During the housing boom, agents and mortgage brokers have done extremely well. In fact, word spread so quickly that we have seen large increases in the number of people making career shifts into the housing industry. From 1989 to 2001, the membership numbers for National Association of Realtors was around 800,000. However, from 2002 to 2007 we see a dramatic and steady increase to approximately 1.4 million active members. Why the sudden increase when for over a decade, membership numbers stayed relatively stable? Welcome to the world of basic economics. The fact that money was to be made in the industry and low barriers for entry, many folks decided to roll the dice and take a chance with real estate. Simple supply and demand. In addition, with a booming market and lending standards so low that you can smell the floor, selling homes and lending money seemed to be a no brainer. Prices kept going up in double-digit sprints and many in the industry saw this as a locked in yearly wage increase. After all, if your income derives on the underlying asset price and the price keeps going up, it is by default that you will make more money since you are paid a percentage of what a home would sell for. This was all fueled by easy credit in every aspect of life. For 7 years it seemed that housing would go up ad infinitum.
The housing market is now entering the first stages of a multi-year bear market. 2007 has seen the loss of 155+ lending institutions. Over 100,000 individuals have lost their lending related jobs. Many entering neophytes are victims of poor timing. They read and listened to the housing bull books and seminars 7 years too late. Many seasoned agents and brokers realize that housing ebbs and flows. These housing veterans have sufficient contacts to weather the storm and will try to hold the fort down during these down times. From my experience in the industry and simply looking at the wage earnings for agents, it is apparent that he Pareto Principle holds true for this industry. Vilfredo Pareto, an Italian civil engineer, observed that 80 percent of the wealth in Italy was owned by 20 percent of the population. How does this apply to agents? In the case of superstar selling agents, it is the case that 80 percent of the sales happen via 20 percent of the top producing sellers. They have deep contact lists and other attributes that make them successful. When you look at the median earnings of real estate agents in the U.S., you’d be surprised by what you find. A good agent is someone that can sell a home when no one else is able to do so. See, the last few years even amateurs were able to sell homes and oversights were masked by a booming housing market. Sort of like venture capitalist throwing money at any prospective company with a dot com in its name during the raging tech boom.
Capitalism is a great thing if you let it run its course without government intervention. For example, now that the housing market is slowing down many companies are falling flat on their faces for running poor businesses. The 155+ lenders that have imploded this year are victims of inefficient business models and the market is taking care of them. After all, these companies were raking in money during the boom times. Good businesses are built with diversification to weather multiple storms. Take a look at Proctor and Gamble and General Electric. During the good times, they ventured into other businesses that allowed them to have a buffer should one industry sector falter. Many of the lenders that are now defunct saw returns too appetizing in the housing industry. Instead of going into more conservative ventures with their revenues or build war chests, they decideded to reinvest into a business model that was unsupportable.
The internet is now a ubiquitous part of life in the U.S. Everyone uses Google to search for answers. If you don’t know the answer to a complex question, you can go to Google and find not only one response but probably a few thousand. Information is power. Even in the 90s, buying a home was a challenge because you didn’t have access to all the important pieces of information. If you wanted previous sales data, you would need to go to the clerks office or pay a title company to dig up the information. Most people never bothered to look at previous tax records. And finding comparable sales? The only viable source was the MLS which was under lock and key by the housing industry. Now with the advent of Zillow, ZipRealty, Redfin, HelpUSell, and other do it yourself services information on homes is no longer hard to find. The LA Times had a great article this Sunday about selling your home with different services. Do you want to know the previous sales price? This will be easy to find. What about comparable sales? Not only can you get this information but you will have it nicely displayed via a satellite hybrid image that you can sort out. And the best thing is most of these services are free or cost a small price. And in a market where 6 percent can mean the difference between you breaking even or going into a short-sale, many folks are opting to use discount services or doing it themselves.
So why will commissions drop? Here are three further reasons for the inevitable drop in commissions:
Misnomer: Only the Seller Pays the Fee
You always here this argument thrown out. Buyers shouldn’t hesitate in using an agent because it is the seller that pays the fee. The way the process is currently setup, the seller pays the typical 5 to 6 percent commission fee and should a buyer’s agent bring a worthy customer, will get a cut of the percent. This can be anywhere from 2.5 to 3 percent. So why is this a misconception? Like a stock that pays a dividend, the market already factors this into the price. You aren’t really getting the service for free because the underlying price is inflated to reflect this market standard. But as standards shift, say commissions go to a lower rate or flat fees, the price of the home will reflect the difference. We are already seeing this here in California where market pressure and multiple options are giving consumers different choices. And sellers that went 0, 3, or 5 percent down realize that 6 percent may be their entire equity, are willing to find creative ways to sell a home. Keep in mind in a hot market where the median price for Los Angeles County is $550,000, 6 percent is $33,000. As a seller, you may think twice about paying this especially in a tighter market.
This priced in model happens in many financial instruments. If you look at options that are nearing a dividend pay date, the market has already priced this into the premium. So you really aren’t getting a good deal even though this is a sort of slight of hand financial gain. And many professionals will argue that you can’t get the service that they can provide at a lower cost. This may be true depending on the person you hire. But look at the professional Hovnanian Enterprises cutting prices in their Deal of a Century campaign to unload homes. In some cases, these professionals are lowering prices by $100,000. Now that will get your attention. And these homes are new units so you don’t really need to worry about wear and tear and in many cases, these builders are now offering financing to move inventory. You can see why a downward market will put pressures on commissions.
Access to Information: MLS, Competition, Down Market
Have you used Zillow? Know about Craigslist? Ever browsed homes on ZipRealty? Then you are benefiting from the competition brought on by the industry. Many of these companies realize that you can make money from other venues such as advertising and taking a lower fee and making it up on volume. They realize that a small piece of $550,000 is enough money to invest millions of dollars into new business models. In addition, the competition is now fierce since sales are dropping and credit is tight, so now your option may be limited to a few qualified buyers that are absolutely determined to buy right now. A good agent is now earning his money trying to sell a home. No longer are multiple offers coming in like the good days. The market is now different. Many new industry folks are unable to deal with a down housing market and are going into this as a trial by fire. This is their first experience with a down market. And the last 7 years were a complete anomaly so anyone thinking we will be back to that is hoping for a deal of a century that will not come again for another century.
It is easy to find information on comparable home sales. You can easily access previous sale prices. These companies at the vanguard are finding that many buyers and sellers are willing to get their hands dirty if that means they will save $20,000 to $80,000. I always get a kick out when the rebuttal is, “well I wouldn’t expect to pilot a plane just because it is cheaper.” Flying a plane is not like selling a house. Doing heart surgery is not the same as showing an open house. There is a clear difference. Will it require work if you decide to do it? Of course. Just like owning a rental property. You will have issues come up but that is why you are rewarded financially. Otherwise, everyone would be doing it. Even savvy attorneys, title companies, and discount brokers are capitalizing on this market. If you are too lazy to review sales on Zillow or ZipRealty, drive around and see a few comparable homes, and read one of the thousands of real estate books out there then yes, maybe you should fork over your money to an expert.
Cost of Housing: People Will get Dirty for Tens of Thousands
When you are selling a $100,000 home in a slow market with few buyers, agents do earn every penny for their hard work if they bring a qualified buyer and the deal closes. Many agents across the US are not in prime areas and the percentage is not that much in nominal terms. But in the last few years, if you managed to get a listing in SoCal all you needed to do was list it in the MLS (if that) for $600,000 in a decent area and you would get multiple offers. In fact, sellers even put into their listings “sold as is” expecting buyers to put up or shut up. And guess what? Homes sold without inspections many times. Lenders couldn’t careless since banana republic mortgages were being bought by investors. So the sellers were in absolute control. It was the best sellers market in decades. It’ll be interesting to see how those in the housing industry that haven’t seen a downturn will react to this market shift (remember the jump of 600,000 NAR members since the boom?). Many of course are calling for a bailout and corporate welfare but this has little chance of making any impact in California or other high priced areas where prices are disconnected from the reality umbilical cord.
Many sellers that bought in 2004, 2005, 2006, and even 2007 that are looking to sell are quickly realizing that 6 percent is a big deal especially if they are swimming underwater. Any smart agent realizes that in slow markets quality buyers must be courted with lower prices and this may include rebates. No amount of marketing or savvy advertising will make a lender fund a buyer; you may have a willing buyer but if they don’t get financed, the deal is going nowhere. The market is changing and to be honest, those in housing will have to revert to old school ways of doing things. Adding repairs and sprucing up houses to catch a now dwindling amount of buyers. Throwing in discounts if possible. More aggressive marketing directed to bringing in qualified buyers (take note on Hovnanian advertising approach). And no, we are not even remotely close to a bottom. We had a 7 year housing bull market and only in late 2006, did we shift into a slower housing bear market. Heck, Los Angeles County returned back to its historical median record price of $550,000 last month so we haven’t seen a correction here. Expect this to last 3 to 4 years. Moreover, these new services are built to cater to price conscious buyers and sellers; in down markets with tighter credit, nothing is more precious than price.
Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.
Digg This!
Add to Reddit!
Save to del.icio.us!
18 Comments:
I wonder if this will erode the power of the big brokers like CB in SoCal. It would be interesting since a fair chunk of the 6% goes back to the brokerage.
@mamsterla,
It will depend on how deep the housing slump goes.
@all,
The dollar is being hammered and Big Ben is going to re-inflate this bubble. Woohoo! .5 cut today. Time for housing bubble 2.0.
Look at the runup in the financials sector. Goldman is up 5%, and the rest of the wall street pimp-my-housing-ride group is also up. Remember that Paulson comes from GS.
As far as housing goes, though - if the psychological rush lasts any longer than a few days, I'd be surprised. Loan rates are tied to the 10 year bond, which momentarily improved but then worsened by day's end. So mortgage rates actually are higher no than this morning.
And since as Dr HB pointed out in another blog, even if rates are 1% - you still have to qualify for the payment. And people don't.
The next moral hazard stepping stone is what will happen in Congress, if Dodd and Frank have their way. FHA limit raised to the conforming limit of $417k isn't actually too bad, but permitting the LTV to go to 125% or something like that is ludicrous. Increasing the conventional limit to $625k is also absurd.
In the end it's just musical chairs on the Titanic - a defaulting borrower now who somehow manages to offload his debt from one institution, to the government, is still likely going to default. Only now it's the taxpayer who will get stuck with the tab, rather than the Wall Street firm that put the deal together in the first place, but who got bailed out by the Fed, Congress, and the Treasury.
I am not as impressed with the Hovnanian sales blitz. It feels like a publicity event to try to change sentiment.
@the board
Was there a sense of frustration anger and then dejection at the Fed for the .5 drop or was it ho-hum they are screwing us over for the boys on Wall St?
@exit,
You are absolutely right. As I’ve stated multiple times, in high priced metro areas this isn’t a sub-prime problem or an interest rate problem, it is pricing problem. They can lower rates to zero and it won’t matter for California. This is good news for folks with $100,000 to $200,000 mortgages that may be able to refinance into 30 year conventional mortgages. But what of the trapeze mortgage buyers in California? Rates dropping .5 won’t do much on a $500,000 balance. And next month we will face the largest number of resets at a whopping $50 billion. Maybe that’s why the Fed panicked and dropped .5 basis points.
@son of brock landers,
At least we know exactly where they stand. The dollar plummeted and gold soared. Actually, everything soared except the dollar. That should make us happy aside from the small fact that most of us are paid in dollars. After the decision today we arrive at two conclusions:
1. Big Ben is another AG
2. Something is simmering in their pot of data that is worse than they expected
If you think about it, this is a pretty big move since we are experiencing steady employment (aside from last month), GDP growth, low inflation, and no external threats according to the ministry of truth. If we are to follow logic, that means that this so called credit crunch, named after the good captain, is much larger in scope. The Fed knows if many of these yahoo portfolios go mark-to-market they will be in a world of hurt.
This drop buys the market time and hope. And Big Ben is offering a big cup of hope for those in the housing sector.
DrHB - One bone to pick, you say that "Heck, Los Angeles County returned back to its historical median record price of $550,000 last month so we haven’t seen a correction here.", but we all know the median is a terrible measure of prices in a changing market. The price per square foot in many parts of L.A. has already dropped considerably, and that's not counting incentives. Not that I need to tell you this... it just rubs me the wrong way when people use the median to assert almost anything about price movement...
Son of Brock - Time to look for a new place to live... it seems a conscious decision has been made to destroy the value of the dollar to save a few campaign contributors on Wall St. and for the government to bail out the speculators at all levels of the housing food chain. After accounting for the soaring costs of imports, you will soon find that your already falling real wages have fallen to levels not seen in decades.
I agree with those that think there is something bigger out there that they know about. This might sound naive but I think the combo of ABCP valuations, insolvency of mortgage borrowers, and the US consumer not meeting the credit payments is wrecking the mega-banks profit margins, leveraging abilities, etc. That, and Wall St has made investments so opaque that no one knows what risks they hold.
With the problems across the pond in European credit markets, and Asian economies not facing facts about increasing domestic demand and reducing speculation in stocks, the carry trade, etc., I wonder if the Central Banks have not had a "WTF do we do" meeting. Somehow the ECB and the BOE stopped hiking rates while supposedly fighting inflation, and the BOJ is definitely not hiking rates anytime soon. It's as if the global central banks still want that crack addict (us consumer) to have purchasing power, even if it damns their own populations and currencies.
I am hedged for a dollar drop due to investments in precious metals & foreign currency denominated CDs, bonds and stocks. I've been blogging about that for a while. I'm not really scared as much as disappointed. God, I sound like a parent. Check out CNN, MSNBC or even the NY Times websites, and of course, the wrong questions are being asked & debated.
Thank you Dr HB for being a light out there. Thanks to good comments that encourage debate and reading between the lines.
A straight percentage just makes no sense. They should charge a flat fee to sell the house at a target price determined by the homeowner and a 3rd party (appraiser).
If the target price is too high, they don't have to take the listing.
If they bring in more than the target price, they should get a percentage cut of the overage.
So maybe $1500 to sell any home and they also get a 20% bonus of every dollar over the target price.
Real estate agents are finding out real fast they the millions in commisions that they just made over the last few years was the money that were going to use to eat for the next few years.
Hope they all like Ramen noodles and foodstamps.
Also real estate agents should only be able to deal with sellers. Buyers can either go it alone, or hire a neogiater for a flat fee.
So maybe you pay $500 to a home purchase neogiator who would work with the buyer to provide a list of potential homes. The buyer can set up appointments, view the homes and make an educated offer based on advice from the purchase neogiator.
Screw the real estate agents.. they had a GREAT SCAM.. then they got greedy.. 6% of $500,000 starter home? Pleeezzz...
in defense of RE agents.
A typical deal is usually split 50/50 between seller and buyer agents. There is office space rent to contend with and of course brokerage cut. Thus, the 6% is really 1.5 to 2% on average.
If you must use an agent (for whatever personal reason) I recommend buying a house that he or she is listing. In this case, the seller and buyer have one and the same agent. The conflict of interest is reduced, albeit, the agent still want the sale price to be as high as possible.
If you still want to go through an agent, try local small time brokerage as they are less likely to ask for the 6%.
I think time are changing, and FSBO and Redfin are gaining in popularity. Real estate agent or as they like to be call Real estate professional now maybe going the way of the dinosaur.
The full bailout is on its way. Take a look at this:
"Lawmakers also passed an amendment to the bill offered by Frank that would raise the agency's loan limit from its current $417,000 to as much as $729,750."
House approves bill helping mortgage borrowers
California will be saved after all! Too bad folks that hold these notes will still be screwed. This just saves the wealthy investors, lenders, and those in the housing industry by passing the risk to the government (aka you and your family). Even if you get the FHA loan, it'll still be amortized over 30 years and at a fixed rate. Now let us wait for further headlines saying...
"The government announced today that they will raise FHA limits to $1,250,000 to help low income home buyers and will begin offering 60 year mortgages."
Maybe Bush can finally dust off that veto pen and use it.
You are freaking kidding me. The FNMA loan limit increase is aimed at exactly one player - Countrywide. Moziloompa loompa announced yesterday that CFC is out of subprime and will only target conforming loans. Guess which states generate the bulk of its income? Hmmmm. During the boom, certain regions of CA were closing $1 Billion per quarter. If limits remained at $417k, the vast majority of California would become suddenly off limits to CFC.
Sure, the other lenders benefit too, but really.
Anyone check the 4's lately? If Moz is "bullish" on his company, has he been buying and keeping his stock rather than dumping?
Is Barney Frank completely delusional?? He says:
'We do not have a general program for helping build affordable family housing, and that's what this bill would do.'
This guy thinks $730K is affordable housing??
All these politicians are treating this 'housing' crisis as some sort of lack of funding problem, and completely missing the fact (deliberately) that it's pricing problem. Stop GUARANTEEING the banks a profit, and these toxic loans won't be made. As as result there will be less bidders in the market (as there should be), and thus prices will decrease. That is when housing becomes affordable.
This bill really should be called 'Bank profits guarantee bill'.
This bill is so sinister. This 'in your face legalized corruption' reminds me of some kind of banana republic. Seriously, I would expect to see Argentina doing this, not the USA.
You nailed it mrfnuts, and what's worse is, will the media that systematically supports Barney Frank and his cohorts call him out on this, even a little?
Watch and see - they won't.
And what does that tell you? Both Barney Frank and the publications that almost always support and almost never question him, bought and paid for.
I'm not sure that the limits on mortgage size matter all that much. What you are doing is taking someone from a Jumbo loan down to a conventional, but assuming that they proper controls are in place, they still have to qualify for the mortgage.
So a "typical" family says I want a 1500 sq. foot house. That costs $750K and at 6% on a conventional mortgage that will still be WAY out of range for the median income.
The dollar is losing value like crazy now with the .5 point drop, so foreign investors will demand higher rates on a 30 year mortgage to compensate.
The next mortgage to cease being offered is the 30 year fixed. Everyone will have to take out a mortgage with a 30 year payment schedule, but with an interest rate that will only be good for 5 or 10 years.
Now if you want to pay back your loan using Euros or Gold... well I can get you into a 30 year fixed.. No Problem!
The point about not raising the conforming limit is not so much the qualification issue. It's that the quasi-governemental GSE's, FNMA and FHLMC ("Fannie Mae" and "Freddie Mac") now are on the hook for the loan. So if the borrower goes bad, the GSE has to back it up - which means the taxpayer. Whereas now, jumbo paper is packaged into a MBS that is the purview of private firms (typically Wall Street). If the loan goes bad, it hits the books of the private firm, not the taxpayer.
Why put the taxpayer on the hook?
Classic American free enterprise - if there's only profit, keep the government's mitts (ie taxes) off. But if Goldman or Countywide takes a loss - Uncle Ben, save us! Take the loans off our books! And onto the taxpayer!
Not that too many people will qualify. But one little trick of conforming loan approvals - if the automated underwriting system ("AUS") spits out an "approve/eligible" - it doesn't matter WHAT the debt ratio figures are. The loan is approved. So some borrowers who currently don't qualify for jumbo loan amounts due to debt ratio, may, once the limit is raised, because now they get to slide under the AUS approval, rather than the stricter jumbo full doc requirements that carry a stricter debt ratio requirement.
It's a valid point that a devalued dollar will ultimately cause rates to spike.
30/5 or 30/10 loans already exist in residential mortgages, and are prevalent in commercial loans, which typically have to be rolled every 5 to 10 years. That would be a curious development, if market forces trumped governmental intervention to keep a 30 year note.
OOPS.
Sorry. I mean whine not wine.
crazed
Regarding this:
"Do you want to know the previous sales price? This will be easy to find."
How exactly does one do this? I may just be weak in my search-fu today, but I'm not finding anything but some site in the UK and a site that charges for the data, with no guarantee that's even what I'm looking for. Is there a free service for this? Maybe I should just check with my local tax office?
I'm trying to save a family member from a stupid mouse purchase, and I'd appreciate any leads you could offer. I've told them it's a bad time to buy, but I'd love to find some hard data to show them.
Bah for typos. "stupid house purchase" is what that should read. Mice have little to do with it.
Post a Comment