, when the U.S. Department of Commerce reported that contracts being signed on new construction dropped 33%, worse than even the glummest economists expected. What this means is that we've stopped worrying about supply and started worrying about demand: last year, we saw plenty of buyers chasing a seemingly bottomless pit of foreclosures being sold at fire-sale prices. At the time, we said foreclosures wouldn't peak until summer 2010.

Now, we see demand weakening even as foreclosures are being mopped up: the percentage of May home sales that were distressed was 31%, compared to 33% the previous month, and May loan-default notices declined 22% from the previous year. Anecdotally, it seems like the sellers stuck on the market for the past six months aren't dropping their prices because they need every penny from the sale to pay off the bank. But sellers just coming onto the market are being more realistic in their pricing.

A Significant Price Recovery is 9+ Months Out

That doesn't mean prices in most markets are going to fall off another cliff, even if demand is weak. The Phoenix market has already lost 52% of its value and homes are now selling below construction cost, so desert homes probably won't drop another 25%. But it does mean that a significant price recovery is more than nine months out. The summer-less real estate cycle that we have been predicting month after month has arrived: usually sales peak in July, but not this year.

We Were Wrong About Interest Rates

We haven't been right about everything. Take interest rates for example. Last month, we reported that "we can't help but believe that rates this low will give summer home-buyers a real jolt." Well, the truth is that nobody will feel a jolt until the low rates show signs of moving up - rates last week for 30-year fixed-rate mortgage were at a mind-bogglingly low 4.69%. But central banks around the world have made it clear that, despite recent skepticism, they'll keep rates low for as long as they can, maybe until the end of the year.

We once believed that rates would have to increase by the fourth quarter, and now we're not sure when that will happen. If rates go up a bit, it would probably just get the market moving. If rates go up a lot while unemployment is still high, we could be in for a long period of very low sales volume, and low prices.

That's the news! Life at Redfin is good. Our customers are still insanely happy, and we're grabbing market-share fast enough that we should be ok even if tough times are ahead. If you have any questions or quibbles, just drop me a line. I get every reply to this newsletter, and try to answer every question.