Bringing you a giant cornucopia of helpful changes!

My friend Matthew Shadbolt alerted me to this editorial by Ken Harney, a columnist for the Washington Post, that was published on The Real Deal.  Harney believes that the not-yet-fully-formed Consumer Financial Protection Bureau can’t get here fast enough, and that the days of wine and roses will soon dawn upon us:

The financial reform bill signed into law by President Obama may look like a giant cornucopia of helpful changes for homebuyers and loan applicants — not the least of which will be the creation of a powerful Consumer Financial Protection Bureau to ride herd on the mortgage lending industry.

Well, forgive the snark, but… a giant cornucopia of helpful changes for homebuyers and loan applicants?Really?

Let’s see what the wondrous benefits of a $500m federal agency we’re about to receive are.

The Benefits

Harney lists the following as tangible benefits of the new law and the $500m bureaucracy it spawned:

1. Replacing the HVCC (Home Valuation Code of Conduct)
2. National hot-line system for “aggrieved mortgage borrowers and others to lodge complaints and alert the bureau to unfair and deceptive practices.”
3. Rewrite of the existing home purchase disclosure rules under RESPA
4. Rules requiring loan officers to verify borrowers can actually pay.

Let me see here…

#1: HVCC was and remains a problem… but uh… I do believe it was Fannie Mae and Freddie Mac, two supposedly private companies, that promulgated those rules?  Why yes, yes they were.  And in fact, FHA and FHLB (Federal Home Loan Bank) loans are not covered under HVCC?

So the problematic HVCC rules exist only because Fannie Me and Freddie Mac have a stranglehold on the American mortgage market?

#2: Although Harney doesn’t define what “unfair and deceptive practices” mean, presumably such practices stop short of fraud.  Because if such practices do constitute fraud, we have this whole branch of the government — local, state, and federal — that deals with fraud known as the courts.  And of course, banks are regulated by state and federal entities, and mortgage brokers are also licensed and heavily regulated.  So what this hotline will actually do, beyond provide government jobs to thousands of civil “servants” is beyond me.

#3: Rewriting RESPA disclosure rules seems sensible.  Do we really need a $500m per year bureau to do that?  How often are we going to rewrite those rules?  Couldn’t we just pay some smart lawyers at some law firm somewhere to write the damn rules one time and revisit it every few years for say $250,000 per rewrite?

#4: Requiring loan officers to verify the borrower’s ability to pay sounds like a grand plan.  But I can’t help but ask why this wasn’t being done during the bad-old-days.

Harney thinks it was because there were no regulators looking over the loan officer’s shoulders:

Not only did they not worry about who could afford what. There was no federal watchdog on the scene to make sure they did. Now there will be.

Wooha!  Problem solved.

But… it doesn’t make sense to me.  If I’m loaning my money out to someone, why in God’s name wouldn’t I check and doublecheck that the guy I’m lending money to is able to pay me back?  A banker that doesn’t do that is unlikely to stay in business for too long, no?

Turns out, mortgage bankers haven’t had to do that because Fannie and Freddie were buying up their mortgages.  It’s only my money that I’m lending out for a short period of time, after which, it becomes Fannie and Freddie’s problem.  See how that works?

And now that Fannie and Freddie have been taken over by the Federal government, the banks aren’t lending their money to borrowers — they’re lending your money to borrowers.  And my money.  And my kids’ money.  So yeah, I guess we’d better have ourselves some federal watchdogs.

Or Maybe…

Here’s a thought.

Rather than doing all that heavy lifting, why don’t we just get rid of Fannie Mae and Freddie Mac and get the taxpayers out of the business of financing mortgages?  Wouldn’t that achieve Harney’s goals and benefits just as well?

No Fannie/Freddie = no HVCC.  Banks, sellers, buyers, realtors — everyone would have to go find themselves an appraiser that all parties could trust to render an expert opinion.

No Fannie/Freddie = banks risk their own capital.  How likely will loan officers be to pay extremely close attention to the borrower’s ability to repay when that’s the case?

New disclosure rules are fine; in fact, they’re wonderful.  But I’d be willing to find a top notch law firm in New York or Washington DC that would write those rules for a fraction of the $500m we’re talking about here.  And instead of a national aggrieved mortgage borrower hotline, just let attorneys file class-action lawsuits against banks that have committed fraud or abuse.  The courts — and the market — will take care of that problem in short order.  The banks and mortgage brokers will naturally find it in their best interest to have disclosure forms be as clear as possible, written in 4th grade English, and explained in a variety of languages to potential borrowers.

Oh, and by the way, this future is probably where we’re headed anyhow in some form or fashion.

Sorry for the snark.  Or not.

-rsh

In part 1, I laid out some hints of what the Obama Administration has in mind for a new federal housing policy that would “reset the rules of the market” and engage in a “fundamental rethink” not just of the mechanics of housing finance, but of the objectives of housing policy themselves.  The Treasury now has all of the comments that it requested from the public and we can expect to see a proposal from the Administration sometime this fall or early next year.

In this post, I’d like to engage in the purest conjectures about what such a policy might look like.  I know that assumptions are dangerous, and any conjecture at this early stage is more likely to be wrong than right, but… hey, this is fun.  (If you’re a real estate and politics geek like me anyhow.)  So here we go.

Sustainable Homeownership

The first phrase that suggests a fundamental rethink is “sustainable homeownership”, which appears to be the new policy direction at least within the Administration:

Officials in a new Office of Capital Markets and Housing Finance set up in Treasury are studying options for reform, and generally have concluded that federal policy should focus on what they call “sustainable homeownership” and not on simply boosting the homeownership rate.

What might such a thing look like?

I suspect there will be two major components to a “sustainable homeownership” policy: changes to federal subsidies for housing, and tax policy.

Fannie Mae and Freddie Mac (as well as VA loans and the FHA) all amount to what is effectively a subsidy for homeowners through the mechanism of creating low-cost, low-downpayment mortgages.  Whatever your opinion of Fannie/Freddie might be, it’s hard to deny that the GSE’s have had a stabilizing effect on the mortgage market, and have encouraged affordable mortgages (some might argue, underpriced mortgages, leading to the bubble).  The 30-year fixed mortgage seems hardly possible without implicit or explicit government guarantees to investors.

I think it’s more likely than not that Fannie and Freddie will be formally taken over by the government, merged into a single government-chartered entity (like the FDIC or the CPB) with the mission of making some types of homeownership affordable.  NAR suggested as much in its answers to the seven broad questions, but NAR wants the new entity to cover all types of housing, in all types of markets.  I think the Administration will stop short of that commitment.

Instead, I expect the new Fannddie will focus on providing a secondary market only for the safest mortgages — low LTV (loan-to-value) loans with heavy documentation.  The interest rates for such loans may actually be kept fairly low, as Fannddie will not be a profit-seeking company, but a government entity in all but legal form.  The implicit guarantee that underlie Fannie & Freddie will be made explicit.  I could see the FHA, HUD, and even the VA surrender the parts of their portfolio pertaining to housing finance to the new Fannddie, in order to focus the efforts of the Agencies on low-income housing (read, rentals).

I cannot imagine the new Fannddie getting involved at all in the high end luxury market (however that’s defined).  I cannot imagine that the new lending standards under Fannddie will be looser than the ones currently prevailing at major mortgage banks; if anything, “sustainable homeownership” implies that the standards will be tougher, requiring lower debt-to-income, greater stability in income, more assets, and lower LTV (read as, higher down payments).  To deal with the issue of foreclosure, strategic default, and the like, I cannot imagine that the loans made under Fannddie — a government chartered entity, rather than a private for-profit company — will be anything but recourse to the borrower, with limited dischargeability in bankruptcy.  Such mortgage debt is likely to have similar characteristics to tax liens.

Tax policy is also likely to play a large role.  The mortgage interest deduction looks like it will either be eliminated altogether, or significantly limited.  For example, we may see a cap — say $250,000 or $300,000 of the underlying mortgage.

Since the mortgage interest deduction mostly benefits the well-to-do who (a) have higher mortgages, (b) have higher income levels, and (c) itemize deductions, it is effectively a subsidy of wealthier homeowners.  Due to the politics around mortgage interest deduction, I judge that it is more likely that we’ll see a cap of some sort; few people will cry tears that homeowners with $800K mortgages in La Jolla can only deduct the interest on $300K of the loan.

In fact, it strikes me as likely that the elimination/curtailing of the mortgage interest deduction may be seen as the primary revenue source for the rental support programs that will form a larger part of the new national housing policy.

The combined effect of these policies — and the likely thousands of other new rules and regulations — will be to shrink the pool of buyers only to those who can easily afford to take on significant debt.  And everyone will take a step down in price levels: luxury buyers today are the mid-range buyers of tomorrow, and the starter home buyers of today are the long-term renters of tomorrow.  The hit to mortgage interest deduction is not likely to deter the higher-income buyers that the “sustainable homeownership” policy wants, and making mortgages more difficult to get naturally lowers the risk.

But what about the millions of lower-income families who will find it impossible to buy a house under the “sustainable homeownership” regime?  Well, that’s where the expansion of rental comes in.

Balanced Policy: Rental Support

The Obama Administration is already moving on this.  The 2011 budget includes a $350m Transforming Rental Assistance initiative that should be seen as a pilot program for the larger rethink.  In fact, the Administration itself views the TRA as a “signature initiative” that will take many years to implement fully.

The entire TRA program is fascinating for some of the extras it incorporates, such as stronger organizing rights for tenants, and the requirement of a “green” study, but the essential core of TRA (and the PETRA on which it is based) is to convert existing public housing which tend to be tenant-based subsidies into project-based subsidies.  I’m simplifying a great deal here, but essentially, the Federal government would enter into a long-term contract (20 years) for a stream of payments to the public housing authority (PHA) that guarantees a profit.  With this revenue stream, each property can go raise money from the capital markets like a private multifamily developer could (although with greater security of cashflow since the United States more or less guarantees it).

The tenants themselves would, as they are now, be limited to paying 30% of their income towards rent and utilities.  Where there is a gap between the contract rent (HUD approved rents, close to market rents) and what the tenant pays (the 30% cap), the government pays the difference to the landlord.

There are, as one might expect, a number of restrictions and regulations on use, transfer, and foreclosure.  Even if a private lender forecloses on a property that converted under TRA, the low-income requirements would remain in place, and because TRA would be based on new legislation, standard bankruptcy law wouldn’t apply to those cases.

Additionally, private landlords will be provided incentives to open up their apartments to low-income renters, who will receive a subsidy from the government.

I’m barely scratching the surface here, but if you’re interested, start at the links above and read for yourself.  It’s fascinating stuff.

There are three conjectures that can be made here.

First, traditional multifamily financing might slow significantly, or come to an outright standstill, once this new regime is fully in place.  It’s no secret that the commercial real estate sector, which traditionally relied on private capital markets, is hurting.  For lenders to multifamily properties, the key question is stability of occupancy: are the tenants in place, and the cashflow reliable?

If you can think of a more stable tenant than the U.S. government, I’d like to hear about it.  As a result, the properties under TRA (or something like it) should be extremely attractive to commercial multifamily lenders.  Capital should gush into the newly converted public housing projects, especially in major urban markets with high rents (e.g., New York, San Francisco, etc.).  Right now, I can’t imagine that capital gushing in without gushing out of private multifamily developments.

One consequence — and HUD might even be counting on this — could be that a number of landlords will simply go bankrupt when they are unable to rollover their loans, or open their doors to the new TRA-Section 8 tenants in order to secure the coveted stability of government subsidies.  That would certainly meet the stated public policy objective of increasing rental stock for low-income families.

Second, given the stated policy of “sustainable homeownership”, which implies that the government will back away from supporting the financing of residential mortgages (likely through the new Fannddie mechanism), it seems to me that the capital markets are likely to switch over to financing the new TRA-housing projects.  The secondary market for residential mortgages will shrink, but the secondary market for a new kind of CMBS (commercial mortgage-backed securities) on TRA public rental properties will grow.

Third, it really is difficult to imagine that we won’t have a set of national rental regulations before all is said and done.  The TRA includes some extraordinary protections for tenants and tenant organizations.  As the inevitable pressure to open up to subsidized renters hits private landlords as well, it’s nearly inconceivable to me that the HUD and other agencies will long tolerate a huge difference between one set of subsidized tenants (those in TRA public housing) and another set of subsidized tenants (those in private buildings).

The rental-support program is also likely to create some odd incentives in a few high-rent markets, such as New York City.  The median income in Manhattan is $64,217; currently, as long as you’re at 90% of the median income, you qualify for subsidized section 8 housing.  That rule is likely to be carried forward, if not expanded to cover more people who would otherwise have sought to become homeowners. 90% of the median income in Manhattan is $58K; at that point, the maximum you will have to spend is 30% or $17,400 and the government will pay the rest.  Well, a 2BR apartment in Manhattan averages $3,680 per month in rent.

If you make $58K a year, and your boss threatens to give you a promotion and a 10% raise, you should say no, hell no.  If she persists, you should quit in protest.  That 10% raise to $63K will end up costing you well over $26,000 per year in lost rental subsidy.

Regulation and Oversight

The TRA, the recently enacted Finance Reform Act (Investor Protection and Securities Reform Act of 2010), and the overall thrust of a new housing policy all contemplate stricter regulation and oversight of various industries.  For example, PETRA requires properties converted under TRA to submit to fairly stringent oversight by HUD or its designees.  That any reform to mortgage rules would require stricter oversight — especially in light of the stupidity, abuse, and fraud that was rampant in the run-up to the foreclosure crisis — seems obvious.

Whatever else might happen, it seems a safe bet that the mortgage industry will be far more tightly regulated in the future than it is now.

Question for us is, will regulation and oversight stop there?

I personally cannot imagine that real estate professionals would escape more regulation under a new national housing policy that shifts objectives as dramatically as this one would like to.  In arguing for the passage of PETRA, HUD Secretary Donovan argues that streamlining is necessary:

With 13 different programs, each with its own rules, managed by three operating divisions with separate field staff, it does not take a housing expert to see that the patchwork of rules and regulations that families have to navigate today doesn’t make affordable housing more accessible – but less.

Now, that’s with only 13 different programs in three operating divisions.  Real estate brokerages is regulated by not only various federal entities, but 50 state real estate commissions, and each local Realtor Association and each of the 850+ MLS has its own rules as well.

Would a government that deems 13 programs unacceptably complicated really continue to tolerate the patchwork of laws, regulations, and rules that is the contemporary real estate brokerage industry?  Especially when much power and influence would accrue to Washington DC by creating an Office of Real Estate Brokerage Oversight within HUD?

I doubt it.

So I am expecting to see federal regulation of real estate brokers and agents, which could be a good thing or a bad thing, depending on what the actual substance of such regulation is.

Those are my conjectures at the moment.  Of course, if none of these things come to pass, then all of this is worthless.  So in the next part, we turn to a consideration of the politics of housing reform.

-rsh

1906 San Francisco earthquake

There was, apparently, an earthquake in Washington DC not too long ago.  Thankfully, no one was hurt, and no serious property damage occurred as the 3.6 magnitude tremor rolled through.  Mere days later, however, I learned that another tremor — this one not registered on any geological survey — centered around Washington DC occurred.  From the Washington Post:

Responding to the collapse in home prices and the huge number of foreclosures, the Obama administration is pursuing an overhaul of government policy that could diverge from the emphasis on homeownership embraced by former administrations.

“In previous eras, we haven’t seen people question whether homeownership was the right decision. It was just assumed that’s where you want to go,” said Raphael Bostic, a senior official in the Department of Housing and Urban Development. “You’re not going to hear us say that.”

While this particular tremor hasn’t developed yet into anything earth-shattering just yet, and there are absolutely no details available just yet, for anyone even remotely connected to the real estate industry, these statements amount to a tectonic shift of realignment.

What rough beast, its hour come around at last, slouches towards DC to be born?

Conjectures follow.

Early Warning Signs

To be fair, I haven’t personally paid attention to the debates going on around federal housing policy until I saw this article, and I’m catching up on some reading.  There are likely a number of people — some of whom work at NAR — who have been on this for a while now.

But one early warning sign I found comes from the June 29, 2009 speech by Bruce Katz of the Brookings Institute.  In it, Katz argues for a new direction in federal housing policy, saying:

I am here to celebrate the awakening of the federal government from the dead and its reemergence as a positive force for change in housing policy.

Like the Great Depression, the Great Recession is forcing the national government to both respond aggressively to the current foreclosure crisis while resetting the rules of the market going forward in order to minimize the potential for abuse and maximize consumer knowledge and choice.

At the same time, energy and environmental imperatives, fiscal constraints, the aging of our population, immigration and the structural gap between worker incomes and housing prices are driving a fundamental rethink of federal policy that builds upon the innovations pursued by states and localities over the past two decade. (Emphasis mine)

Reset the rules of the market.  Fundamental rethink of federal policy.  Got that?  And what drives Mr. Katz to argue for a reset of the rules and a fundamental rethink?

The Great Recession was precipitated by madness in the mortgage market, a spurt of reckless lending and regulatory abdication that has wreaked colossal havoc on people, on communities, on institutions.

We cannot just dwell on what caused this crisis—we need to distill the lessons learned for policy going forward:

• Markets are not self policing and that sound and sensible regulation and oversight is part of healthy capitalism
• The financial literacy of many consumers has not kept pace with innovation in mortgage finance
• The US has underestimated the costs of homeownership and oversold the benefits
• And we have tilted the policy playing field too much to homeownership, denigrating rental housing in the process.

But the excesses of the past half decade only explain part of what is driving—and must drive—housing policy going forward.

Despite the decline in housing prices, the United States continues to face a stark disconnect between wages and the cost of owning and renting a home. This is not rocket science—workers earn too little and housing still costs too much, because the supply at the low end is inadequate.

Huh.  There are places where a reasonable person might disagree with Mr. Katz on his casus belli.  For example, one doesn’t have to agree that markets are not self-policing; an argument could be made that were it not for all the stimulus and bailouts, the banking system would have bankrupted those banks that were insolvent, gone through pain, then emerged out the other end by now.  Of course, there are disagreements on such statements.

But the point of this post isn’t to engage in lengthy debates about political economy, but about looking at where U.S. housing policy might be headed.

Among the various things that Mr. Katz recommends are:

• A housing policy that embraces markets as a way to spur innovation and spread benefits, but also respects and reflects the critical role of regulation and oversight.
• A housing policy that understands that national challenges like resolving global warming or catalyzing a green economy require close linkages related policies on transportation, energy, labor and the environment.
• A housing policy that is evidence-based and performance-driven.
• A housing policy that is both federal and federalist—galvanizing the network of highly skilled state and local housing agencies, nonprofit intermediaries and private sector actors that has emerged in the absence of federal direction.

And he ends with this clarion call for action:

Most importantly, we need a housing policy that gets us closer to achieving the national goal set 60 years ago: to ensure that every American has access to a decent and affordable home in a suitable living environment. [Emphasis mine]

I emphasized the word “access to” because it suggests something rather different than the classic American Dream of homeownership.

The Gathering Storm

That speech was over a year ago.  Fast forward to today, and we see this:

The decision to focus more on rental housing and less on homeownership differs in many ways from the Bush and Clinton administrations. President Bush touted an “ownership society” that sought to increase homeownership rates, specifically for low-income people. President Clinton had a “National Homeownership Strategy” that advocated for a specific homeownership rate.

HUD Secretary Shaun Donovan has been most out front in the administration in advocating a new approach. “While we continue to promote affordable homeownership, for many Americans, renting will continue to be the only or preferred option,” he told lawmakers recently.

And more:

Officials in a new Office of Capital Markets and Housing Finance set up in Treasury are studying options for reform, and generally have concluded that federal policy should focus on what they call “sustainable homeownership” and not on simply boosting the homeownership rate.

And still more:

Supporters of rental housing say they perceive an early but markedly different tone from the Obama administration. “My impression is that the administration at pretty much every level is serious about a balanced policy,” said Vincent O’Donnell of the Local Initiatives Support Corp. “Their purpose is to look at and make more workable rental housing programs.”

The Obama Administration has asked for public comments on seven broad questions on housing policy (no, it didn’t make big news three months ago, so yes, I missed it).  But they’re interesting ones; read the whole thing.  Just an example:

How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?

Commentary could address: policy for sustainable homeownership; rental policy; balancing rental and ownership; how to account for regional differences; and affordability goals.

To me, there is a direct connection between the Katz speech from a year ago to these questions by HUD and Treasury.  It seems to me that denying that the people within the Obama HUD and Treasury are indeed influenced by folks like Katz, and think tanks like Brookings is silly.  Of course they’re influenced.  The wording and the tenor of the “broad questions” suggest as much.

“Prioritizing” federal housing finance “objectives” clearly suggests a “fundamental rethink”, for example.  If the fundamental policy remained promotion of homeownership, there is little reason to prioritize objectives.  Bringing up rental policy, phrases like “sustainable homeownership”, and such strike me as almost a cheat-sheet providing clear hints as to what sorts of answers the Treasury and HUD are seeking here.

The NAR Response

As one might expect, the largest trade association in the country happens to be one that is directly involved with the housing market: NAR.  It goes without saying that NAR has already responded to the seven questions (PDF).  The response is also worth reading in full.  A fuller discussion of the NAR positions will need to wait for a future post, but the answers are interesting at a high level.

For example, NAR argues (unsurprisingly) for homeownership to be the primary goal of housing policy, but appears to recognize that it cannot fight the “reprioritization” directly.  So, for example, the language goes like this:

Establish: (a) reasonable housing affordability goals so all qualified borrowers, including low- and moderate-income households, have an opportunity to realize the dream of homeownership; and (b) reasonable multifamily rental housing affordability goals to increase the availability of financing for rental housing.

For what it’s worth, I think this is smart drafting.  NAR has some good lobbyists, for sure.  Note the phrase “dream of homeownership”, which stands in direct contrast to the Katz/HUD phrasing of “sustainable homeownership”.

In other answers, NAR is directly and forthrightly arguing for continued support for homeownership.  To the extent that NAR appears to nod towards a federal rental policy, it looks to me like lip service.  For example, here are a couple of answers from NAR:

1. Ensure an active secondary mortgage market by facilitating the flow of capital into the mortgage market for all types of housing, in all market conditions.

…

8. Ensure there is sufficient capital to support mortgage lending for all types of housing, in all market conditions.

Note the language: “all types of housing, in all market conditions”.

The bottomline recommendation from NAR is that Fannie Mae and Freddie Mac be turned into government-chartered entities with explicit guarantees by the United States, as opposed to the government-sponsored entities they are now.  This way, Fannie/Freddie will become essentially a “wholly-owned” tool of the Federal government, even if legally separate.  Existing government chartered entities include the FDIC, Corporation for Public Broadcasting, and the Tennessee Valley Authority.

There are further interesting points and suggestions in the NAR response, such as a nationalized loan underwriting standard.  We’ll discuss them in the near future.

Some Questions & Implications

As I started writing this, I realized that the topic is huge.  It’s hard to know even where to begin to ask questions or consider implications, even on a purely conjectural basis.  I’ll be trying to tease those out in future days, weeks, and months myself.

But the central question is one of causation.  Did the Federal housing policy evolve to meet the American Dream of homeownership?  Or did the American Dream of homeownership evolve as a response to Federal housing policy?

Before the New Deal, mortgages often required 50% down payment on a 5 year loan, and interest rates floated with the market.  Were it not for the Great Depression, it isn’t clear that institutions like the FHA, Fannie Mae, and others that support the contemporary housing market would have developed.

For the past couple of decades (if not more), the explicit policy of the United States was to encourage homeownership across the economic spectrum.  The current mood in the Obama Administration and intellectuals like those at Brookings appears to be fairly hostile to the notion of homeownership as a public good in and of itself.

There are immediate political questions, of course.  Given the current political environment, would Congress and the Administration really go after homeownership the way it appears to want to go after it?  By emphasizing the “rental policy” as strongly as it does, is the Administration considering a set of national regulations over rental properties?  Could we possibly be looking at a form of national rent control, or is that overly paranoid thinking?

The implications for the industry could not be bigger.  Should the Federal government truly pursue a “sustainable homeownership” policy while boosting affordable rentals, it seems to me that the relatively low down-payment, low-interest 30-year fixed mortgages may be headed the way of the dodo bird.  ”Sustainable” at a minimum suggests greater equity stake for the homeowner, combined with affordable payments.  That the pool of potential buyers would shrink is a given; what such a drop in demand might do to home prices is fairly obvious.

And of course, what such an environment augurs for the real estate brokerage industry is… tectonic in scope.  It would be nothing short of a new era in real estate.  Existing business models may or may not survive such a paradigm shift.  Things that seem impossible today may become not just reality, but a new normal.

I’ll be thinking and reading and writing about this; I hope you will too.

-rsh

For every Phoenix Real Estate Guy, there are likely umpteen dozen soulless me-too real estate blogs in any given metro these days. Many are filled with meaningless “market reports,” meandering “community updates” – and most were last updated many moons ago.

These blogs float like drift nets on the web, hoping to snare the clueless web visitor who stumbles in through some long tail Google search.

I, however, don’t necessarily agree with his premise.  In order for something to die, it had to have been alive at some point.  Since I don’t believe that the “real estate blog” as defined above was ever graced with the spark of life, I don’t know that I would mourn its death.

Instead, I would like to recommend some tools that are critical to the aspiring real estate blogger in the hopes that we might change the definition of a ‘real estate blog’ from “soulless me-too” Google-farming wanna-be blogs to an actual blog: a weblog, a series of thoughts.

These are not free tools, unfortunately, but for someone interested in blogging — whether in real estate or hyperlocal or something else — these tools are absolutely essential.

Essential Tool #1:

Essential Tool #2:

Essential Tool #3:

There they are.

Together, they’ll run you about $30.  But there’s no monthly subscription fee.  You pay it, you own a perpetual license (as long as the pages don’t fall apart).

Chances are, you already have #2 — a dictionary of some sort.  And if you’d like, you can always go to any number of online dictionaries.  Stephen King’s book may surprise you if you’re not a fan.  No matter what you might think of his body of work, the man is passionate, driven, obsessed even with the craft of writing.  There is no more inspirational work.

And of course, Elements of Style sets a bar that all modern scribes aspire to… even while falling short constantly.

Blogging Is Writing, Not Content Creation

The point, if I have one at all, is that blogging is writing.  (And for those about to rise up indignant about photoblogs and videoblogs and the like… please read to the end.)  The written word is at the source of blogging as a communication vehicle, as a means of self-expression, and really as a technology platform as well.

The reason why the Jay Thompsons and Kris Bergs of the world have such popular blogs is not, in my view, because they’re such great content creators.  It’s because they’re great writers.  I asked a number of top-flight real estate bloggers at REBC San Francisco just this past week whether they would continue to blog if they were no longer in real estate, or if blogging lead to no business at all.  All of them said they would.

Because they’re passionate about it apart from the ‘business’ of blogging.

Maybe we’re all just frustrated wannabe Hemingways.  I know I am.  But there is something magical to the act of creation, the act of putting words on paper (or on pixel), whether those words add up to talk about great human issues or how to deal with a short sale.  Actually, the two might be related these days….

Mere content creation of the kind described by Joel in his prescient post is not “blogging” in my book, because it isn’t writing.  It isn’t creation.  It’s just… marketing.  Attention-seeking behavior.  Not much different from the inflated gorilla balloons you sometimes see at car dealerships.

Not a blog.

Those kinds of content creation and marketing are probably better off on the various social networks like Facebook or LinkedIn or Twitter.  You don’t much care about power of a properly formed phrase, the structure of a paragraph, or any such thing when you just want to put stuff out there to go, “Hey, look at me!”  You just want an audience.

But if you write to please yourself, rather than an audience, if you write because something in your soul makes you want to put words down, and you want to share those words with the world for whatever unknown reason… then the blog is your modern day printing press.

The same creative urge, the same inner-drive to express something, exists in photoblogs and videoblogs.  As a writer, I will always consider the word to be superior, but that’s only because I’m not good at taking gorgeous photographs or expressing my thoughts on film.  But I know that the same urge to create, to express, to share exists in the real photo/video bloggers as well.

Is that ‘content-creation’?  I suppose that if one wished to argue semantics, all blogging is content creation… in the same way that a McDonald’s cheeseburger and the painstaking work of a Tom Colicchio are both “food”.  But readers, like diners, know the difference.

The real estate blog is not dead.  But it hasn’t ever really been alive either, if by that term one means mass-adoption and effectiveness as a marketing channel.  Because the blog, like most of the creative arts, is the province of the enthusiast, the amateur (in the original sense, meaning lover), and those who do it for the love of doing it.

So let me end on a piece of advice for those considering starting a blog for their real estate business: Don’t.  Use Facebook instead.  Or pithy Twitter messages.  Or Yelp or Foursquare or whatever.  Use postcards.  Use email.  Do cold calls.  All of those take less time and far far far less effort to do than a blog.  Do those.

And then, once you’re doing all those, and you find yourself sitting alone at night, feeling the itch to write something… and that itch doesn’t go away while watching the latest Law & Order rerun… then start a blog.  Start writing.

You will be rewarded in surprising ways.

-rsh

If you’re feeling optimistic right now, thinking that the real estate market will be rebounding soon based on the past couple of months of strong performance, well, I urge you to skip this post.  No need to spoil a perfectly good mood with gloom, especially on such a beautiful summer day as today.

As I’m not an economist, despite looking very much like one, I’m just going to share a few things I’ve read in the past couple of days that make me a wee bit jittery.  Back in May, I wrote that there were some worrisome signs for the housing market.  These signs don’t make me any more hopeful.

Mortgage Delinquencies Up

First, according to LPS, mortgage delinquencies are up as of May 31 to 9.2%, and shadow inventory is up thanks to an all-time high being reached in an ignominious category (h/t: Calculated Risk):

According to the Mortgage Monitor report, the percentage of mortgage loans in default beyond 90 days increased slightly, while both delinquency and foreclosure rates continue to remain relatively stable at historically high levels. There are currently more than 7.3 million loans currently in some stage of delinquency or REO.

The report also shows that the average number of days for a loan to move from 30-days delinquent to foreclosure sale continues to increase, and is now at an all-time high of 449 days, resulting in an increase in “shadow” foreclosure inventory.

After a two-month decline, deterioration ratios increased, with 2.5 loans rolling to a “worse” status for every one that has improved. The number of delinquent loans that “cured” to a current status declined for every stage of delinquency, except in the “greater than six months delinquent” category.  This improvement was likely the result of trial modifications made through the Home Affordable Modification Program (HAMP) that transitioned into permanent status. (Emphasis mine)

It now takes, according to this report, 449 days to go from 30-days delinquent to foreclosure sale.  That’s 14 1/2 months!  That there is one helluva extend-and-pretend game.

Furthermore, the deterioration ratio increased after two months of decline — so in March and April, it appears that fewer loans were going bad, but that’s also gone south again.

Office & Retail Vacancies Up

Again, thanks to CalculatedRisk, we find that U.S. office vacancy rate is up to a 17-year high at 17.4%:

Office vacancies in the U.S. rose to the highest level since 1993 in the second quarter as the sluggish economic recovery damps demand from corporate tenants, Reis Inc. said in a report.

The vacancy rate climbed to 17.4 percent from 16 percent a year earlier and 17.3 percent in the first quarter, the New York-based research company said today in a statement. Effective rents, the amount tenants actually pay landlords, fell 5.7 percent from a year earlier and 0.9 percent from the previous three months, according to Reis.

So we have high vacancy rates and depressed rents in commercial office space.  From the happy people at REIS, we also get the retail report (by way of Reuters):

Retailers shuttered more stores in U.S. shopping centers during the second quarter, further delaying a rebound in the struggling retail real estate market, according to research firm Reis Inc.

Shopping centers and strip malls have been pounded harder than other types of real estate, hurt by weak consumer spending, anemic job growth and an oversupply built to serve new housing that never materialized.

The Reuters article goes on to mention that “retail rents are not expected to return to 2008 levels until 2016″.  Yowza.

It’s the Unemployment

All three indicators, to me, are related to employment — or rather, the lack thereof. Delinquencies rising at this point suggests either (a) that the borrowers are having real financial difficulty, or (b) more and more borrowers are exercising strategic default.  Office leasing depends almost entirely on whether there are human beings who need office space. Such people are called “employees” at most companies.  And of course, retailers depend on shoppers, and the unemployed make awful shoppers.

But unemployment rate dropped in June to 9.5% from 9.7% in May, right?

It appears that there is pretty solid evidence that the official unemployment figures are unreliable at best, and quite possibly misleading at worst.  For example, here’s Bloomberg reporting on the views of Bill Gross of PIMCO and David Rosenberg of Glusskin Sheff & Associates:

“That’s [the drop from 9.7% to 9.5% unemployment rate] a statistical illusion because you had this precipitous fall-off for the second month in a row in the labor force and without that, the unemployment rate would have gone up to 10 percent,” Toronto-based Rosenberg said during a radio interview on Bloomberg Surveillance with Tom Keene. “You can go as high as 16.5 percent, if you count the unemployed and under- employed.”

But Lawrence Yun (my doppelganger) of NAR believes that 1m new private sector jobs will be created in 2010, and another 2m in 2011:

Through May of this year 495,000 net private sector jobs have been created; NAR’s forecast for employment growth is about 1 million additional net new jobs over the balance of the year and another 2 million in 2011.

“If jobs come back as expected, the pace of home sales should pick up later this year and reach a sustainable level of activity given very favorable affordability conditions,” Yun said.

Who to believe?

On the one hand, I’m inclined to be optimistic about the economic recovery.  I certainly hope we have a rebound.  Mortgage, office, and retail numbers are all, in a way, lagging indicators of weakness — it may be that companies are hiring again, shoppers are flocking to malls, and people are getting current on their mortgages, and we’ll see that in the statistics in the second half of the year.

On the other hand… the jobs numbers for June were not good.  Of particular concern is the fact that long-term unemployed (unemployed for six months or more) is now 46% of the total unemployed.  That’s a new record.  How many of the mortgage delinquencies are from these long-term unemployed?  There are no stats available for that, but I wonder if there’s a correlation.

Real Estate in a Deflationary Environment

The combination of the above — high unemployment, high delinquencies, high office and retail vacancies — points towards a deflationary environment.  This despite the Fed pumping in money into the economy just as fast as it could (the Fed Funds rate was cut to 0.00% in 2008, and remains between 0.00% and 0.25% as a target even now).

John Malkin at AEI just published a report entitled, “The Rising Threat of Deflation“, in which he argues that U.S., Europe and Japan are all headed towards deflation:

In fact, banks have virtually ceased to function as financial intermediaries since 2008, preferring to use the zero cost of money provided by the Fed to finance purchases of Treasury securities instead of supplying loans to households and small businesses. After a financial crisis, banks become much more risk averse, as is manifest in their willingness to lend only to the government instead of to households and businesses. That development is deflationary because it means that a sharp boost in the monetary base engineered by the Fed does not translate into faster monetary growth at a time when the precautionary demand for money has been boosted by elevated uncertainty.

Although inflation or even hyperinflation may be headed our way in the long run, Malkin makes some compelling arguments.  In the next few years, we may indeed be in a deflationary cycle.

And guess what deflation does to the real cost of debt, even responsible 30-year fixed mortgage debt?

Expecting a surge of consumer demand for housing and mortgages (no matter what the nominal interest rate) without s significant drop in home prices strikes me as overly optimistic, if Malkin’s thesis holds.

Seatbelts.  Buckle them.  We might be in for a rough second half.

-rsh

Image: AgentHarvest. Used with permission.

Recently, I ran across a hilarious little parody website called ReallyRottenRealty.com.  The site exposes some of the more compellingly awful business practices of some brokers and agents out there.  Check it out, and be prepared to laugh while grimacing.

Turns out, the website is a marketing vehicle for a company called AgentHarvest, based in Dallas, TX.  It’s basically a lead referral business, the likes of which we’ve seen before.  But there are some interesting, unique things about AgentHarvest that make it worth discussing a bit.

Based on Finding an Agent

Most lead-generation websites in real estate are centered around properties.  Homegain, for example, and “media” sites such as Realtor.com, Trulia, Zillow, and others are all focused on property search or home valuation that ultimately create a lead for a broker or an agent.

In contrast, AgentHarvest is centered around real estate agents, and promises to find its customers the best agents for their needs.  (To be fair, HomeGain has something called AgentEvaluator that promises the same, but the selection criteria are likely to be slightly different.  More on that below.)  Most industry people right about now are shrugging their shoulders going, “Uh, so? Doesn’t like every single real estate website out there offer the same thing?”  For example, Trulia has Find A Pro, and Zillow has its directory, and every brand website has some way to Find an Agent or Find an Office.  So what’s the big honkin’ deal about AgentHarvest?

Enter Performance Statistics

A while back, the announcement by the Houston Association of REALTORS that it would begin allowing consumers to access the performance statistics of real estate agents was received as major news.  Respected voices like Marc Davison of 1000watt applauded the leadership shown by HAR with its REALTOR Match tool.  The HAR tool, in turn, was inspired by Agent Scouting Report, created in 48 hours by Diverse Solutions for the 2009 Connect Create contest.

At the heart of both of these widely-praised tools is the notion that a real estate agent can be evaluated in large part from his or her production statistics.  For example, from the blogpost about Agent Scouting Report, we know that the Diverse Solutions team used an algorithm to take into account:

• Popularity: How many homes have they sold in the last 180 day, 1 year, and 2 year periods?
• Salesmanship: What was the average number of days on the market
• Knowledge of market: How many times did they drop the price from the initial listing?
• Experience: How long have they been a member of the MLS?
• Ability to negotiate: How close was the last list price to the final sales price?
• Diligence: On average per listing, how many open houses do they have, how many photos do they load in, and how lengthy are their descriptions?

In other words, number of transactions over a period of time, DOM stats, years of experience, sale-to-list ratio, and some other activities for which there are stats in the MLS data.  There are opinions that such statistics are woefully inadequate to determine the quality of a real estate agent for a variety of reasons, nonetheless, it is a fact that industry people do take production statistics into account.  For example, I have as yet to see an agent be named as a “top performer” by a brokerage or an Association or a franchise who didn’t have production numbers to match.

Selection Criteria

What AgentHarvest promises to do is to use performance statistics drawn straight out of the MLS to find consumers the best agent for their particular needs.  The owner, Bill Petrey, is a licensed Realtor in Texas, and a member of the local Association.  He, therefore, has access to the performance statistics from the MLS, as every member does.  As AgentHarvest attempts to break into other markets, Mr. Petrey (or someone like him) will need to become subscribers to the local MLS in question.

Think of it as a human-powered version of HAR’s REALTOR Match or Diverse Solutions’ Agent Scouting Report tools.  I got curious about how AgentHarvest goes about selecting agents for its customers, so I emailed Bill Petrey.  Based on his answers, it appears that AgentHarvest basically uses the number of homes sold within last six months as the relevant statistic, then layers on both (a) familiarity, that is, has the agent done business with AgentHarvest in the past, and (b) what he calls the “naughty or nice” list based on consumer feedback:

Q: Do you rely on anything other than performance statistics when you make your recommendations?  How is that information gathered?  (For example, do you have an internal database of showing notes or consumer comments about an agent?)

A:  We have a few processes that we go by, but the first round of elimination is solely based on statistics.  I think that’s the only way to eliminate all forms of puffing, exaggeration and blatant lies.  The first round in the selection process is a list of all agents that sold property, similar in size to the client’s house, within a 5-mile radius of the homeowner’s home (or buyer’s target area) within the last six months.  If you aren’t on this list, you don’t get considered for the referral.  From this list, we select several agents who have had the most sales and we also choose agents that we’ve worked with in the past and have received favorable remarks from our clients.  From these selected agents, we choose three agents to present to the client.  We also give the client some information to interview and research all of the candidates before making their selection.

The information we use on our initial round of elimination is gathered solely from the local MLS in that client’s area.  Naturally this limits our service territory but we feel that it’s worth doing that way.  I’d rather do a lot of business in a few places than  a little business in a lot of places.  If I’m cold-calling an area I’m not familiar with, like most agent referral services do, I’m not really doing justice to my clients.  The information is gathered via MLS and we collect and build our own database of consumer comments regarding agents through our follow-up process after the agent interviews and during the agent’s listing.  We call it our “naughty or nice list.”  We do blacklist agents that receive bad remarks however don’t release names for OBVIOUS reasons.

The business model is straightforward.  Since Bill Petrey is a licensed Realtor, he is able to collect referral fees (~25%) from the agent to whom he has sent the lead upon a successful closed transaction.  Every Realtor in the country does this business, and does it all the time.  It’s part of the industry’s practices.

So why is this interesting at all?

The Last Hidden Database

I find AgentHarvest interesting because it is (1) a business model I expected to see formally introduced for a couple of years, and (2) partially unveiling the last hidden database in real estate.

Perhaps there have been other companies that have done what Bill does: become licensed Realtors for the sole purpose of lead generation, leading to referral income. But Bill is the first I’ve seen who became a Realtor and will join other MLS’s for the express purpose of using the agent performance data to create a referral business.

In this, what AgentHarvest is doing is reminiscent of what Realtor.com and other property-centric websites have already done: taking information that was formerly the province of professionals alone and providing access to the consumer.  We have heard for years that listings are everywhere, and that competing on the basis of listing data is foolish.  That’s probably true.  But what we also know is that while consumers can go to any number of websites and companies to do research on properties, neighborhoods, demographics, and so on, only the MLS holds all of the performance data on an agent.  If property data is now everywhere, the last hidden database is agent performance information.

The only thing a consumer cannot research today with any degree of efficiency is agent quality.  I have written and spoken on the topic of how a consumer could tell if a real estate agent is good or bad, and oftentimes, I come back to the conclusion that only other real estate professionals really know who’s good and who’s not.  Because professionals, unlike consumers, deal with real estate and other professionals in real estate every single day, rather than once every seven years.

In AgentHarvest, we have a Realtor willing to tell you the consumer which of his peers are any good, using the hidden database of agent performance metrics that lies within his MLS system.

Seems to me, it’s just a matter of time before this kind of referral business pops up everywhere.

Imperfect, But Interesting

I think there are a number of gaps and holes in AgentHarvest as it is today.  For one thing, it isn’t clear that number of sales standing alone tells enough of even a high-level story.  It may be, of course, that Bill does use all the secondary statistics like DOM and price-to-list as well, and has some sort of algorithm that lets him recommend one agent over another.  But deciding how to weight various statistics is in and of itself a real judgment call.

The larger issue is that a company whose entire experience with other Realtors is limited to sending them leads may not have enough direct transaction experience with them to make real quality judgments.  Is the agent detail-oriented? Is she responsive?  How is she in negotiations?  How about managing the transaction?  Consumer feedback helps, but remember that they’re consumers — they don’t have enough knowledge to compare.

Nonetheless, AgentHarvest is interesting precisely because it addresses a market need that is currently unfilled: finding the right agent.  Automated tools like REALTOR Match and Agent Scouting Report may be the longterm answer, but they have even less exposure to the intangibles like patience, attention to detail, friendliness, and so on.  For the time being, I would think that a slightly improved version of AgentHarvest-type of service would be invaluable to consumers.

Time will tell.  This could be the start of something interesting.

-rsh

If you’re responsible for real estate brokerage operations, you owe it to yourself and to your company to read this post by Glenn Kelman at Redfin.  I have said for a while now that I believe Redfin to be one of few viable models for real estate brokerage of the future, and this post helps confirm that belief.  It’s a long post, and worth reading in full, but here’s the money graf:

But outside of calling one agent after another, the CB CEO has no way of knowing what his agents are doing; most work as contractors, for franchises, recording their deals in spreadsheets and notepads. Redfin on the other hand has a system for scheduling home tours and writing offers, which means we also have a system for storing data about every tour & offer. Months before the numbers are recorded at county courthouses or by federal agencies, we know when bidding wars are back, or when tire-kickers have taken over the market. We can see the whole elephant, and we’re minutely sensitive to when he’s about to roll on top of us or stampede through the jungle. [Emphasis added]

Fact is, far too many real estate brokerages pay lip service to the importance of technology.  Even the ones who do invest are putting money and resources towards marketing technology rather than information technology.  In the long run, I think the companies that survive the Great Recession will be ones who invested in information technology, rather than just another pretty website.

If You’re in the Knowledge Business…

A lot of real estate people say that they’re in the knowledge business, that what clients pay them for is their expertise, information, and knowledge of local markets, of real estate, of transactions, of laws and regulations, and so on. Well, act like it then.  Invest in knowledge and information and data.  If your spend on marketing is 100 times your spend on knowledge, it’s sorta hard to be convincing as someone whose value rests on what you know.

MLS data is great; it’s valuable, in fact, it’s invaluable.  But Redfin collects data outside of what’s in the MLS.  What’s stopping you?  ”Well, Redfin has millions in venture capital” is not a good excuse, since The GoodLife Team in Austin, a tiny little brokerage with less than a dozen agents, also collects that data.  There’s a reason why GoodLife is now up for an Inman Innovator Award.

But My Agents Won’t Do It!

An excuse I do hear often whenever I discuss collecting data from brokers is that their agents simply won’t do it, or can’t do it, or have no time to do it.  I term that an excuse because, well, it is one.

Fire them!  If your brokerage is in the knowledge business, if you pride yourself on your local knowledge, if your brand promise to clients is that you and your agents are fully on top of what’s going on locally, then why would you continue to tolerate the existence of agents who don’t care about collecting data?  It’s like being in the customer service business but tolerating rude and unfriendly staff.  Get rid of them.

Of course, if your brokerage is not in the knowledge business, that’s fine.  But do tell your clients that so they’re not misled as to what to expect from you and your people.

All Your (Data)Bases

Finally, let’s not confuse a blogpost about the new restaurant down the street with actual knowledge your clients are likely to care about.  The client is looking to hire a real estate expert, not a local tour guide.

Read again what Glenn Kelman wrote:

Months before the numbers are recorded at county courthouses or by federal agencies, we know when bidding wars are back, or when tire-kickers have taken over the market. We can see the whole elephant, and we’re minutely sensitive to when he’s about to roll on top of us or stampede through the jungle.

Yes, a huge part of your value as an individual real estate agent is to be able to interpret the data for your clients and offer your wisdom, rather than just raw data.  But without the data, what the hell are you interpreting?  And if you’re simply outsourcing data collection to some third party vendor (which, by the way, includes your MLS) who is selling the exact same thing to all of your competitors, how are you different from them?

More Knowledge, Less Pizzazz

Do yourself, your company, and your clients a huge favor.  Invest in knowledge.  That doesn’t mean just buying computers and off-the-shelf databases.  It also means spending time — your time, your agents’ time, your staff’s time — to collect and interpret the information.  It means turning data into knowledge.

In a tough market, where nothing is particularly certain, clients want experts who know what they’re talking about.  They also want to know on what basis an expert is rendering an opinion.  Do give that to them, please.

And if that means not investing in some newfangled animated property flyer technology… well, so be it.  More knowledge, less pizzazz.  More substance, less dazzle.  For the good of us all.

-rsh

The incredibly smart, sometimes bearded, Gahlord Dewald has a post up on Inman (will go behind paywall in 24 hours) in which he counsels brokers and agents to “break free from cookie-cutter real estate” by paying more attention to categories of information and data:

Think your brand is different from your competition? Go look at the categories for real estate on your site then go look at the categories for real estate on your competition’s sites. See any difference?

This isn’t a case of tools not existing. Categories are an inherent function in every database-driven content management system out there.

But a quick tour of real estate sites will reveal that most of these systems have been set on autopilot to mimic the same categories that were used for real estate in — you guessed it — newspapers.

His recommendation is to rethink the categories for a real estate search website, perhaps to better “narrowcast” information to a specific segment of the audience.  It’s an interesting approach, and one that I’ve recommended to others in a slightly different context via persona-based marketing, but… the post made me wonder about something.

Cookie Cutter Real Estate

Gahlord’s point appears to be that 21st century realtors, using 21st century Web tools, are using 19th century categories for properties invented in the Age of the Newspaper.  That seems a fair assessment.  So every website uses the same categories: “single family residence”, “condo”, “bed/bath/zip”, etc.  Creating differentiation, then, from Gahlord’s standpoint appears to include different categories that might better reach a narrower, more qualified set of buyers.

Here’s the thing, though: to abuse Gahlord’s analogy some more… whatever the shape of the cookie cutter, if you’re cutting the same cookie dough, don’t you get the same cookie?

So you get a narrower, more qualified set of buyers, who find the property because the category is something like “starter homes for parents with only one child”.  Great!  They have now become your client.  Is the service they receive from you different somehow?

A sugar cookie is a sugar cookie is a sugar cookie, whether it’s shaped like a star, a snowman, or whatever.  When I bite into one vs. another, they all taste like a sugar cookie.

Narrowcast the content — great.  I’ve bought in.  Your content was properly narrowcast to the right audience — I’m a motivated, high-quality lead.  I’ve called you.  I’ve met with you.  I’ve signed the representation agreement.  Congratulations!  Now what?

Do you do things faster than other realtors?  If so, how?  As your client, as opposed to the other guy’s client, what am I getting in terms of the actual service — you know, the thing I’m paying for?  Are you cheaper than the other guy?  If so, how?  Do you know more about local zoning ordinances than the other guy?  State real estate laws and regs?  Financial impact of the purchase decision?  What is the difference between you and the other guy, once I’m an actual client?

The more I look at real estate today, the more it seems to me that we have brokers and agents spending tons of time and energy around the shape of the cookie cutter, and precious little time and energy on the actual cookie.

Differentiation

The conversation almost always extends into, and centers around, the oft-misunderstood concept of “branding”.  Numerous consultants (like me) are telling brokers and agents to differentiate themselves from their competitors.  Stand out from the crowd!  Be unique!  The justification for almost all of social media marketing is that it will create a brand — personal brand or corporate brand — with which consumers can relate and engage.

Yet, very few people talk about the substance of the brand — the so-called “brand promise”.  The guys at 1000watt do, and some others, but the vast array of vendors, consultants, coaches, and other #vendorwhores (thanks, Greg Swann!) mostly emphasize the surface.  The cookie cutter gets all the attention; the cookie remains the same.

Here’s where I am right now: less cookie cutter, more cookie.  I’d rather advise clients to decide whether they’re going to make chocolate chip cookies or oatmeal raisin cookies, and let the “branding” take care of itself.  Who cares, ultimately, if the cookie is round like every other cookie — if my cookie actually tastes different, is different, than the other guy’s?  I’d rather bet that the customer who likes my cookie will tell their friends about it, and focus on baking some great unique cookies.

Marketing Is More Than Promotion

Of course, I know Gahlord isn’t saying just keep on doing the exact same thing as everyone else, but dress it up differently with categories.  But I just loved the analogy, so I’m inspired by his post.

The point remains, however.  There are 4 P’s of Marketing.  Product and Pricing are two of them.  Promotion — what real estate professionals spend most of their time and energy thinking about — is only one aspect of Marketing.

The lack of differentiation in real estate, I would submit, has very little to do with how the story is told.  It has a lot more to do with the story itself.

Less cookie cutter.  More cookie.  Less promotion.  More product.

-rsh

A while back, I wrote on Inman (subscription required) that the single greatest asset of realtors was political power, and got mixed comments about that position.  Well, the time to find out is upon us:

The popular tax break for mortgage interest, once considered untouchable, is falling under the scrutiny of policymakers and economic experts seeking ways to close huge deficits.

Although Congress last year rejected the White House’s proposed cut to the amount wealthier taxpayers can deduct for home mortgage interest payments, the administration included it again in its 2010 budget — saying it could save $208 billion over the next decade.

When NAR lauched HouseLogic.com last year, one of the examples it used to talk about how important HouseLogic.com would be was defending the home mortgage interest deduction.  With the Obama Administration putting the elimination of the mortgage interest deduction back on the agenda for 2010, it’s time to find out just how powerful NAR is, and whether NAR does in fact add value to the Realtor or not.

Plus, given that the “recovery” of 2009 and spring of 2010 (I have my doubts on how much of the recent market is a recovery vs. simply pulling deals forward in time, but nevertheless…) was widely seen as having been fueled by a $8,000 first time homebuyer tax credit, the elimination of the mortgage interest should have interesting — if devastating — consequences for the market.

Is the Mortgage Interest Deduction That Big A Deal?

There are those, such as the Urban Institute, who think that the mortgage interest deduction doesn’t actually mean very much for homeownership:

The MID [Mortgage Interest Deduction] disproportionately benefits taxpayers in the top fifth of the income distribution (Toder, Harris, and Lim 2009). Those who do not itemize deductions on their tax returns receive no benefit and the subsidy rate is larger for individuals in higher marginal tax rate brackets. Because most who benefit would own homes without the deduction, it mostly provides an incentive to live in more expensive homes, not to own instead of rent. Other countries without an MID have similar homeownership rates.

Toder, et. al., might very well have a point… especially from a policy standpoint.  But that “mostly provides an incentive to live in more expensive homes” piece is going to affect brokers and agents whose incomes are directly tied not only to transactions but also to home prices.

The recent experience of the home buyer tax credit also suggests that eliminating the MID would have negative consequences.  If $8,000 was enough to get a bunch of buyers off of the sidelines and into homeownership, losing the MID may be enough to get a bunch of homeowners to sell, and even more people to wait on purchasing.

Just to put some numbers on this, based on this worksheet, a buyer who takes on a $240K mortgage in the 25% federal income tax bracket receives tax savings of more than $23,000 over the first seven years of homeownership (when the amortization is such that interest is the bulk of the mortgage payment).  That’s just over the first seven years.

Consequences to the Housing Market?

At this point, I think anyone who claims to know what the elimination of the MID would do the housing market is probably (a) smoking something, or (b) selling something.  At the same time, even if one doesn’t know for sure, it’s hard to imagine that getting rid of the MID would be a net positive for housing.

Even assuming that the Urban Institute and other critics of the MID are correct, buyers would then move down the price chain since the incentive to live in more expensive homes will be eliminated.  Housing prices may not collapse, but they’re certainly not going to go up.

Plus, maybe my wife and I are unique and different, but when we were first-time homebuyers, we definitely had conversations about the fact that the mortgage interest would be tax-deductible in our financial calculus about whether we should buy or continue to rent.  Without the MID, we may have held off our purchase for a few years longer and simply stayed out of the market.

Just the rumor of the MID going away is likely to influence the market:

ANOTHER UPDATE: A reader emails: “Speaking for myself, just the rumour of ending the mortgage deduction has caused me today to call off my house search. Not just because of the loss of the deduction to me personally, but because it’s easy to imagine this crashing prices, which is all you need to, in fact, crash prices.”

And finally, given the enormous shadow inventory of not-yet-released foreclosures and the extend-and-pretend games that banks are forced to play, it’s hard to imagine a scenario where the glut of inventory can be worked through faster by removing the mortgage interest deduction from play.

Nonetheless, who knows what the impact would actually be?

One thing I can surmise for certain, however, is that the lobbyists at NAR suddenly have a new #1 mission over the summer.  Realtors (as well as licensees who are not members of NAR) may learn by the end of it that political power is in fact their single most important asset.  And maybe folks would come around to seeing that HouseLogic, and not RPR, is the most significant initiative launched by NAR last year.

Some Questions for Real Estate Brokers

So I’m curious to hear from those who are in the trenches day in and day out.  How important is the mortgage interest deduction to homebuyers?  Is it something they mention when discussing how much to pay for a house?  Or when they’re trying to find a house?  Or is it completely irrelevant by the time someone has entered the market?

Do you ever find that you have to point out the mortgage interest deduction when discussing the pros and cons between renting and buying?  Is it persuasive to most people, or only those really right on the fence?  Does it matter whether you’re in a luxury market (where the buyers are likely to be in high tax brackets and have larger mortgages = larger deductions) or in a low-income market?

Inquiring minds want to know.

-rsh

About a week ago, the good folks at Trulia released their “Rent vs. Buy Index” of the largest 50 U.S. cities by population.  The full list of the 50 cities is available here as a PDF.  Given the current economic trends, and the rising interest by consumers for rentals, this is a great time for people in real estate to be talking about renting vs. buying.

Trulia didn’t post their full methodology but it does look like they did a good deal of work.  From the blogpost describing the Rent vs. Buy Index:

Total costs of home ownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. Total costs of homeownership include an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions.

Total costs of renting include rent and renter’s insurance.

Based on these factors, Trulia concludes:

Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city

Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city are The total costs of ownership of a home in this city are greater than the costs of renting, but it might still make financial sense depending on the situation.

Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.

The analysis was for 2BR apartments, condos, and townhomes — so the rent/buy for single family residences might be different.  But the index is a useful tool nonetheless.

Since I’ve written on the rent vs. buy decision before, I thought it would be interesting to look a bit closer at the ratios — although I don’t have the actual numbers that Trulia used — to see what, if anything, might pop out.

The Ratios & Findings

In all cases, I used this rent-buy analysis worksheet (XLS) to take a look, making all sorts of assumptions about property tax rates, HOA or condo fees, maintenance costs, income tax rates, and the like.  I used pretty close to the numbers on the Trulia Rent vs. Buy Index (e.g., if the median price was $298,621 as was for San Jose, I used $300,000) for the sale price and the rent price.

I used 4.81% as the 30-year fixed mortgage rate, which was the latest I could find as of this writing, and assumed that all buyers would make a 20% down payment.

What I was looking for is the savings (if any) of renting vs. buying over a 10-year and 5-year period, as well as the present value of owning vs. renting over 10 years and 5 years.  For a 2BR condo, which is more of a first time homebuyer’s initial property, it didn’t really make sense to go beyond 10 years.  Chances are, people are going to move up within those 10 years.  5 years also made a lot of sense for such properties.

Using those assumptions, here’s what I’m finding:

The lowest Price-to-Rent Ratio on Trulia’s index is 8:1 for cities such as Miami and Minneapolis (one hot, one cold… weird).  At a PTR of 8, it makes little sense to rent.  Buying vs. renting Miami, for example, has a present value of nearly $150,000 over 10 years.  Renting in Miami, at $2,000 a month, means you lose nearly $116,000 over 10 years.  Even over 5 years, you’d lose almost $20,000 by renting over buying in Miami.

Trulia says that 15 to 16 PTR is sort of the breakpoint between renting vs. buying.  Chicago is a 15 PTR market, with median sale price of about $300K, and median rent of $1,700 a month.  I’m showing a 10-year present value of about $22,000 for the buyer in Chicago; it’s a net gain.  However, over a 5-year span, the buyer loses out slightly ($1,462), which to me is a wash since the variable data (like maintenance costs, etc.) would vary widely.  The Chicagoland buyer/renter can plug his own actual numbers in and see for himself.

At a PTR of 21 and above, Trulia suggests it’s much cheaper to rent than to buy.  Portland falls into this category with a PTR of 22, median sale price of $308K, and median rent of $1,145.  Indeed, the buyer in Portland has a present value of negative $70,000 over 10 years, and negative $39,000 over 5 years.  The renter would save, respectively, $194K over 10 years, and $122K over 5 years in Portland.

As one might expect, the PTR at the ‘cusp’ markets get a little weird.  Denver, for example, has a PTR of 18 according to Trulia, which would make it a “neutral” market.  I’m showing that renting in Denver nets a savings of $129K over 10 years, and $92K over 5 years, with buyers having negative present value in either case.  Given the squishiness of the assumptions, it isn’t clear to me whether a PTR of 18 is neutral or not.  Being conservative, I’d suggest that anything with a significant (say over $10K) in negative present value is probably a rent rather than buy situation because there is real value to liquidity, but again, the underlying data is squishy.

Personally, I’d peg the line at around 18 or 19, rather than 21+, but again, that’s me working with the incomplete data I have.

Index Should Shift With Interest Rates

The first thing that pops out at me is that the Rent vs. Buy Index should move with interest rates — which also means creditworthiness of the buyer.

Take a positive market, like say Baltimore with a PTR of 12.  At 4.81% interest rate, the buyer has a present value benefit of $42K over 10 years, and $10K over 5 years.  At 6% rate, that goes to $29K and $4.5k respectively.  And that’s not taking into account the likelihood that house price appreciation (which I’ve assumed to be basically flat at 0.5% annually) might stall as the pool of buyers shrink due to higher rates.

The impact of rates, however, is not reflected in simply the price-to-rent ratio as the impact doesn’t necessarily show up in the purchase price (at least not immediately).  In fact, two buyers — one with excellent credit, one one with so-so credit — might end up in rather different places even in the same city, with the same PTR index, because one can get the better mortgage.  I know this is common sense, but it’s interesting nonetheless.

Again, at the extremes, I don’t know if much changes — I can’t imagine the interest rate at which renting would be better than buying in Miami (at least, if you’re going to get a mortgage at all).  Similarly, in New York, with its PTR of 33, I doubt there is a low enough rate to make buying a better economic decision than renting (although, to be fair, Manhattan is a weird market, and a 2BR condo might be someone’s home for 30 years no problem).

Inflation is another big factor.  I had assumed a flat 3% annual inflation.  But if the world’s central banks continue to print money to prop up various sectors of the economy (particularly the banking sector), then one can’t rule out far higher inflation in relatively near term.  That, of course, makes buying far more attractive than renting, especially with a fixed rate mortgage, since rents will rise with inflation (unless you’re in rent control markets, but that creates other serious distortions; see, e.g., New York City), while homeowners would be paying back fixed loans with depreciated dollars.

Watch both key numbers for significant movements.  They seriously impact the buy vs. rent decision.

A Suggestion

I do think that the current economic environment means that renting is going to become far far more important.  There are signs that American consumers — particularly the younger, less-employed, more-saddled with debt Millenials — are no longer enamored with the idea of homeownership.

Real estate professionals, particularly in the higher PTR markets, are going to have to do more to explain not just the emotional benefits of homeownership but the financial impact as well if they hope to be seen as trusted advisors.  The Trulia index is a really nice shorthand, but I rather think that realtors should familiarize themselves with running the rent-buy analysis for a particular client, on a particular property, given his/her particular credit rating, financial status, and the like.

-rsh