Archive for October, 2006

Date: October 17th, 2006, Filed under Uncategorized

WAUKEGAN, IL

By A.B. Dada
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I’ve always been confused by the real estate agent as well as the real estate industry as a whole. It seemed to me that the job of the real estate agent seemed “off” from the norm, but it wasn’t until I accepted the free market position that I started to understand WHY the agents who assist in the buying and selling of real estate didn’t jive with the way my mind works.

In many areas, we see laws favoring the real estate agent over another type of service-oriented business: state-licensing, state-requirements and even state-preferential regulations. I have friends who assist others in purchasing products, and they’re not under the same requirements as the real estate industry. I also have friends who are real estate agents, and they’re constantly surprising me with the laws they want enacted or the protections they want for their industry.

Lately, I’ve been skipping the local shopping mall and the local stores and buying online. My first stop is always eBay — it offers me the ability to choose what I want to spend on an item, and if I win the auction for my price, I know that I received the absolute best deal I could get. I love to haggle when I shop, and local stores are less open to haggling than online stores are. If eBay doesn’t get me what I want at the price I’m willing to pay, I will often send an e-mail to a smaller retailer online (or three or four) requesting the product at the price I’m willing to pay. I get the item nearly 50% of the time. I find that buying a week before month’s end is the BEST time to get a deal — people have rent to pay and could use the gross income!

I see houses and land auctions on eBay all the time, but I’m usually shocked as to why I don’t see more. For now, it seems that the Realtor-managed MLS is really the best place for selling a home, but why is that? Usually, it revolves around the fact that Realtors (a quasi-publicly licensed real estate agent) prefer to show homes that are listed on the MLS, and since Realtors tend to gain an advantage on State-licensing and State-regulations, the MLS database also gains power through the closed-loop system. So what’s the best step to fix the problem?

I think the best step is to take the real estate agent through a change. Just like online price databases for airline tickets changed the travel agent business (for the better!), the same thing must occur in the real estate agent business. The first step I take before I buy an airline ticket is browse the web — make some comparisons as to when I fly, what airlines I fly, what seating status I receive (first class, coach, stand-by, confirmed), and where I need to go. Once I have a general idea of the prices, I’ll contact my local travel agent and see what they can do. I’d rather pay the agent 10% over Expedia and get the long term service than have to deal with the online sites. My father recently was double-smacked by Orbitz over tickets they mis-sold, and he lost hundreds of dollars. No Orbitz for me, but no Expedia either. That 10% I’m giving the agent over Expedia is a commission between 15 and 30%, a nice figure for what takes less than 1/2 hour for them.

Why shouldn’t the real estate agency business be any different? The first step we can take is to find houses that match what we want — bedrooms, amenities, neighborhoods, age, overall design. The online database, or even eBay, should allow this quickly and easily — just like the online travel sites do. Once I find some homes I like, the next step is to use an appraiser to qualify which homes meet my financial needs. This appraiser is exactly the person we need over a real estate agent — someone who is there to meet our needs, not to try to manage two parties. The average real estate agent that works for a seller makes about 3% commission on the sale. For them, moving the price downwards on a home by $50,000 only loses them $1,500 in commission. It hasn’t made much sense to me that this is the best way to make a transaction.

On top of appraising, it surprises me that the banking/mortgage industry doesn’t actually have their own full time appraisers. If I was to get a loan, doesn’t it make more sense to contact a mortgage provider and work with them to verify that the home you’re buying is worth the price as well as within your budget? I’ve never figured out why mortgage providers don’t utilize a better appraisal system — theirs seems based on the real estate agent’s appraisals (a conflict of interest!).

Sure, a home is a large expense, something costing the average family over 50% of their gross annual household income to buy, maintain and utilize. Some will say that casually making offers on an auction is a big risk — but that is why we need to have an agent that is truly neutral in terms of negotiating on our behalf. The current version of the real estate agent if flawed because their negotiations are based more on their financial outcome than ours. My version of the real estate agent is based on the idea that the agent is paid when I am happy — as any service provision should be.

Does anyone have any recommendations for what the industry needs to be more in line with how the free market works? I think the auction idea makes sense — open bids at $1, have a private reserve, and see what the market offers. This makes sense because it does a better job of appraising the home in terms of demand and supply. Of course I know that government monetary creation/inflation, real estate agent licensing and mortgage regulations throw a real wrench in the gears, and I know the first real step would be to remove these collusions and regulations, but when it comes down to actually transacting the transfer of a home from buyer to seller, what are the impediments to seeing a free market within the system?

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Date: October 16th, 2006, Filed under Housing Bubble News

ARLINGTON HEIGHTS, IL

By A.B. Dada
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Finally some news on the credit crunch in my area — Chicago. The Chicago Tribune asks “What’s in your wallet?”, the coming credit crunch. Oops.

From the article: According to First American LoanPerformance, interest-only mortgages made up nearly 20 percent of all new loans in the Chicago area in 2005 and 2006, and option mortgages accounted for another 4 to 5 percent. 20% seems small. But then we also see: There also is a significant increase in late mortgage payments among sub-prime borrowers, generally those with credit scores below 680 on a scale of 300 to 850. Nationwide, just over 10 percent of sub-prime borrowers are at least 30 days late on their mortgage payments. 10% are 30 days late (meaning they have gone over 60 days without making a payment). Double oops.

Many people I know are in trouble right now — including a good number who didn’t feel like they were in trouble 3 months ago. A congregational friend just had his wife’s car repo’d, and he’s unsure how he will make his $610 payment on his car this month. He doesn’t even answer his phone anymore because it isn’t a friend who’s calling. So unfortunate.

From Naples News we get an interesting article yesterday, Expensive times for Lee workers. The article has some interesting figures: With three children to support, for Rudy Bustillo and his wife it came down to a choice between having a home or luxuries like eating out and going to the movies.

They chose to have a home. Now they have a $2,100 mortgage to pay from their combined gross monthly income of $4,800 - about $4,200 during the slow summer months. Bustillo, who works as a cook at Skillets in Bonita Springs, leaves his home in Lehigh Acres at 5:10 a.m. and drives 50 minutes one-way and works a second job in bars or restaurants when he can. His wife works in a grocery store. “We can’t pay our bills with just one job - mortgage, car payments, insurance, utilities…,” Bustillo said. “It is hard but we wanted a chance to own our own home. We didn’t want to rent anymore.”

Why is the choice only buy or rent? Since when did society get so confused that owning a home is the best thing to do, and renting is a few steps below it?

I don’t like debt — I’ve hurt my past by taking on debts for things I didn’t really need, and now don’t even want. I’ve sold most of those things, and given away the items I couldn’t sell. I don’t want a big home either — my old 4 bedroom gigantic house was filled with junk just to keep the rooms feeling “homey” so my friends and family could gawk. What a waste.

If I was to do it again, I’d have done one of three things:

1. Buy a home that I could pay off in 10 years or less — preferably 7 years. Still debt, but much easier to swallow. On top of that, use any income above the baseline to pay down the mortgage.

2. Live with family. Why is this bad? Historically, this was how many people bought a home — getting married, living with family, helping reduce the overall costs of living, cooking, cleaning, and socking away that 33% of their gross income that normally goes to pay down today’s mostly interest payment on a 30 year mortgage. In the 5 years that you don’t pay all that interest, you’ll have more than enough for a 20-40% down payment on a small beginner home. Don’t try to eat a 96 ounce steak if you’re never had an 4 ounce one.

3. Live with friends. It sounds embarassing. One of my closest friends and pastor of a congregation I serve did that for a few years — him, his wife, and their 3 children. They lived with friends who had no kids, and they all shared in the responsibilities of maintaining the HOME (not just the house). It worked so well, but interest rates fell and they bought a house. Now more than 60% of their income to goes to keeping that house in shape. Ouch.

We’re so tied up with our jealousy — jealousy over what our friends and family seem to have (but don’t have titles to), jealousy over what we see people living like on TV and jealousy over the fact that we don’t seem to be capable of having those things. Yet I’d venture a guess that 80% of the people you know who have better things than you don’t actually own those things. Leased cars (owned entirely by a bank!), mortgaged homes (owned usually 80-95% by a bank), clothes they won’t pay off for 3-10 years, and vacations that were taken last year but might get paid off next decade: these are not things that someone can say are theirs, they’re things that someone else was kind enough to rent to them at a ridiculously high future burden.

I’ve always felt that Boston would be the first to dissolve in terms of property value, followed by Vegas. Both of these towns aren’t just oversupplied, they’re overtaxed. Buying a $500,000 house with 33% of your future gross income for 30 years might be acceptable to a bank, but have you seen what they’re hitting you for property and income taxes? That’s a huge consideration to make. The Boston Globe has an article titled The homeowner’s day of reckoning which covers more sob stories about people who “didn’t know” even though they did. Excitement breeds desire — excitement not just that you’ll have something “bigger and better,” but excitement that you’ll be a step ahead of all those people around you who don’t have it as good as you do. Excitement that they’ll be the jealous party, that you’ll come out so far ahead because in recent years you’ve heard how much money your friends and family made on their overinvestment.

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