Notorious R.O.B.

Inman News has a very interesting… I guess one would have to call it an Op/Ed or News Analysis on the Washington Post’s story on HUD Secretary Jackson’s last day:

An article in last Sunday’s Post deserves credit for attempting to go beyond the allegations of cronyism that forced Jackson to resign, and taking a deeper look at the role HUD policies may have played in the housing downturn. Unfortunately, the article doesn’t deliver on that promise.

The Post claims that because Jackson “pushed for legislation that would make it easier for federally backed lenders to make mortgage loans to risky borrowers who put less money down,” he will be “remembered as a Cabinet secretary so committed to carrying out President Bush’s goal of increasing homeownership that he encouraged policies that threatened to exacerbate the mortgage crisis.”

Matt Carter does go on to explain some of the political shenanigans that went on in wa-wa land (aka, Washington DC, which is like la-la land, aka, Hollywood, in that they both indulge in fantasies, but different in the personal attractiveness factor) and basically debunks the WaPo story.  The entire thing is worth a detailed read, especially if you’re interested in legal and political issues in real estate.

I thought it interesting, however, that there were two assumptions made in the story.

First, Matt assumes good faith on the part of the Washington Post.

What’s ironic about the Post’s story is that the Bush administration (and Republicans in general) usually come under fire from housing advocates for attempting to limit the government’s role in lending — especially when it comes to Fannie and Freddie, which during the housing boom were hobbled by caps on their portfolios and requirements to maintain additional capital (those limitations were imposed in the wake of management and accounting scandals that forced both companies to restate several years of earnings). Some critics say the limits on FHA, Fannie and Freddie were one reason “private label” lenders — many employing much looser underwriting criteria — were able to boost their market share so dramatically during the boom.

To claim that the administration’s lone attempt to expand a government-backed loan guarantee program “threatened to exacerbate the mortgage crisis” suggests a lack of awareness of the changes that took place in the lending industry during the housing boom, or the motives for expanding FHA loan guarantee programs.

Matt — maybe it’s not a “lack of awareness” but willful ignorance?  Or worse still, perhaps the WaPo simply doesn’t care about inconvenient things like the truth.  I think he actually means to suggest it, but is politely refraining from calling a spade a spade.  I have no such restraints, polite or otherwise.  Washington Post’s story is nothing more than a politically motivated hit piece on the Bush Administration written by left-wing editors and writers in an attempt to lay the blame for the current pain in the real estate market at the feet of the White House by any possible means.

It’s a shame, but that is the state of the “news” media in this country today.  When people like Ron Peltier of HomeServices and Alex Perriello of Realogy talk about the relentlessly negative media environment for real estate, there is some truth to their complaints.

As Matt Carter himself reports in another article on Inman, fact is that this whole ‘subprime’ thing may have been much ado about nothing:

According to the latest economic letter from the Federal Reserve Bank of San Francisco, it’s likely ARM loans have higher delinquency rates than fixed-rate loans not because of the payment shock associated with interest rate resets, but because the people who took them out had higher risk characteristics.

And later in the article:

The flip side of Yellen’s analysis is that markets that weren’t subject to lots of speculation are in better shape to weather the storm. PMI’s latest risk index shows a reduced risk of price declines in markets that didn’t see steep run-ups in prices during the housing boom.

Huh.  And here we are, thinking all this time that the reason why the housing market is in the tank is because of irresponsible bankers and mortgage brokers selling these DANGEROUS subprime loans to poor unsuspecting consumers.  Turns out, mortgages have less to do with delinquencies than the price fluctuation brought on by speculation?  Whodathunk reading the New York Times or Washington Post?

About those poor unsuspecting consumers… that’s the second assumption Matt makes.  He writes at the end of his excellent analysis:

HUD estimates the simplified disclosures will help consumers save $8.35 billion a year. Had those disclosures been in place during the frenzied buying of the housing boom, many buyers who got into homes by taking out loans they didn’t understand might have instead gone with more affordable mortgages — or not taken out a loan at all. (Emphasis mine)

Why do we continue to believe that the problem was buyers who “didn’t understand”?  Why do we persist in the assumption that these delinquent buyers were tricked, fooled, bamboozled into buying million dollar homes on $35K a year incomes?  Maybe these buyers understood perfectly well that they were taking an enormous gamble but simply didn’t care; maybe they all thought they’d get out before the market crashed and make a few tens of thousands of dollars for nothing.  Maybe they fell into the trap that every bubble-economy fool falls into: the Greater Fool theory.  Maybe they’re not poor unsuspecting victims after all, but simply gamblers without morals or ethics or sense of personal responsibility.

That would, after all, fit the profile of “higher risk characteristics”.

People are walking away from houses not because the loan terms got so damn onerous, but because their gamble didn’t pay off.  That’s the only possible interpretation of the San Francisco Fed report.  ARM or 30-year fixed, makes no difference — the rapid rise, then rapid fall, in housing prices does.  Those are the facts.

The responsible buyers, the ones who didn’t feel like speculating on real estate, who weren’t “flipping condos” and dreaming of making big bucks on No Money Down deals, they’re still buying in this market.  They were buying at the height of the boom too — but they didn’t go pouring everything into $2M condos on $50K a year.  They behaved like rational adults, rational consumers.  And they continue to do so.

Are there innocent victims?  Meh… I suppose… but it would have to be one hell of a story involving either a health crisis or unemployment to pass the smell test if someone bought a house they simply could not afford a mere two years later.

As for the Washington Post and the rest of their comrade-in-arms in the media… should we see a Democrat elected to the White House in the fall, I think we’ll suddenly find that the editors will discover hitherto unseen silver linings in the real estate cloud.  The sun will break through the dark clouds, and wonder of wonders, we may come to learn that WaPo and NYT begin to see a ray of hope, a brighter tomorrow.

Even then, making assumptions about their “lack of awareness” would be a step too far in the direction of naivete.

-rsh

Courtesy of Zillow’s blog, we hear about the economically depressed city of Youngstown, OH razing thinly populated neighborhoods in order to save on public services costs to the area. There are lots of reasons to do this — abandoned homes can become a base for crime, drugs, and other naughty activities that civilized society frowns upon. And I’m not opposed to the “Honey, I Shrank the City” movement.

On the other hand… I’m just wondering…

Why not try homesteading?

And I don’t mean the modern definition of the term that refers to bunch of neo-hippies practicing some “back to earth” sustainable living type stuff. I mean the original, 1862 version of the word homesteading.

The 1862 Homestead Act required that the claimant “improve” the land he was claiming, and stay there for five years. At the end of that period, the land was his free and clear.

A homesteader had only to be the head of a household and at least 21 years of age to claim a 160 acre parcel of land. Settlers from all walks of life including newly arrived immigrants, farmers without land of their own from the East, single women and former slaves came to meet the challenge of “proving up” and keeping this “free land”. Each homesteader had to live on the land, build a home, make improvements and farm for 5 years before they were eligible to “prove up”. A total filing fee of $18 was the only money required, but sacrifice and hard work exacted a different price from the hopeful settlers.

This was an amazing chapter in the history of the United States. Former slaves, freed by the Civil War, could become landowners. New immigrants, women, the poor — all had a real shot at making a life for themselves and achieving the dream of landownership.

Why not again today?

Suppose Youngstown were to simply condemn the houses, then hand out title to any U.S. citizen who claimed a property, with some conditions, similar to the one in the 1862 law.

• You must stay in the residence for at least five years.
• During your stay, you must maintain the house in reasonable condition and not engage in any illegal activities in the house.
• It must be your primary residence for those five years.
• You must pay all property taxes and government fees associated with homeownership, such as for trash removal, water and sewage, etc.

At the end of five years, title to the house belongs to you free and clear.

If there is a homelessness problem in this country, rather than continuing to invest in public housing, why not encourage (in the most radical way possible) private homeownership for the poor?  Imagine a poor family suddenly having title to their own house after five years.  What can they do with that?  If the economy turns around because of an influx of people, businesses start up again, jobs start to get created, and the value of the property becomes something substantial… those people might have a real nest egg for retirement, or use the equity in the house to start a business or go to college or whatever else they want.

And Youngstown wouldn’t just have a reduced cost for services, but a higher tax base as well.

Rather than embracing defeat and shrinkage, a city faced with the blight of mass foreclosures can actually revitalize their entire economic base simply by giving away abandoned houses.  The “owners” are not likely to be complaining, seeing as how the alternative is to have the property razed and turned into a public park or some such.  After Kelo, I can’t see how this sort of program would not pass muster, especially as it pertains to abandoned homes in blighted areas.

What am I missing here?

-rsh

Work has been absolutely crushing the past couple of weeks, and blogging has been light out of necessity.  Hopefully, I can get back on schedule next week.

But I did want to briefly note that the Seventh Circuit Court of Appeals issued its ruling (PDF) affirming the lower court’s decision in Craigslist v. Chicago Lawyers Committee (H/T: Inman News).  It seems like a sweeping victory for Craigslist to me, and good news generally for the RE.net community.

Trulia, Zillow, and others can relax a bit.  Seems to me that under this ruling, even a brokerage network may be safe from liability for discriminatory ads/descriptions entered by an independent contractor (aka, the agent).

I wonder, however, what to make of this dictum:

To appreciate the limited role of §230(c)(1), remember that “information content providers” may be liable for contributory infringement if their system is designed to help people steal music or other material in copyright. See Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913(2005); In re Aimster Copyright Litigation, 334 F.3d 643 (7th Cir. 2003). Grokster is incompatible with treating §230(c)(1) as a grant of comprehensive immunity from civil liability for content provided by a third party. (Emphasis mine)

Arguably, the court ruled in favor of Craigslist partly because Craigslist provides next to nothing to the advertiser. It’s basically just a big message board.

If you provide additional tools to the agent — such as a way to edit listings, or manipulate photos, or automated feed uploads — does that take you over the line into contributory infringement? One could make the argument that such a rich system is “designed to help people” infringe the Fair Housing Act, couldn’t one? Providing detailed maps, data on crime, etc. could theoretically be construed as providing a “system designed to help” those who want to redline and steer consumers.

That creates a perverse incentive for the online listings aggregators: provide more tools, face more liability.

I know, it seems like weak tea, but it did make me wonder. Maybe the real solution isn’t in the courts, but in the legislature. Time to update the Fair Housing Act to conform to the 21st century reality.

-rsh

A cautionary tale from the real estate world:

The Fifth Amendment ends saying, “…nor shall private property be taken for public use without just compensation.” In the end, this is private, not public property. The same person that wants to dictate what can and cannot happen on private property, does not want anyone to tell them what they can and cannot do to their own house. I understand development more than the average person. Because an ex-employee wanted to get back at me, he asked for one of my projects to be considered a landmark for no other reason than it was old enough to fit the criteria. So I have been through the Landmark process and have spent a large amount of money all to have the Landmark board unanimously vote NO.

Going through this process made me question my political rights. Political freedom is being free from tyranny and free to own what you want to own as long as it does not harm anyone else, or abuse their rights. This is the point where opposition becomes confused. Opposition may use the argument that development of the Ballard Dennys would harm or abuse their rights, but on what grounds? I am sure John McCullough (attorney hired by Benaroya) will appeal this decision on the simple ground that this is private property and will not harm or abuse other’s rights.

We are all giving these personal freedoms and Ken Alhadeff, the owner of Majestic Bay Theatres said it perfectly. “If you choose to designate, you must be part of the solution. And then what? What’s the next step? Who will restore it? What will it be?”

Sadly, Jon, the answer is that Ken Alhadeff is wrong.  You don’t have to be part of the solution; you can just make the private landowner pay.  You don’t have to show harm or abuse or any such thing — you just have to have the power to compel private property owners to buckle under to the will of the majority.

At a time when large numbers of Americans accept rent control laws, believing that all those laws do is “stick it to the rich”, why anyone would continue to believe that appeals to conscience would preserve personal freedoms such as private property rights is beyond me.  Freedom isn’t free.  It must be defended, and vigorously, not just from foreign enemies, but from the far more dangerous domestic enemies.

In the aftermath of Kelo, the number of Americans who are clueless about where various local candidates stand on the issue of private property rights is astonishing.

People deserve the leaders that they get.  I would suggest Jon consider running for office, or supporting someone for office who cares about private property rights and personal freedom.

-rsh

If you care about legal issues, this is a must read post from Real Estate, Real Competition, and The Law. Chicago Lawyers’ Committee for Civil Rights Under the Law (CLC) sued Craigslist for violating the Fair Housing Act and got pretty much slapped around by the trial court. CLC appealed, and the Seventh Circuit heard the appeal.

The blogger, Michael Erdman, spent a great deal of time and energy reporting on the actual oral arguments. Having been to a court hearing or two myself, I know just how incredibly boring that can be. He deserves a great deal of thanks for the work he’s done here.  Seriously, read the whole thing.

This case is important not just for real estate, but for the internet industry as well.  If Craigslist is found guilty of violating FHA because its members posted ads that are, that creates all kinds of problems for all web-based advertising businesses, social networks, and the like.  At issue is whether a web-based message board has a duty to filter content — or at least attempt to filter content — to keep objectionable ads off its system.

Again, forcing companies like Craigslist and eBay to filter content proactively is going to have immense implications for companies like Facebook, MySpace, and others.  In real estate, such a rule would have enormous implications for FSBO sites, as well as non-FSBO listing sites in terms of proving some sort of an affirmative filtering mechanism.

In concluding, Mr. Erdman expects to see a unanimous affirmance of the trial court’s ruling to dismiss the case against Craigslist.  I hope so.

-rsh

Looks like the latest CoStar blog post takes the rivalry between CoStar and Loopnet to a new level.  It’s exciting — almost as if we’re in a Presidential Election season.  Oh yeah…. 

Anyhow, CoStar basically pimpslapped Loopnet’s membership claims and alleges false advertising:

If the impressive-sounding number LoopNet claims as its “registered users” is really the cumulative number of times someone ever registered to use their web site over the past decade, why would LoopNet say that it can “immediately expose” listings to 2.5 million people?

We think the answer is clear: LoopNet doesn’t have extensive research facilities. It doesn’t spend millions of dollars on trained researchers to track down listings all over the country the way CoStar does. Which is why CoStar has a higher quality, more comprehensive database, with the information you can’t find anywhere else. 

Granted, the two of them have been going at it for some time now, including various lawsuits enriching various corporate litigators from coast to coast.  And I gather that they’re tussling with each other over who will be the National Commercial MLS when it’s all said and done, since the commercial real estate world doesn’t have domination-by-MLS that the residential side does.

I personally can’t wait to see the response by Loopnet.  It’s going to be an interesting time in the tiny, arcane world of online commercial real estate.

Here’s the thing, however, for those who don’t follow the Inside Baseball stuff about commercial real estate websites.

There is little doubt that CoStar is right.  Loopnet does make silly claims.  2.5 million registered users just doesn’t fly considering the size and scope of the entire commercial real estate market.  Not to mention aging of users, as CoStar brings up.  At the same time, CoStar shows its character with not only the blog post but the lawsuit that inspired it.

CoStar is extremely good at what they do.  Really, they are.  Their technology is very good, and their research capabilities (which CoStar has spent hundreds of millions of dollars developing and maintaining) are second to none.  CoStar singlehandedly changed the way that commercial real estate firms conduct business.  But they’re evil.  If you look into their business practices, you realize that you are seeing the wielding of monopoly power the likes of which you haven’t seen since the pre-Google Microsoft days.  That CoStar looks upon litigation as a good competitive weapon says much about how they compete: to win, and to win in Conan-like ways.  Crush your enemies, see them driven before you, and hear the lamentation of their women.  Not that there’s anything wrong with that, but that sort of competitiveness isn’t going to make you a lot of friends.

Loopnet may not be as evil as CoStar, but they’re incompetent.  This is not the place to go into the details of their incompetence, but suffice to say that they remain in business because (1) how much the industry despises CoStar, and (2) their competitors are even more incompetent than they are.  Going out with a 2.5 million registered users claim when even a cursory examination of the numbers based on public records (as CoStar did) shows that claim to be… how shall we put this… marketing fluff is not the height of competence, especially when you’re locked in a death match struggle with the Death Star CoStar.

Looking at this particular little fight, I feel like I did when (as a Jets fan) the 2007 Patriots played the Dolphins.  Do you root for the evil empire?  Or the utter incompetence of the Fish?  Eeek.

I will point out one thing, however.

CoStar says it plays straight with its subscriber numbers.  Curiously, I haven’t been able to find those numbers.  I’m sure they publish their subscriber numbers somewhere in their voluminous marketing materials, since that is the substance of their lawsuit against Loopnet: false advertising.  I just can’t find them.

But beyond that, the way that CoStar defines ‘subscriber’ isn’t necessarily what one might think when one thinks of the term “Subscriber”.  Subscriber typically implies some sort of voluntary act, coupled with payment, by an individual to a publication.  In CoStar’s case, that ain’t necessarily so.

CoStar agreements tend to be at the enterprise level, not at the individual level.  For example, Cushman & Wakefield has a single agreement with CoStar covering all of its agents (some part of the 11,000 employees it claims worldwide).  Let’s say for the sake of discussion that 5,000 of the 11,000 are actual commercial agents & brokers, with the remainder support staff.  That means that all 5,000 Cushman brokers are ‘subscribers’ to CoStar, under the enterprise agreement — even if they have never used CoStar, never will, and don’t even know how to use the Internet.  As long as you have a listing in your name, or an administrative assistant could conduct a property search in your name, you may be covered under the agreement as a ‘subscriber’.  In fact, word is that CoStar fairly insists on having some pretty stringent definitions to ensure that the maximum number of ‘subscribers’ are covered (since the fees a compay pays to CoStar is closely tied to the number of licenses, aka, subscribers).

Let me give one example I happen to have personal knowledge of.  A firm with 35 brokers wanted CoStar, but only for the 5 brokers who are full-time commercial agents.  The other 30 are what one might call “resumercial” agents who dabble in commercial now and again.  The firm was planning on having an admin conduct property searches for its agents, and putting listings up for agents — a common arrangement.  How many subscribers would you imagine were covered in the agreement between said firm and CoStar?  If you guessed 35, you get a gold star.

And technically, that’s true — because the firm was paying CoStar the fees for having 35 licenses, and each of the 35 agents had his/her individual login and password.  The admin would login under an agent’s login/password to do the work for that agent.  But 35 people in that firm were not looking at CoStar day in and day out.  One person was, with perhaps another five checking the site once in a while.

Nonetheless, one cannot deny that CoStar’s numbers are ‘more straight’ than Loopnet’s.  Which is why CoStar’s pimp hand is so strong.  I can’t wait to see Loopnet’s response, beyond the generic “Allegation is ridiculous” pooh-poohing that isn’t going to convince anyone.

-rsh

Once again, Bloodhound has a fantastic post up on a topic that is tangential to much of a theme I’ve been hammering since I started this blog. Greg Swann tells the story of an unfortunate eBay merchant who is being threatened with legal penalties for “auctioneering without a license”. Read the whole thing — it’s worth the time.

Greg’s point is that licensing laws are bad — they don’t protect the consumer, but the licensees:

But there are consumers who need protecting, right? Oh, you bet:

D&J Virtual Consignment had 11,000 feedback comments on eBay and 14 were negative, Pletz said, giving her a 99.9 percent satisfaction rating.

Ebay is not just perfect Capitalism, it is Capitalism Perfected — everything that has always been implicit in free-market commercial transactions made utterly transparent by means of database management. If you are looking for the complete and irrefutable refutation of Das Kapital, you’ll find it not on but in the form of Ebay.com.

So where’s the beef?

Amoros, the state spokeswoman, said investigations were a “complaint-driven” process but those complaints are confidential.

Uh huh.

It is only possible to for you to defend occupational licensing laws by ignoring the palpable harm they do to actual consumers — higher prices for lower quality goods and services. But even then, don’t get downwind of yourself. This stuff stinks.

As a non-practicing attorney, I know what Greg speaks of firsthand. The work of a first year attorney is something that most chimpanzees that are not brain-dead can do. We’re talking about stuff like deciding where a comma should or shouldn’t go and making photocopies. In most firms, the senior paralegal has forgotten more about the law than the new lawyer has ever known.

Yet, that snot-nosed lawyer commands $175K a year (in NYC) while the paralegal gets by on $50K because the former has that shiny thing the paralegal doesn’t: the license to practice law.

So I agree with Greg overall. However, and c’mon you knew there was a ‘BUT!’ in here somewhere, there is something he’s not taking seriously enough.

Greg is mostly correct (I think) in describing eBay as “Capitalism Perfected”, but he glosses over what makes that really possible: utter transparency made possible by means of database management.

I’m as big a fan of the free market as just about anyone, but even I think there is a role for government in the market. Its critical role is to cover the one enormous weakness of capitalism: access to information.

People (and companies) rarely have the incentive to provide complete and full transparency. I haven’t yet seen a case where complete transparency has redounded to the benefit of the person or company being transparent. Even between husbands and wives, complete transparency might not really be the best policy. I mean, do you really want your wife to know your actual, true, transparent opinion on whether those pants make her look fat?At the same time, for a free market to function, there has to be enough information available for buyers and sellers to make a rational choice. This is not the same thing as saying that buyers and sellers have to be actually informed — merely that the information must be reasonably available. Otherwise, the notion of caveat emptor just doesn’t apply.

If you’re looking for a heart surgeon, wouldn’t the information that Dr. Smith has had 3 of 3,000 patients sue him for malpractice while Dr. Jones has had 400 of 3,000 patients sue him be a relevant piece of data in helping you make your choice? Of course it is. If you had that information, learned it, you can still choose to go with Dr. Jones — but you’re probably going to bargain the price of services down, or negotiate for insurance arrangements, or do something where you benefit as the consumer.

eBay is Capitalism Perfected in a sense because of its reputation management system. While it can be gamed a bit, it’s very, very, very difficult to game it consistently over time with thousands and tens of thousands of interactions. So someone who has a 99.9% satisfaction rating with 11,000 feedback is plainly trustworthy. Applying licensing laws to someone like that does indeed stink, as Greg puts it.

But in the real world, we don’t have the benevolent eBay dictatorship able to track all of the transactions and gather feedback on a person-by-person basis, then presents all of that information in a single, easy-to-use place for the consumer. Trying to get the equivalent of a eBay rating in the real world would take weeks and months of painstaking research — even if the information were actually out there somewhere.
Furthermore, eBay’s transaction regime is pretty one-dimensional: did the seller deliver the item to the winner in a satisfactory way? How do you evaluate the performance of professional services? Is someone a good lawyer because he’s prompt with his responses, considerate of your needs, and a good father, even if he loses every case for you? Is the opposite a good lawyer — he wins every case, but treats you like a piece of crap?

In the real world, I do think there is some justification for a licensing scheme for some professions. Not a lot, but some — and certainly the schemes we have need some real improvement.

In a way, licensing is merely branding with teeth. The purpose of a brand is to engender trust in the consumer by having lived up to the promise of the brand time and again. Licensing extends that concept and gives it some teeth.

If I’m looking for a lawyer, I might not have the time to do what I really should do: sit down with the man, and quiz him on torts, contracts, constitutional law, corporations law, income tax, property tax, federal courts, and the numerous other fields of law to make sure he knows what he’s doing. I should look up all of his past cases to make sure that he hasn’t absconded with client funds, or defrauded clients, or done any one of the really horrid things a lawyer could do. But I just don’t have that kind of time.

So I rely a great deal on his license. If he had absconded with client funds, he would have been disbarred. If he didn’t know a thing about basic black-letter law, he wouldn’t have passed the Bar exam. His license to practice law is a brand that proclaims, “this man knows enough and is ethical enough for you to trust him with your life savings”. Or in some cases, your life itself.

If the licensing scheme is coherent, rational, and rigorous, and it is designed to further consumer benefit, it can be a very important stand-in for the eBay User Reputation system. A great example is the designation of Master Sommelier. Try getting one of those — there are only 1

Now, just because I can defend these licensing schemes does not mean that I can defend all licensing schemes, or for that matter, that I want to defend licensing laws. I could see some jobs where the possibility of harm is so great to the consumer or to society that we need the power of government to prevent anyone who does not have the proper training and ethics from working those jobs without a license. Commercial aircraft pilots come to mind. Even if licensing laws in that case result in protecting the licensee’s turf, the downside of not making sure that someone flying a 747 is properly trained is way, way too big.

For most professional services, however, the licensing laws are a big problem.  There is no coherent benefit to the consumer, and the license itself no longer carries the ‘brand’ that it used to.  In those cases, I think a professional registration program — with much higher, more stringent standards — is far superior.  Rather than prohibiting people from practicing law without a license, why not simply have those who have passed the Bar register with the State Bar Association, and make that data public.

The application to our real estate industry is, I trust, obvious.

-rsh