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Pocket Listings Distort Housing Inventory

pocket listingHere is an interesting article from Diana Olick of CNBC.com on “pocket listings” and how they distort the statistics on housing inventory.The number of homes listed for sale nationally is finally beginning to rise, but ask anyone looking to buy a home and the majority will complain there is nothing out there. Neighborhood to neighborhood, market to market, supply still seems tight, despite a 6.5 percent increase in listings from a year ago, according to the National Association of Realtors.

“Statistically it appears that we are getting back to very balanced market conditions,” said Lawrence Yun, chief economist for the Realtors. “However, the sentiment out there is that we still have a shortage of inventory, and I think that is due to the prevalence of pocket listings in some markets.”

A so-called pocket listing is when the real estate agent signs a listing agreement with a seller but does not advertise it widely or put it in a multiple listing service, where other agents and buyers can see it. Instead, they circulate the listing only among their own buyer clients or within their own brokerage. That way they can potentially get commissions on both buyer and seller sides, and would not have to split commissions with other selling agents.

No hard numbers exist on pocket listings so their rise and fall comes anecdotally from Realtors. Pocket listings are not illegal.

The incentive for a seller to do a pocket listing could be that they need to sell the home quickly and don’t want to go through a wide marketing plan with multiple showings and open houses. The agent is promising the seller that they know of enough potential buyers personally that they can get a deal done fast. This usually happens when the market is very tight, and buyers are willing to make larger offers up front to negate the risk of a bidding war.

“Some of the brokerage firms really try to exploit that,” noted Eric Murtagh, an agent with Evers & Co. in Chevy Chase, Md. “It creates uncomfortable feelings among brokerages. If it’s being done as part of a regular strategy, it’s not conducive to goodwill across the board. We don’t do it as a strategy.”

Murtagh said he will only do pocket listings in cases where the property might be distressed or even too dangerous for a public showing—homes that have gone through fires, floods or may have mold. He has done them in estate sale situations, when family members might be given the task of selling an older home that is in need of costly repairs.

“We look at each individual listing case by case, and in some cases it’s warranted,” he added.

Despite an easing in price gains, across the nation it is largely still a seller’s market. Inventory may be rising, but it is still lower than it should be, given demand. While listings may be increasing, the perception hasn’t changed among buyers, and that may be fueling more pocket listings.

“The conditions are ripe for this kind of approach to take,” said Nela Richardson, chief economist at Redfin, a real estate brokerage. “When there is limited inventory, an agent is able to convince a seller, because there is so much demand for housing that maybe as many eyeballs don’t need to see your home as in a traditional market.”

But she disagrees with the strategy and said Redfin agents do not do pocket listings at all.

“Transparency suffers when you do a pocket listing. Homes are selling very quickly, some within two weeks, so the need for a pre-listing doesn’t make sense to us,” she added.

Average days on market fell to just 45 in June, according to the Realtors. While pocket listings may be skewing some perceptions, it is more likely that the tight inventory situation is being driven by other factors, as well. Agents are seeing more buyers who are putting money down on a new home but not selling their old home. Rents are so high, and rising, and mortgage rates are so low, that it makes more sense to hold on to their old property and let the renter foot the bill for the mortgage…and then some.

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