Riders on the storm....

I’m honored to be asked to give the closing remarks at the Council of MLS conference in Chicago this year at the end of September/early October.  Since I’m supposed to be wrapping up the discussions of those few days, I can’t actually prepare anything ahead of time.  But I can sort of cheat by putting out to the industry some of the bigger issues/questions I’ve been thinking about, in the hopes that the speakers, panelists, and participants at CMLS this year might talk about some of these things.

These Seven Big Questions represent some of the really fundamental challenges facing the MLS industry as a whole.  I do not (yet) pretend to have all the answers, or even any answer (at least, not in public, heh) but I did want to start posing them to my readers.  For those attending CMLS, please give some consideration to thinking about these questions.

Question 1: Geography and the MLS

The recent DotMLS initiative got me thinking about how tied the MLS is to a particular geography.  Some 40 MLS’s have joined, and are claiming URL’s like Atlanta.mls and Charlotte.mls.  Whether the DotMLS thing is a good idea or not, the initiative raises a question as to just how tied to a geography a MLS is.  For the smaller MLS’s that only service a particular county or a small market area, presumably this means that we’ll be seeing things like EssexCounty.MLS and TownofBridgeport.MLS.

So the question is: Is geography destiny for a MLS?

Followup: If the answer is yes, given that geography is destiny for a MLS, what does that imply for small or medium MLS’s with small footprints?  What does that imply for very large MLS’s such as MRIS, MRED, CRMLS, and others?

If the answer is no, why then are the services of a MLS so geographically constrained?  Habit? Custom? Local regulation?

Question 2: Dealing with Loss in Membership & Revenues

The trend for the past few years for almost all MLS’s has been drops in membership numbers – and accordingly, dues revenues.  Many MLS’s have spent and grown while the going was good, and now face extremely challenging times.  The peculiar feature of the MLS is that it is an organic local monopoly that enjoys positive network effects: every real estate agent has to join.  The flipside of that is, the MLS simply does not control how many customers it has within its footprint (see above, re: geography).  People either join the profession and therefore the MLS, or they leave it and therefore the MLS.  It isn’t clear why some MLS’s even have a Marketing Department — whether you have the greatest marketing department in the world or the worst, you’ll get the same number of subscribers influenced entirely by larger market considerations.

And those larger market considerations don’t look good, and don’t look like they’re getting any better. Consider:

• Many economists are forecasting a double-dip recession, especially in housing, as the foreclosure problem was merely kicked down the road, and numerous participants in programs like HAMP and the “extend-and-pretend” are now defaulting.
• Government policy is now on-record as seeking to back away from homeownership towards rentals and “sustainable homeownership”.  No one yet knows what this means, but it certainly doesn’t look like we’ll be back to the heyday of the 00′s.
• Technology keeps accelerating, and keeps leaving MLS systems behind.  There are still technology systems that require Internet Explorer; meanwhile, the world is moving onto the iPad, Android devices, and HTML5.

Question is: Which of the following strategies will the MLS embrace most successfully?

• Do we think a wave of consolidation is coming?  If so, what does that consolidation look like?  How many MLS’s will remain standing in 2015?
• Can MLS’s cost-cut their way to sustainability?  If so, what do they cut?
• Can MLS’s increase dues to achieve sustainability?  If so, how much can the individual member tolerate?

Those are pretty much the only ways a MLS can impact its top and bottomlines: take over other areas, cut costs, or raise prices.  Which of the three will prove most successful?

Question 3:  Ancillary vs. Core Revenues

A key concern, and a rather interesting trend, over the past few years for the MLS has been “ancillary” revenues.  These are value-added services or products for which the MLS either charges extra fees, or gets a cut of revenues from the vendor.  The biggest hoopla, of course, has been the RPR which proposed to monetize the MLS’s data, but the larger picture for years has been MLS’s trying to increase their non-core revenues.

Thing is, they’re doing this not from a position of strength where their core revenues are strong and growing, and throwing off profits that can be reinvested, but from a position of weakness where their core revenues are under assault (see above, loss) and they are prohibited by either market conditions or by governance (Boards, Associations, etc.) from raising prices or acquiring new markets.

So they turn to ancillary revenue sources.  The issue is, and we’ve been seeing this play out here and there, as the MLS expands its operations into other value-added areas of the real estate practice, they come into conflict with brokerages and franchises.

Question is: What is the proper interplay between the MLS, the brokerage, and national companies (both franchises and others, such as Zillow/Trulia/Realtor.com)?

All three offer tools and services to the individual agent.  Who should do what?  Assuming for the moment that competition for the individual realtor dollar is a good thing, how much should a MLS compete with its member brokerages?

Question 4: Governance

Many if not most MLS’s are organized as nonprofits, with an eye towards keeping costs as low as possible for member REALTORS instead of generating a return.  The governance structure of the MLS reflects this understanding, with brokers, agents, and Association of REALTORS executives on the Board of each MLS.

Question is: Is this structure, which has served the industry and the MLS so well for decades, still the best one given the challenges that we face?

How much does the consensus-oriented governance structure of a MLS help or hinder progress?  Why don’t more MLS’s have outside board members – e.g., executives at data/technology companies like Google or Cisco, or academics, etc.?  Would such outside board members help or hurt the MLS?

Question 5: Is the MLS a business?

Closely related to Question 4 above, is the MLS a business?  Should it be?

Nonprofit status only speaks to whether the shareholders can take dividends from their ownership stakes.  Being a nonprofit means that the organization does not have profit as a primary motive. But even nonprofits have to pay their bills.

Some 70% of MLS’s in the United States are owned by the local Association of REALTORS, itself a not-for-profit organization.  They are operated as a member benefit at the lowest possible cost.

Question is whether, given the challenges the industry is facing, the MLS should continue to operate as a nonprofit membership organization or be operated as a business, with business realities (revenues, growth, profit, and loss) driving decisions.

Question 6:  Technology Issues

The importance of technology to the MLS can hardly be understated.  And there are so many trends, so many factors, so many issues going on at once that the big picture question cannot help but be a bit overgeneralized.  But here they are:

• What are the five top technology challenges facing the MLS today?
• Who is/should be responsible for addressing those challenges?
• Are they up to the task?
• If not, what needs to happen for them to be up to the task?  Is the barrier political? Financial? Technical?

Question 7: Who is the Customer?  Who should be?

MLS’s have a wide range of customers (individual brokers and agents).  They break down in Pareto principle (aka, the “80/20 rule”) along the production axis and along the tech-savvy axis. If Pareto principle holds across both axes, 20% of agents do 80% of the business, and 20% of the agents use 80% of the technology features.  That sets up this chart:

Note that the high producers are all making money and using the system extensively, but not all of them are using all of the advanced features.  The high tech agents tend to be the most vocal in complaining about the system, and push the envelope the most, but not all of them are making any money.

The demographics and characteristics of each quadrant are likely to be quite different.  The High Production, Low Tech, for example, might be your older agents who have an established practice, are very successful, but don’t really use technology very much.  The Low Production, High Tech agent, on the other hand, may very well be your new Gen-Y realtor who is demanding an iPad app but doesn’t yet have the book of business to the point where price-sensitivity is not an issue.

If the Pareto principle holds along both axes, a super-majority (64%) of the MLS’s subscribers are the Low Production, Low Tech agent.  Only 4% of the customers are using all sorts of technology, and making a lot of money doing so.

They are all the MLS’s customer.  The question is, who is the most important customer, and who is the least important?  Who should be the customer in order of priority?

There May Be Answers

There are my Seven Big Questions for the MLS industry.  It’s possible there may even be answers to some or all of these questions.  I hope to learn about some of them — or at least your opinions on some of these questions — in the next few weeks, and at the CMLS show.

Please share any thoughts you may have, or any questions you yourself may have.  If you’d like, you can email me any anonymous comments/questions at: rhahn@7dsassociates.com.

-rsh

Just got off the phone with a broker friend of mine who thinks I’m plainly nuts with all the fearmongering and paranoia about things that will never come to pass.  My recent series on real estate policy has him alternatively dismissive and wanting not to get out of bed in the morning.  So I’d like to tell all of you what I told him.

The reason why I’m being such a chicken little is not to have the industry up in a panic.  It’s to encourage everyone to start planning.  Now is not the time to be reactive, but the time to be proactive in thinking through some of the issues, making contingency plans, and putting a solid strategy in place so that you will know what to do if any of these things should come to pass.

And if none of them materialize, what have you lost?  Keep on keeping on with what you’ve been doing.

People often ask me what the hell I do for a living.  I do corporate strategy.  Part of that is precisely this kind of contingency planning in the event of X.  No matter how many gurus want to pretend that putting up a Facebook page is corporate strategy, it ain’t.  That’s more in the line of tactics and methods.  Strategy is about looking at the overall environment, thinking about competitive factors, assessing capabilities, identifying areas of strength and weakness, and tailoring a plan for imposing your will on the competition, while making contingency plans.

So some free consulting advice for my readers.

On the Importance of Contingency Planning

The foremost strategic organization in the world is probably the United States military.  They have hundreds, thousands of people constantly thinking about “what-ifs” and wargaming various scenarios.  General Petraeus recently said that the U.S. has a contingency plan in place to deal with Iranian nukes:

“It would be almost literally irresponsible if CENTCOM were not to have been thinking about the various ‘what ifs’ and to make plans for a whole variety of different contingencies,” said General David Petraeus, who heads the US Central Command that oversees the Middle East, the Gulf region and Central Asia.

Good.  One would hope that our military would consider any and all possible scenarios and have a plan in place for it.

Even with all the contingency planning in the world, sometimes events overtake us, and we get surprised.  9/11 was such a surprise; no one had actually thought about that particular scenario and put a contingency plan into place for it.  You can bet we now have a bunch of contingency plans at DHS, the Pentagon, FBI, local law enforcement, and other agencies in case of X or Y.

The reason why contingency planning is so important is that it fills the gap for the most important resource in the event of a crisis: rationality.  When bad news hits, most people tend to panic first, get worried, and get confused.  It’s natural.  It’s why disaster victims often walk around with a dazed look on their faces.  Their minds literally go blank.

Take the recent foreclosure crisis in real estate.  A lot of brokers did a significant amount of business from 100% financing sales, where buyers were not required to put any money down at all.  Then lenders started tightening guidelines across the board.  Sad to say, quite a few people never planned for that eventuality; in hindsight, most real estate pros say that the situation was untenable.  You couldn’t continue to loan people 100% of the value of the house and expect that they’d be good homeowners.  But while the 100% financing stuff was going on, very few people even made plans in case that form of financing went away.

Away it did go, and a lot of brokerages suffered huge setbacks in business.  They then started to make plans to deal with the new situation.  Reacting to bad news is not strategy, and when you’re trying to think through how to deal with a problem, while the problem is screwing with your day to day operations, rationality goes out the window.  Plans that people come up with in mid-crisis are rarely good.

That’s why contingency planning is so important.  Yes, you need to be flexible and deal with the actual situation on the ground.  But you have to have something in place to help restore rational thinking, provide at least the feeling of being in control, and tweak that plan in reaction to the actual situation.

So, What Plans Should I Make?

You could go overboard with all the planning stuff.  You don’t really need contingency planning to deal with every little issue.  ”In case we run out of coffee, open the file ‘Coffee Contingency Plan 1.22″ is a bad, bad thing.  Those planning-obsessed organizations end up doing nothing but making plans, executing on none of them well.

The plans I would make are the ones that deal with what-if scenarios that threaten the existence of the organization.  Maybe 10-15 years ago, that was the what-if of the Internet.  What if some big website pops up that makes real estate agents completely useless?  What if consumers start buying and selling homes on Ebay?  What if, what if, what if?

Today, the Big Bad Voodoo scenarios are almost all government-related.  So I would make contingency plans around those things that you personally think might be likely to happen, or unlikely to happen but with such a negative impact that some planning might not be a bad idea.  And you have to consider just how bad event XYZ could be:

• 80% likelihood x $10 worth of badness = $8
• 10% likelihood x $80 worth of badness = $8

The two are the same; you plan for both.  Don’t just plan for the 80% likely scenario, since that’s far more likely to happen — the impact to your business is the same for both.

How to Do it: Contingency Planning 101

Because each market is local, and each real estate organization is setup differently, with different strategies, different business models, and the like, I would start by assessing likelihood and impact in your market, your business.

For example, suppose the mortgage interest deduction is eliminated.  You could say, “Rob, you’re crazy; that will never happen.”  Fine, then assign 0% to likelihood and don’t plan.  If you think, however, that there’s a 5% chance it will happen, then you need to assess the possible impact.

What do you think will happen to your pool of buyers?  What would happen to home values? Not nationally, or statewide or whatever, but in your neck of the woods.

You think about it a whole bunch, then you say, “Hmm, in my particular neighborhood, the elimination of the MID would mean anywhere from 20-30% of buyers would disappear… and that might mean a 25% drop in home values.”  Now you have impact.  What would happen to your business if 30% of buyer demand went away, and home values dropped by 25%?  You do a bunch of calculations and decide, “I’d go from $10m in GCI to about $4m.”  Holy #*&@!

Since the event has not come to pass yet, you’re able to rationally, coolly, calmly, like a game (there’s a reason why the Pentagon calls it a ‘wargame’), figure out what your response should be if the highly unlikely (5% chance, remember) event were to come to pass.

You put together a contingency plan that might go something like this:

“If MID is eliminated, I’m going to go from $10m in GCI to $4m.  I need to layoff Joey, Carla, and Schmitty.  I’d need to move office space — so let me look at what exit clauses I might have in my lease agreement, or at least look at possible subtenants.  I would eliminate the free sodas in the lounge, the annual employee picnics.  I’d have to go into the higher end luxury markets where buyers aren’t as sensitive to mortgage interest issues.  Let me think about training 3-4 agents more on luxury segment.”

You take that plan and file it away, or maybe you start implementing some of it — like training some agents to do more luxury segment business.  Review it periodically to see if those steps are still what you’d want to do.

Point is, that if the highly unlikely, but highly damaging event like the elimination of the MID were to come to pass, you’re not then reacting in a panic, running around like a poulet sans la tete.  You’re opening up your file, reviewing what you planned on back when things were sane, and feeling like you have at least a path forward.

Be Proactive in Planning; Now is Not the Time to be Reactive

So, if you think I’m totally crazy with all this government policy stuff… that’s your prerogative, of course.  But all I’m suggesting is that my friends and colleagues spend a few hours doing some contingency planning… just in case.

Evaluate likelihood and impact, then decide if you need to put a plan down on paper.  It’s like insurance.  You hope you don’t need it, but if there is a fire, and a total loss… boy you’ll be glad you paid those premiums all those years.  Contingency planning doesn’t require a premium.  So go do it.

These be interesting times; the least you could do is plan ahead.

-rsh

Given all of the energy and action of late around housing, housing finance, and future of homeownership by the Federal government, I think it’s time the RE.net (and others!) put together a Carnival of Real Estate Policy.

I’ve organized one and will host the first one here on Notorious.  Submission deadline is 8/31/2010 and this inaugural edition will be posted on 9/5/2010.

I’m looking for blogposts that address the intersection of housing, housing finance, and government policy at all levels: Federal, state and local.  The posts can be mostly about housing, impact on price or sales, impact on consumers, impact on the industry, etc. but should at least address housing policy questions.  They can also be more about the politics — whether such and such a policy is a good idea or a bad one, or whether this policy or that one has a chance of success, or wider political implications, whatever.

This is the first edition; if there is enough energy around the topic, I’ll look to make this a regular monthly carnival, hopefully with other blogs hosting it as we go forward.

How to Submit

First, write a blogpost and schedule it for publication around 9/5.  Then email me the post and the permalink to rhahn@7dsassociates.com.  I’ll read it to make sure the post is on-point, then include it in the actual Carnival Edition post.  Readers will be sent to your blog to read the actual post.

Let’s get the conversation going on this all-important topic.  Looking forward to your thoughts.

-rsh

It’s a chilly, rainy day here in New Jersey under iron grey skies.  If where you are is sunny, and you’re feeling happy and optimistic, and you want to stay that way, let me strongly suggest that you not finish reading this post.  This is where I engage in paranoid fearmongering speculation.

You have been warned.

Actual post continues after the jump.

July 2010: Worst Month Ever for Housing

July’s housing sales numbers were not merely bad; they were catastrophic.  They were so bad that even the legacy media outlets noticed and went into full metal jacket panic mode.  Here are a few samples:

Housing, the real estate market, it’s a disaster, in plain English. The numbers came out for July today. One economist calls them eye watering. Here’s the big bad number. Sales of existing homes fell off a cliff last month, down 27%. That’s the biggest one-month drop on record in our history.  (NBC News)

Economic forecasts were plenty pessimistic ahead of Tuesday’s report by the National Association of Realtors because of other data pointing to weakening sales since the federal tax credit ended in April. The actual numbers were far worse — sales fell more than 27% from June and 25% from a year ago to an annual rate of 3.83 million units. (USA Today)

The latest sign that the economy is losing steam: Home sales fell 27 percent in July, the steepest one-month drop since figures were first compiled in 1968, according to a report released Tuesday. Analysts had expected sales to decline following the expiration of a federal tax credit for homebuyers this spring, but the drop was nearly twice as large as forecast. (Washington Post)

And this drop in sales happened in an historically low interest rate environment, which leaves the talking heads on TV scratching their heads.  Many of the commentators talked about how the expiration of the $8,000 homebuyer tax credit led to this unexpectedly large drop in sales.  The implication is that if only the tax credit had been extended, or put in place permanently, more people would have bought houses.

I and others within the industry have been saying for months that all that the tax credit did was to pull demand forward and that it seemed very odd that folks would put themselves into hock for hundreds of thousands of dollars over a measly $8,000.

One question that naturally arises is… how could economists be so surprised by July numbers?  How the heck are they “unexpected”?

The New *@#&(%#$ Normal

NBC’s Brian Williams says, “What’s equally scary is this: the inventory, the number of unsold homes on the market, rocketed to a 12 and a half month supply.”

Actually Brian, that’s not the really scary thing.  The really scary thing is that this is merely the start of the New Normal for residential housing in the United States.

I’ve been writing on the Obama Administration’s new housing policy for the past few weeks.  Of course, that meant I had to read a bunch of stuff on impenetrable government websites, boring news sites, and various blogs.

I am forced to conclude that the Obama Administration seeks to redefine American housing by changing the national housing policy.  For decades, the national policy on housing has been to encourage homeownership.  The creation of Fannie Mae and Freddie Mac, of FHA, of HUD, of various other agencies that are involved in housing and housing finance, the mortgage interest deduction, the bailout of Fannie/Freddie, the wholesale takeover by the Fed of the housing finance market… these were all undergirded by the commitment by the United States that owning a home is part and parcel of the American Dream.  One can debate whether such subsidizing of the housing market was a good idea or not, but the fact that the Federal government has long encouraged homeownership is not debatable.

The new housing policy we’ll be seeing come down the pike is one of “sustainable homeownership” combined with encouraging rentals.  The Treasury and HUD held a conference recently in which various handpicked experts opined about what needs to happen.  Reading between the lines — and referencing a number of other policy moves of late — I have speculated that the following will happen:

• The mortgage interest deduction will be eliminated, or at least sharply scaled back
• Fannie/Freddie will wind down participation in the single family residential market, and raise participation in multifamily housing (aka, rentals)
• The 30-year fixed rate mortgage is headed to the ashbin of history; I rather expect the “new normal” will be something closer to a 10-15 year adjustable rate mortgages that adjust every year or even every quarter.
• Down payments are headed up, up, up from its current levels (some FHA loans are still requiring only 2-3% down); Bill Gross of PIMCO has said that if he were funding mortgages, he’d require a minimum of 30% down payment.  I think that’s where we’re headed.
• Some form of national regulation for rentals, in order to (a) encourage rentals by those who would otherwise be first-time homebuyers, and (b) protect renters from eeeeevil landlordz.  It may be as heavyhanded as a national rent control regime, or (more likely) an expansion of Section 8 to include far more “middle-income” units.

There will be other changes, of course.  But the overall impact is to decrease the pool of buyers, drive housing prices lower, and have fewer transactions.  Only those buyers who can easily afford to buy their dream homes, and have significant skin in the game to keep them honest about paying back their loans, will be buying homes in the future.

That’s the New Normal for the housing market.

The 27% drop in July has folks all atwitter with fear and trembling.  Guys, 27% will seem like nothing relatively soon.  Economists are suggesting that the elimination of $8,000 in first-time homebuyer tax credits is to blame for the historical drop; wait till you see what the elimination of home mortgage interest deduction does.  Buyers have lost confidence, commentators commentate.  Wait till you see what buyers do when the standard mortgage is not the 30-year fixed at 5% with 10% down, but a 10-year ARM at prime + 2% with 30% down.

That’s the New (*@)(#%&@# Normal for housing.

The Politics of Fingerpointing

Of course, with Republicans quick to jump on Obama and Democrats given the dismal news of July, it may be that the political pressure will force the boys and girls at Treasury and HUD to scale back their ambitious plans.

Again, whether you think the Federal government should be so heavily involved in housing or not, fact is that as of right now, it is.  Without significant policy changes, we will probably have gloomy months and years ahead, and a reset of expectations as Glenn Kelman of Redfin says in the New York Times:

His house, he knows, is “an illiquid asset, a long-term asset, something I won’t be able to tap in for cash. But we chose a place we’ll be able to stay for a long time, to ride out any trouble.”

Once upon a time, before everyone from the banks to the buyers to the sellers got greedy, that was how everyone thought about the housing market. And however bumpy the path, that is once again the market’s future, said Mr. Kelman of Redfin.

“It’s not the apocalypse,” he said. “People will buy homes when they need to move or want the house, not when they want to make money. There will be winners and losers — not just, as in years past, winners and bigger winners.”

Yeah, well, if the Administration does successfully push through its program for “sustainable homeownership”, I rather think even the normally unflappable Glenn Kelman would describe that as the apocalypse.

Welcome to the New (*@)%&#@$ Normal.  You may now commence the fear and trembling.

-rsh

Click: The Magic of Instant Connections is a slim little volume that resists easy classification.  I suppose you could call it a book on psychology, as it explores a particular phenomenon that isn’t well-researched: how people connect with each other.  From Chapter 1:

This book is about those mysterious moment — when we click in life.  Those moments when we are fully engaged and feel a certain natural chemistry or connection with a person, place, or activity

Except it’s about far more than those “mysterious moments”.  And as it turns out, I think Click has a good deal of applicability to the modern practice of real estate in a bunch of ways.

The Book In General

As a general matter, Click is an easy read.  The authors — two brothers Ori Brafman, an organizational business consultant, and Rom Brafman, a psychologist — write in a breezy, anecdotal style weaving stories of individuals like police hostage negotiator Greg Sancier into and out of discussions of academic literature, psychological experiments, and observations about human behavior.  I read the book in one sitting in an afternoon, and it was an overall pleasure to read.

The general topic of the book is why people connect with each other, these “magical moments” of full engagement, the impact of those bonds over time, and what sorts of factors “accelerate” such meaningful connections.

It is in the discussion of these accelerators where the book gets interesting.  There are, for all intents and purposes, three major accelerants of connection: Vulnerability, Proximity, and Similarity.  (The authors posit two additional accelerants, Resonance and a Safe Place, but I find those to be either extensions of the other three, or wholly unconvincing.)

Vulnerability, the authors conclude, is a major accelerant of connecting with people:

Allowing yourself to be vulnerable helps the other person to trust you, precisely because you are putting yourself at emotional, psychological, or physical risk.  Other people tend to react by being more open and vulnerable themselves.  The fact that both of you are letting down your guard helps to lay the groundwork for a faster, closer personal connection.  When you both make yourselves vulnerable from the outset and are candid in revealing who you are and how you think and feel, you create an environment that fosters the kind of openness that can lead to an instant connection — a click.

And the authors pile on evidence from psychological research and anecdotes to prove their case; the most amusing of which is a study which showed that “vulnerability” on the part of a computer elicited more openness from human participants, even though the people knew very well that a computer doesn’t have feelings.

Proximity is the next major accelerant.  Basically, the insight is that people connect with people who are nearby.  That alone doesn’t sound like much, but the authors go further:

In other words, the single most important factor in determining whether or not you connect with another person is neither personality nor mutual interests — it is simple proximity.

Furthermore, the authors claim that “the last few feet” make an enormous difference in how people connect:

The likelihood of clicking, or forming a meaningful connection, with someone increases exponentially the closer we are to that person.  We call this phenomenon exponential attraction.

So the students in the middle of a dorm hall were more popular than those at the end of the hall, simply because they were a few feet closer to other students.  Police academy cadets become friends with each other simply because they happened to sit next to each other, when seating was assigned in alphabetical order by last name; Adams became friends with Aldrich, Smith became friends with Samuelson, etc.

Even more interesting, the authors showcase one study in which mere exposure led to more positive impressions about a person: familiarity doesn’t breed contempt, it breeds connection. There were measurable differences in how people viewed four different women (none of whom ever spoke or interacted with anyone else in a large lecture hall) simply because one attended more of the lectures than the others.

And finally, Similarity is the next accelerant of clicking, which seems obvious: that we connect easier with people who are like us seems common sense. Where the book shines is in providing some interesting evidence that shows just how deep the urge goes.

For example, the authors discuss studies in which merely the similarity in names between the test subject and the experimenter resulted in nearly doubling of charitable contributions, even though the similarity was never raised by the experimenter.  Subconsciously, people responded to requests for donations from total strangers whose only “similarity” was a shared first name by doubling their donation.  And, it doesn’t much matter what the similarity is:

The point is that similarity, no matter what form it takes, leads to greater likability.  When we discover a shared similarity with someone we’ve just met — and as we’ve seen, it doesn’t matter in which areas the similarity occurs — we’re more likely to perceive the person as part of what psychologists call an in-group.  An in-group is a collection of people who share common traits that differentiate them from others.

…

We tend to perceive in-group members in a more favorable light (we think of them as being more attractive and better people).  This drive is so strong, so deeply ingrained in us, that casual conversations that reveal similarities naturally trigger the in-group response.

And finally, it appears that for similarity, quantity matters over quality.  It isn’t how deeply you share something, or how closely you agree, but on how many different topics you agree, and how many different areas of similarity you share with another person that leads to stronger connections.

Perhaps that would explain how a Republican strategist like Mary Matalin could be married to a Democrat politico like James Carville.  Despite their significant, and apparently real, differences, maybe they’re really similar in tastes in music, movies, food, and so on.  Quantity outweighs quality.

Application to Real Estate

I’m still thinking through all the different applications to the practice of real estate.  I can draw some conclusions, while wondering about many more possible applications.

One conclusion is that the success of social media might lie in the seductive power of similarity. Despite the hype, fact is that heavy usage of social media tools — especially the fringe tools like Yelp, Foursquare, and Twitter — remains something for a small minority of the population.  True, adoption is rising, but the majority of Americans are not yet checking into Foursquare on their iPhones everywhere they go.

As a result, when someone who is on social media runs across a realtor who is also on social media, that similarity might lead to in-group treatment, making connection more likely.  Click tells us that such in-group status leads to more favorable perception.  When it comes to buy or sell a house, then, it appears reasonable to think that those people would reach out to their in-group realtors over the out-group realtors.

At the same time, because similarity works via quantity rather than quality, and breadth of similarity rather than the subjects of similarity, it isn’t clear to me that the ultimate path to success is to be a real estate agents in an area where one is most similar to the neighborhood in as many topics as possible.  In a suburban commuter town like mine, for example, it might help to have a spouse who commutes to NYC, a couple of kids in the school system, shop at the local deli, go to the local parks, eat at the same restaurants, etc. etc.  A childless, single agent might have a harder time in a town like mine no matter how brilliant her marketing is, and how competent she is, simply because of the power of Similarity.

Proximity raises an interesting question as well.  Without question, if the authors of Click are right, then the single best use of a realtor’s time might be to just go to a lot of local events.  You don’t even have to say anything or interact with anyone; just show up and be seen.  That alone, according to Click, raises your favorability with people who see you.

The question is whether social media tools — such as a hyperlocal blog or a Facebook profile — can substitute for “proximity”.  I think it could.  In other words, simply being “seen” on Facebook — through status messages, commenting on people’s walls, etc. — might be enough to trigger the Proximity accelerant for connections.  I know how familiar some people seem to me when I finally meet them in person because I’ve interacted with them online; why that wouldn’t work for average consumers is not clear to me.  I think it would.

This idea then dictates that the most effective form of Facebook marketing might be simply to go comment constantly on the walls of people who live in your locale.  It doesn’t matter what you comment on; it just matters that you are “present” to trigger Proximity.

Finally, maybe there is something to this whole “photos on business cards” thing that many real estate agents are so fond of.  If familiarity alone breeds regard, rather than contempt, simply seeing the picture of a real estate agent everywhere does work at a subconscious level.

I haven’t yet figured out how Vulnerability might work in real estate context.  But I’m thinking about it.

So… if you have a few hours, and like $25, it might be worth buying Click and checking it out.  It is certainly thought-provoking (at least for marketing geeks like me), and who knows, you might find something valuable out of it.

For working real estate agents… do these ideas strike you as being right?  Similarity, Proximity, even Vulnerability?  Do those help you make the connections you need?

-rsh

James Pethokoukis writes on Reuters today (h/t: Instapundit) that the Obama Administration may be planning to eliminate many/most/all underwater mortgages in a single swoop:

Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. (Emphasis mine)

If this does come to pass, the mind simply boggles at the thought.

The underwater mortgages would become Federal government debt practically overnight.  It might be time to think about not paying your mortgage….

How Would This Even Work?

Presumably, the way it would work is for Fannie & Freddie to do a one-time reset of all of the mortgages in their portfolios to some sort of “appraised value” based on homeowner request, which would include some sort of appraisal conducted at the homeowner’s request.  If Fannie/Freddie then approves the “reset”, there would be some sort of a purchase of the full mortgage contract from the bank who “owns” the mortgage, then a write-down by Fannie/Freddie of the value.  The Fed would supply Fannie/Freddie with the money to stay solvent while taking these massive write-downs.

So let’s say you’ve got a $500K mortgage on a house whose value has dropped to $350K.  The bank who wrote the mortgage may have packaged it into some MBS with various streams of payments due the bondholders.  You now make an application to have your mortgage reduced; you get an appraiser to come in, look at the house, and issue an appraisal of $350K.  If approved, then presumably, Fannie would reduce the stream of payments it was due from the bank to the $350K principal level, and write down the resulting loss on its books.

Then again, if there are multiple different bondholders… Fannie might have to pay those people off to buy their payment streams in discounted present value basis.

Maybe if the loan is still on the bank’s books, Fannie would simply purchase it for the face amount, then take the loss directly, and send it to whichever servicing company Fannie uses to handle collections and payment processing.

The whole thing would take some time, I think, but all underwater mortgages would become “overwater” mortgages overnight.  At the cost of some $800 billion, of course.

Plus, there are a host of unanswered questions — which is inevitable given that we’re talking about a rumor here.  But I wonder….  If after a homeowner receives this “mortgage reset”, house prices rise, and he ends up selling for a profit… would he have to pay that back to the Fed, or is that his to keep?  Would only primary houses be eligible, or investment property as well?  Would the loan have to be delinquent to be considered, or would there be relief for homeowners who have kept current, despite being underwater?  Would second or third mortgages or even refis be eligible, or only the primary mortgage?

Argh, so many questions without answers….

Is This Good or Bad for Real Estate?

Many taxpayers would be understandably irate if such a thing were to come to pass.  As Pethokoukis notes:

The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.

But leave the political realities for other blogs to cover in greater depth.  What about for the real estate industry?  Would such a “loan forgiveness” program be good or bad for real estate?

Presumably, short sales would disappear, since no house would actually be underwater anymore. Foreclosures are likely to come to a halt or a near-halt; why foreclose, when you the bank might recover the full value of the mortgage from the Feds?  Would prices recover?  Since the principal reduction would have to go hand-in-hand with a new appraised value of some sort, if anything, wouldn’t that create a “new normal” for the pricing for housing in a given area?

Would banks relax their lending standards, knowing that Fed would bail them out if the loan goes underwater?  Even if this “reset” is sold as a once-in-a-lifetime thing, wouldn’t bankers be justified in believing that a precedent has been set?  Units might go up if true, but that almost suggests that we’ll have another bubble in real estate in a few year’s time, no?  Or have things changed sufficiently now?

Boy… I really haven’t a clue as to whether this sort of a bailout-for-homeowners would be a good thing or a bad thing.

As Pethkoukis says, August 17th is a key date, as that is when the Treasury will hold a hearing on the future of Fannie and Freddie.  Keep an eye on Washington; these be interesting times we live in.

Your thoughts on either the mechanics of how such a thing might work, or the desirability/undesirability of the “bailout”?

-rsh

Last night, the RE.net and the world lost a thinker, a mentor, a wit, a pioneer, and above all, a good man.  Joe Ferrara has passed on.  My thoughts and prayers are with his family, and his wife Sandra, whom he loved above all else.

Joe’s Sellsius blog was one of the first and best real-estate blogs, full of interesting thoughts, news, and most of all, a great sense of humor that Joe imparted to it.  Posts like this one usually had me grinning, and sometimes laughing out loud maniacally, startling the nearby denizens of a Starbucks or two.

Joe is also one of the first people I’ve met in the RE.net.  When I first started blogging in 2008, Joe was one of the first to somehow find my unadvertised blog, comment on it, and contact me, encouraging me to keep writing.  If it weren’t for him, it isn’t clear whether Notorious R.O.B. ever evolves.  I called him the Godfather of La Blogstra Nostra, the East Coast RE.net Famiglia, out of respect for him and his sense of humor.  That is what I’ll remember about him — how great his laugh was, how his eyes would twinkle constantly, and how funny the man was.

I will never forget that Joe was a font of ideas and innovation.   Although not a wealthy man, Joe was constantly thinking about helping those less fortunate than himself.  We must have discussed the idea of pro bono real estate for hours, days, weeks.  He was the first person I remember proposing a “Hot Ladies of the RE.net Calendar” to raise money for various charitable causes, like Habitat for Humanity.  His ideas were often great, sometimes not, but always, always interesting.

Joe and I have had so many great conversations over the years, whether on the web, or in person at various conferences, or meeting up in New York City over a cup of coffee or seven, debating everything from social media to real estate to the state of the nation to whether Batman could beat Superman in a fight.  It was our love of conversation that led to the Lucky Strikes Social Media Club, which is still going strong in New York, in the hopes of getting together with other like-minded real estate, technology, and marketing people to share a meal and a great conversation.  That wonderful network of people does not exist without Joe Ferrara’s leadership and vision.

Above everything else, I will remember just how much Joe genuinely loved people.  That’s a rare enough quality in human beings, nevermind an attorney.  (Yes, Joe, I hope you’re laughing where you are, since you loved attorney jokes.)  But he really cared about people as people, was interested in them as human beings, and wanted to connect as one person to another.  If social media means anything at all, it means human beings treating each other as such.  Joe embodied that spirit better than just about anyone I know.

I’ll miss you, Joe.  See you on the Other Side.

Click here to view the embedded video.

-rsh

Future Realtor-in-Chief?

So earlier today, I get an email of some interesting real-estate related links from my friends at AOL Housingwatch (where I pen an occasional column or two).  In it, I find this gem of a story:

Mortgage loan originators will have to be fingerprinted and sign up to a central registry to do business in future, according to final rules issued on Wednesday by the Federal Reserve and other regulators.

The rules are part of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, also called the S.A.F.E. Act.

They were issued by the Fed, Comptroller of the Currency, Federal Deposit Insurance Corp, Office of Thrift Supervision, Farm Credit Administration and National Credit Union Administration.

Well, isn’t that special!  Heartfelt congratulations to my friends in the mortgage origination industry for finally earning the right to be fingerprinted to have a job.  You have managed to join all Federal and State employees in that distinction.  Now when your electronically-submitted loan application is found to be fraudulent, your prints will be all over that email!  There is nowhere to run!

Snark aside, I missed the passage of and the significance of the SAFE Act of 2008.  So… I went digging a little bit.  What I’ve found convinces me more than ever that federal regulation of real estate agents is not far behind.

That such regulation would also fit into the overall shift in national housing policy, of course, is a given.  What might such a scheme look like?

The SAFE Act of 2008

The place to begin is the federal regulation of mortgage professionals, since it’s a hop, skip and a jump from regulating mortgage brokers and originators to regulating real estate brokers and agents.

The Nationwide Mortgage Licensing System (NMLS) has a good overview of SAFE Act that can be found here.  And this document (PDF) is a pretty good overview of the mandates contained in SAFE.  The major mandates are:

• A “Model State Law” proposed by Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR)
• Federal minimum standards for mortgage originators, overseen and managed by Housing and Urban Development (HUD)
• Nationwide database of mortgage licensees (the NMLS above) that requires registration by all mortgage originators (along with the above-mentioned fingerprints, of course), and provides public access, including via the Internet.
• NMLS-developed national courses and exams for pre-licensing, continuing ed, and licensing.

As it happens, a few days ago, the Federal Agencies released the Final Rules for SAFE compliance.  A competent attorney (calling Brian Larson!) is invited to examine the said Final Rules (PDF).

There are, as you’d imagine, hundreds of details that you’d need a good attorney to review in detail.  As I am an attorney only in name, and would not call myself a good one, I’ll skip any legal analysis and just talk big picture.

Basically, every mortgage originator (which includes mortgage brokers) with some small exceptions (non-Federally insured credit unions, it looks like) are required to register with the NMLS.  There is a whole list of what information must be submitted in the Final Rules.  Consumers will have access to some of that information including via the Internet.  A mortgage originator has to provide his “Unique ID” in the NMLS to the consumer — much like California Realtors all have their DRE numbers everywhere.  Presumably, the consumer can use that ID number to look the mortgage originator up in the NMLS system.

Plus, some of the teeth, as contained in the Final Rules (Federal Register, Vol. 75, No. 144, p.44661)

The Agencies note that the Federal Housing Finance Agency (FHFA) has directed Fannie Mae and Freddie Mac to require all mortgage loan applications to include the mortgage loan originator’s unique identifier.

No registration, no Fannie/Freddie.

But what’s more interesting is the Model State Law and the accompanying federal examination system administered by the NMLS.  The way that Model Laws work is that each State, which is technically a sovereign, is invited to adopt the Model Law to create uniformity across the country.  Oftentimes, the State legislatures and agencies may make small tweaks to the Model Law, but for the most part, where a Model Code exists (e.g., Model Criminal Code), the States generally fall in line.  As one might expect, the Federal government has ways to be extremely persuasive.

SAFE Act, of course, directs the HUD to review each State’s version of the Model State Law to ensure that the standards contained therein meet the Federal mandates as laid out in the SAFE Act (and for all intents and purposes, the Final Rules of the Agencies).  And each State has to license its mortgage people through the national database (NMLS).

Additionally, the NMLS is directed to review and approve coursework for pre-licensing and continuing ed, as well as develop Federal exams and approve exam providers.  What is far more likely is that the NMLS will propose a set of coursework and requirements for licensing, and recommend to each State board what to adopt — much like the Model Law.

The likelihood that each state will develop its own licensing exam that is significantly different from the Federal exam is extremely slim.

Therefore, practically speaking, it is safe to say that the mortgage brokerage industry today is now a Federally regulated industry, with Federal standards, Federal registration, and a Federal licensing scheme (although administered by each State).

Why Realtors Are Next

Just because mortgage originators have fallen under Federal regulation doesn’t necessarily mean that real estate brokers and agents will, right?  After all, in the recent Housing Bubble and ensuing credit crisis, the mortgage guys were right in the middle of a lot of fraudulent, NINJA loans, and the like driven by greed and stupidity, right?  Why should real estate agents get caught up in that?

Well, I find illustrative the following Commentary on the Model State Law by HUD:

The SAFE Act is designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators and for the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) to establish and maintain a nationwide mortgage licensing system and registry for the residential mortgage industry for the purpose of achieving the following objectives:

(1) Providing uniform license applications and reporting requirements for state licensed-loan originators;

(2) Providing a comprehensive licensing and supervisory database;

(3) Aggregating and improving the flow of information to and between regulators;

(4) Providing increased accountability and tracking of loan originators;

(5) Streamlining the licensing process and reducing regulatory burden;

(6) Enhancing consumer protections and supporting anti-fraud measures;

(7) Providing consumers with easily accessible information, offered at no charge, utilizing electronic media, including the Internet, regarding the employment history of, and publicly adjudicated disciplinary and enforcement actions against, loan originators;

(8) Establishing a means by which residential mortgage loan originators would, to the greatest extent possible, be required to act in the best interests of the consumer;

(9) Facilitating responsible behavior in the subprime mortgage market place and providing comprehensive training and examination requirements related to subprime mortgage lending;

(10) Facilitating the collection and disbursement of consumer complaints on behalf of state mortgage regulators.

The new standards, as well as the uniformity and consistency of such standards, directed to be established nationwide by the SAFE Act present a significant step in the effort to increase integrity in the residential mortgage loan market, enhance consumer protections, and reduce fraud. (Emphasis added)

All but one of those objectives (#9) would apply with equal force to real estate agents, who are also licensed by each State as mortgage originators used to be.  Uniform licensing requirements?  Isn’t this something even some in the industry has been clamoring for?  Establishing a means by which residential brokers would, to the greatest extent possible, be required to act in the best interests of the consumer?  Isn’t that the point of fiduciary duty of the realtor?  Providing increased accountability and tracking of real estate brokers?  Seems to me the argument applies with equal force.

Of course, NAR may decide that a Federal licensing scheme and a registration database is a step too far, and wield its considerable political power to oppose such a thing.  But is this a battle NAR would even choose to fight?

After all, a number of people within the industry has been asking for higher standards on real estate licensing — a huge part of the “Raise the Bar” (or #RTB) movement wants higher standards, tougher requirements, more education, and so on.  Dale Stinton himself has suggested that the industry needs to raise the bar for what it means to be a real estate licensee.

Given the sentiment of some consumers about their realtors, arguing against “greater accountability” for real estate agents strikes me as a difficult hill to climb in any event.

So I am more convinced than ever that we’re going to see some sort of a Federal regulatory scheme for real estate agents.

What That Might Look Like

I believe the regulatory scheme would largely parallel the SAFE Act.  HUD and the other Agencies will take the lead.  ARELLO, the Association of Real Estate License Law Officials, is the rough equivalent to the CSBS and AARMR, so it will be charged with coming up with the Model State Law.  I haven’t researched carefully, but ARELLO might already have one in place, for all I know.  ARELLO already runs a database, called the DADB (Disciplinary Action Data Bank) that can easily become the equivalent of the NMLS system, by making participation in it mandatory for all licensees.  Like the NMLS registry, the DADB would make some information available to the public at no charge, likely through some sort of a consumer-facing website.  At a minimum, such a database would include disciplinary action; it may also end up including some agent performance statistics to help consumers select the right agent.

I expect NAR would support such a move, and assist ARELLO in drafting the Model State Law if one doesn’t currently exist.  Such a Model State Law would likely incorporate much of the REALTOR Code of Ethics, as that would tend to show “requiring acting in the consumer’s best interest”.

Presumably, ARELLO would also review and approve the pre-licensing courses as well as the continuing ed courses, and publish Federal examinations and approve testing providers, just like the NMLS does for mortgage.  Any state-approved coursework would need to be approved by ARELLO as well, which makes it quite likely that the ARELLO test would become the de facto national real estate licensing exam.

As Fannie/Freddie will require mortgage originators to include their NMLS number in any loan applications, I’d imagine that the National Realtor Number (perhaps the NRDS database would be co-opted by ARELLO?) will be included with just about any document on which a real estate broker hopes to get paid.

All of this is quite in line with the intent of the regulation: uniformity and consistency, nationwide, in real estate professionals.

A couple of wrinkles here that are extremely interesting to consider.

First, “mortgage originator” under the SAFE Act usually refers to an employee of various types of institutions (FDIC-insured banks).  Since the real estate agent is not technically an employee of the broker, but a 1099 independent contractor, but the legal duty to the client flows to the broker, it’s quite possible that we’d see a national definition (or re-definition) of who is and is not a real estate broker.  Given that some states (such as Colorado, I believe) do not distinguish between brokers and agents, making all licensees a broker, while others have different types of agencies (e.g., Florida has the “transaction agent” concept), I think it quite likely that the national standard would put forth a single definition of a “real estate professional”.

Second, related to that re-definition of a licensee… it isn’t clear to me that the statutory non-employee classification for real estate agents would survive that redefining process.  This is probably a long post in and of itself, but briefly, the trend of big legislation recently (e.g., Healthcare, finance reform, SAFE Act, etc.) all rely on employee status for various mandates.  In a SAFE Act-like regulatory scheme for real estate agents, if there is a violation or a problem, it isn’t clear who is to be blamed — the licensee or the broker, who is theoretically supervising that licensee and is legally responsible for his/her actions.  It would be simpler overall to classify the licensee-agent as an employee of the broker.  (Plus, employee status means more taxes for the employer, which the Federal and State governments all desperately need these days.)

To suggest that most brokerage companies in the United States today is not ready for such a change is, I think, an understatement.

Third, the mortgage industry does not to my knowledge have anything like the MLS in the real estate industry.  Fannie/Freddie might provide the enforcement teeth for the SAFE Act; for a Realtor-SAFE Act, the MLS will need to be the teeth.  How such a scheme might be designed or carried out is beyond my ken right now, but I have a strong feeling that the MLS may be looking at some Federal regulation in the not too distant future, connected to something like the SAFE Act for real estate.

Remember: Speculation

As we close out, remember that this is all speculation at this point, based on looking at the SAFE Act, its contours, its goals and objectives, then thinking about the national housing policy of discouraging homeownership, and various other strands.  For all I know, none of this could come to pass.

And even if it were to come to pass, I’m not sure that national regulation would necessarily be a bad thing.  I’m undecided on it.  After all, it isn’t as if having 50 different rules and regulations is a real positive for the industry, as far as I can tell.  Nor is having some 850 different rulesets for each MLS a wondrous benefit either.

Nevertheless, five years ago, I would have thought that a national regulatory scheme for real estate agents was unthinkable.  It is not unthinkable now.  In fact, I’d suggest it might even be likely before not too long — say 2012 or so.

If you’ve read this far, thank you.  And let me know what you think.  Is Federal regulation more or less likely within the next two years?  And would such a regulation be a good thing overall or a bad thing overall?

-rsh

Few industries worship innovation as much as real estate does.  It is perhaps the highest compliment to a company or to an individual in real estate to say, “You’re so innovative!”

Thing is, I believe innovation is disruptive.  In fact, I think how innovative something is can be correlated to how destructive it is of older practices.  On that basis, I have a feeling — a hunch really — that Hunch.com is an innovation you’re going to want to watch.

Hunch: Social Search

From the Wired profile of Hunch, and its co-founder, Caterina Fake:

Fake’s solution is uniquely, well, Fakeian: Get people talking about themselves — their opinions, tastes, beliefs, idiosyncrasies. Then, once they have shared enough information, mine that data for correlations that provide precisely tailored recommendations for each user. It is a quietly radical premise, implying that our tastes are defined not only by what we buy or what we’ve liked in the past but by who we are as people.

Hunch learns about its members through “Teach Hunch About You” questions. These queries can cover anything — exercise regimens, the ethics of SeaWorld, zombies — and the more of them people answer, the more complete a profile Hunch can create. (Since the site launched in June 2009, it has collected 55 million answers to these questions from its 1 million active users.) Once Hunch’s algorithm collects enough data, it can start finding surprising correlations. For instance, people who swat flies have a thing for USA Today. People who believe in alien abductions are more likely than nonbelievers to drink Pepsi. People who eat fresh fruit every day are more likely to desire Canon’s pricey EOS 7D camera. And respondents who cut their sandwiches diagonally rather than vertically are more likely to prefer men’s Ray-Ban sunglasses.

Back when I was at Realogy, and then at Onboard, I thought something like this would be part of the grand vision of Lifestyle search: finding neighborhoods and homes by where people like you lived.  Trying to figure out the search algorithm, however, from a mountain of demographic, psychographic, and behavioral data was a nontrivial task.

Looks like Hunch might have an answer.

What Hunch is trying to do is to put together a very detailed profile of every single person in the world:

Just as Google built a vast index of the Web and Facebook constructed a model of our social connections, Hunch is assembling an extraordinarily rich and detailed picture of each user’s taste. From there it can claim to know or extrapolate everything that a person likes or would like. “The ultimate goal of the company is to map every person on the Internet to every object on the Internet, be that a product, a service, or a person,” Fake says.

Interesting, n’est-ce pas?  Then by mapping the connections between persons, Hunch hopes to create recommendations on everything from widgets to dating.

And We Care Why?

Considering the importance of real estate as a search category, it seems highly likely that Hunch will have an impact on real estate if it is successful.  Hunch could be either the real estate professional’s best friend, or its worst enemy.

On the one hand, Hunch could replace the entire panoply of property search (think Realtor.com, Zillow, Trulia, etc.) with social search.  The days of “price/bed/bath/zip” may be history if I could simply tap into the social search web to find what properties other people like me, with my interests, with my “social mapping” are looking at — with some varying levels of similarity of course.  The realtor who receives such a lead — who, by the way, is likely to fit into the consumer’s social map (see below) — will have an enormous amount of information about the consumer to help advise them further.

On the other hand, Hunch could theoretically replace the need for a realtor to be involved very much — except for the pain-in-the-rear transaction management and paperwork piece.  The buyer and the seller could connect directly via the “social map” — especially if the social map has some sort of historical memory.  Maybe the seller is 45 and looking to upgrade for her teenage girls, and the buyer is more or less her ten years earlier in terms of taste, likes, dislikes, number of children, etc.  In that world, the real estate agent is more or less relegated to a clerk who just takes care of the paperwork.

Finally, Hunch (or something like it) would bring to reality the long-held dream within real estate of a “eHarmony for real estate”, matching consumers with realtors with whom they are most compatible.  Because real estate is such an emotional business, style and personality fit may be more important than performance metrics.  That such a service would have an impact on things like real estate brands is difficult to doubt.

Watch This Space

Of course, Hunch may do none of that, and just be another startup in pursuit of a cool idea that goes bankrupt when the funding dries up.  But watch this space.  The vision of social search, of people-powered knowledge, a sort of a global Overmind, is real and it’s closer than one might think.

-rsh

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