Revenge of the Renter (humor)
Posted by nithi.vivatrat on June 29, 2009
Gallows humor from Dilbert, in case you missed it last week:
(ht CalculatedRisk, ShortCourage)
Credit Card Song (Parody)
Posted by nithi.vivatrat on June 26, 2009
This is funny (but then again, I am a big dork):
(HT CalculatedRisk)
Boston.com’s real estate blog on fee-for-service model
Posted by nithi.vivatrat on
BostonRealEstateNow, Boston.com’s real estate blog, had this post yesterday discussing the fee-for-service model of real estate. The post specifically mentioned Bill Wendel of Real Estate Cafe, a pioneering fee-for-service brokerage in the Boston area. Bill was also cited in this 2004 WSJ article about differing fee models in real estate.
The BostonRealEstateNow makes these two very good points:
Consumers have three choices:
- Buy and sell on your own.
- Pay a broker per hour; maybe pay for services that don’t lead to a purchase or a sale.
- Pay a broker by commission; pay nothing unless the purchase or sale happens. (There are some hybrid models that give rebates on commissions, but you are still paying commissions.)
And
The fee-for-service model is perfect for a consumer who is self-motivated and interested in doing a lot of his/her own footwork and research.
I made this comment — hopefully it will be approved soon:
Down in the metro DC area, SmithAdams (http://www.smithadams.com) offers consumers a fee-for-service alternative to the commission mode of real estate. Your statement that “The fee-for-service model is perfect for a consumer who is self-motivated and interested in doing a lot of his/her own footwork and research” is spot-on — that is exactly our sweet spot, as is a growing segment of consumers who are uncomfortable with certain aspects of the commission model (such as the potential for conflicts of interest).
You are right that many consumers fear paying hourly — but more and more of them are doing the math and making individual risk/reward calculations that lean towards choosing a fee-for-service model. In a world where the information advantage of the broker over the consumer has eroded significantly, many consumers just want to pay a broker to help them through the transaction — and pay the same way they would pay a lawyer — by the hour, even on a non-contingent basis.
You put it perfectly — the fee-for-service model is just one option that consumers should have — and each consumer can make the choice right for him or her. The commission model will always be a choice for many consumers, but the fee-for-service option should be there for others. Bill Wendel is definitely a pioneer in this area, to the great benefit of Boston area consumers. Thanks for your post!
How the fall of home prices deflates the consumption balloon
Posted by nithi.vivatrat on June 25, 2009
I’ve always felt that a balloon was a better analogy than a bubble (in no way am I claiming to be the first) to describe an economic contraction in a particular sector or area, such as housing or consumer spending. It’s not that the market in question “pops” and disappears — it just deflates to a different size after the “air” get sucked out.
The lost “air” in our economy was inflated consumer spending fueled by borrowing — borrowing largely leveraged against rising housing prices. Thus, as housing prices have fallen, consumer spending has dropped as well — causing this significant contraction of our economy. If you don’t believe me, see today’s post by Atif Mian and Amir Sufi of the University of Chicago Booth School of Business in WSJ Real Time Economics (thanks to CalculatedRisk for highlighting the post). A key finding:
Using this methodology, we find striking results: from 2002 to 2006, homeowners borrowed $0.25 to $0.30 for every $1 increase in their home equity. Our microeconomic estimates suggest a large macroeconomic impact: withdrawals of home equity by households accounted for 2.3% of GDP each year from 2002 to 2006.
Kris Berg: When Stimulus is Meaningless
Posted by nithi.vivatrat on June 24, 2009
Kris Berg, a very successful real estate agent in San Diego and frequent contributor to Inman News, posted this wonderfully written commentary about the flaws of stimulus programs relating to easing the turmoil in the housing markets. This is the lead-in:
Dear lawmakers:
I am writing to thank you for everything you have done over the past year to suture our economic wounds and stimulate our housing market. It has been very helpful. Now, please stop.
What I loved about her article was how her anecdotes put a human face on real, unintended consequences of these programs. An informative and persuasive read — I’d comment more, but I urge you to just read it.
An industry with its own set of rules
Posted by nithi.vivatrat on June 23, 2009
Just now, I was about to press “publish” on a well-sourced post containing general, publicly-available news (nothing nasty) about a large brokerage company, but then I suddenly realized it could be misconstrued as a violation of Section 15 of the NAR Code of Ethics. It got me thinking — it’s interesting to be part of an industry which essentially has its own set of rules beyond standard state and federal laws, covering areas of behavior such as libel and non-competition. Is the implication that the same laws that govern behavior in other industries are not adequate? Can it be proven that these rules “improve behavior”? And do these rules benefit the consumer, as well as the industry participants?
I don’t have the answers to these questions, though I am forming my opinions — I just throw that out there for folks to think about.
How credible is your broker’s take on the housing market?
Posted by nithi.vivatrat on June 15, 2009
I hope everybody had a wonderful weekend! On Saturday, the Washington Post had this article with a compelling lead-in:
At what point does the real estate industry’s penchant for boosterism — and the sunny outlook that comes naturally to any good salesman — get in the way of buyers and sellers looking for guidance they can trust?
I will make this one comment: regardless if abuse is prevalent or not, it cannot be disputed that there is an unavoidable conflict of interest here — a direct result of the traditional commission fee model. When your adviser is compensated based on whether or not you take a certain course of action, there is a conflict. I discussed this in my very first post titled “The Problem with Real Estate Commissions”.
The SmithAdams approach avoids this conflict of interest. To that point, we will shortly be enabling you to self-subscribe to detailed market updates for your zip code or area. Click the thumbnail to the right to see a sample report (PDF format) for condos in select Arlington zip codes. If you don’t want to wait until the self-subscribe function is set up, just let me know (1) what area you are interested in and (2) condo/townhouse or single-family home, and I’ll email it to you.
Speaking of Arlington, if you somehow still haven’t seen the Arlington rap on Youtube, here it is:
Hilarious.
CalculatedRisk: Weak Hiring and the Jobless Recovery (and my take on the impact on housing trends)
Posted by nithi.vivatrat on June 11, 2009
CalculatedRisk reports how an economic turnaround NEED NOT be immediately accompanied by increased hiring. This will continue to be a drag on housing prices and transaction velocity. When people don’t have jobs or are still afraid of losing them, they will be less likely to buy a home even when mortgage rates are low. Lenders will also be skittish in a poor job market. In addition, a lack of improvement in the job market will also cause foreclosures to persist as a problem. My opinion: wait for the hiring trend to improve before we see a sustained improvement in housing prices and transaction velocity.
Would you pay a higher commission for charity?
Posted by nithi.vivatrat on June 10, 2009
@Rob Hahn, founder of strategy consulting firm 7DS Associates, tweeted this query yesterday:
>>> Would you pay 8% commission rate to sell your house, if you knew that the brokerage was donating 40% of profits to charity of your choice?
Interesting question though I thought the answer was obvious. But hey, Rob sent it, so I figured there’s something to this and perhaps I should do the math.
This ended up being an even more interesting theoretical exercise that I had initially thought. As is the case with many situations, it depends what metrics you decide are important. If your cost of doing a real estate transaction is your only metric, then obviously paying a higher commission rate would be silly. On the other hand, if maximizing proceeds to charity is also important to you, then you might decide something else. With both constraints, you should look at total net after-tax costs.
Rob’s tweet said “40% of profits”, but for fun let’s assume this imaginary brokerage would give 40% of the commission income of each transaction to a charity of your choice. I’ve attached a screenshot of the math below (which I did quickly — please alert me of any issues) for 5 scenarios assuming a $300,000 sale price and a marginal tax rate of 35%. The scenarios are as follows:
- A: 8% commission ($24,000), brokerage gives $9600 (40% of $24,000) to charity of your choice
- B1: 5% commission, and you make a separate $9600 charitable contribution
- B2: 5% commission, and you make the appropriate contribution to have net after-tax costs of $24,000 (to match the cost of Scenario A)
- C1: 6% commission, and you make a separate $9600 charitable contribution
- C2: 6% commission, and you make the appropriate contribution to have net after-tax costs of $24,000 (to match the cost of Scenario A)
- D1: 7% commission, and you make a separate $9600 charitable contribution
- D2: 7% commission, and you make the appropriate contribution to have net after-tax costs of $24,000 (to match the cost of Scenario A)
(click to enlarge)
The key factor is the prevailing seller commission rate (the cost of your alternative to the 8% brokerage). At a prevailing seller commission rate of 5%, your charity gets much more bang for your same buck if you choose a 5% brokerage and make a separate charitable contribution, assuming you can take the whole deduction (compare Scenarios B1 and B2 against Scenario A). At 6%, you’re roughly indifferent (compare Scenarios C1 and C2 against A). At 7%, on the other hand, your charity would get more proceeds by choosing the 8% brokerage (compare Scenarios D1 and D2 against A).
The marginal tax rate is also factor — the higher the margin tax rate, the more it favors the scenario where you make a separate contribution and get a tax deduction.
So, conclusion: not as wacky an idea as I originally thought. It would be interesting to see if any consumers would go for this idea. Of course, the truly best scenario is to go with SmithAdams’ commission-free a la carte services, and then donate your savings to charity 
DISCLAIMER: I am not a professional tax adviser, you should consult with your adviser for real guidance. In fact, I really wouldn’t listen to anything I have to say…
Interesting Recent Posts on CalculatedRisk
Posted by nithi.vivatrat on June 9, 2009
If you don’t read CalculatedRisk, you’re missing out on some valuable insights on financial and economic matters. There are two posts from the other day that I thought you might appreciate:
- A great overview of the psychology (backed by the math/economics) of short sales
- A vivid example (the W San Diego) of how the risk of foreclosure is not just for individual homeowners
Enjoy!