Notorious R.O.B.

Ted Williams: .406 batting average in 1941. Me: .600 in 2009. Sorta...

Coming off of an awesome, Hall-of-Fame type of year in which I batted .600 in predictions (or, alternatively, a year in which I only got 6 out of 10 predictions even remotely close to right, and hence am a big #FAIL), I thought I would don the Nostradamus hat once again and make foolish predictions for 2011. I know I should make 10 predictions, but… y’know, I’m sort of stuck on that number Seven.

Here are seven predictions for 2011. Many are guaranteed to be wrong, or your money back! But as a bonus, each prediction comes with a music video for your entertainment.

[Warning: don’t read this is you’re feeling happy and optimistic, and you want to stay that way. I’m personally feeling happy and optimistic, but as I put this together, I can’t help but want to reach for strong drink for the industry as a whole. I know I tend towards bearishness, and some might suggest, alarmism, so… I’d suggest you go read some other 2011 predictions posts as well. Here are a few I’ve seen myself: Lani on Agent Genius, Greg Robertson on VendorAlley, and this whole series over at Inman.com.

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Your future tax dollars at work?

In my earlier post on the New Normal in real estate, a commenter took issue with my predictions about the future of the 30-year fixed rate mortgage (among other claims).  I thought I would expand on that aspect a bit.

The specific mechanism that I think will be put in place is a change in the mission of Fannie Mae and Freddie Mac (possibly other housing-related agencies, such as FHA, VA, and the state/local housing authorities).  I expect that Fannie/Freddie will actually become fully government-chartered entities (as NAR suggests) rather than this weird government-sponsored private companies that provide private rewards at public risk.  As a GCE, rather than a GSE, F&F will no longer have profit as its raison d’etre, but the promotion of public policy.

In this case, that public policy is to encourage the development of affordable rental properties across the low and middle-income spectrum, thereby reserving homeownership for the (relatively) wealthy who pose far less credit risk to lenders.

That, to me, spells the end of the 30-year fixed rate mortgage.

Allow me to step you through the argument for why this is likely to happen.  (Which is not to say I want this to happen, of course.)

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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.

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

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

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1906 San Francisco earthquake

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

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

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

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

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

Conjectures follow.

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

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

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

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

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

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Almost a year ago, at a time when various folks in finance and real estate were ready to write eulogies for Realogy, I spent a few posts arguing that the rumors of Realogy’s demise were ahh… premature.  My basic point then was that the bondholders of Realogy have very little incentive to push Realogy into bankruptcy:

The reason isn’t that I know something others don’t about the strength of Realogy or any such thing.  The reason mostly has to do with incentives for bankers and bondholders to allow a default and the consequences of such.  There is next to zero incentive for any creditor of Realogy to force the company into bankruptcy.

Realogy has next to no assets.  Really.  If you think about their business model, as a franchisor of service businesses, their main assets are the brand names and the people who work at their various company-owned stores or franchisees.

In the case of some of the other firms named by Crains, such as JetBlue or Hovnanian Enterprises, they own real assets that can be auctioned off or sold off to raise a fair amount of money.  Airplanes and real estate are both real assets.  In those cases, it might make a lot of sense for creditors to push those companies into Chapter 7 liquidation proceedings and recover their losses that way.

But Realogy’s real assets are negligible, to say the least.  It owns no buildings that I know of (unlike other franchise models where the franchisor owns the franchise location and receives rent from the franchisee).  All of its company owned stores are lessees of other landlords.  Whether its servers, technology equipment, office equipment, and such are worth a lot is unknown, but one suspects that Realogy probably doesn’t own the equipment in its datacenters (it probably leases them from the hosting facility), and used furniture isn’t exactly going to make a huge dent in the billions owed.

A year later, the latest news from Realogy (PDF) is that it has posted $58m in profits in Q3 of 2009 on $1.2b in revenues.  Critically, Realogy managed to stay in compliance with the debt-to-income ratio in its loan covenants.

Looking through some of the details, however, it appears that Realogy has really dodged a bullet this time around… but the way in which they dodged said bullet augurs a promising future.

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So it seems my little tweet the other day has engendered a bit more discussion — you can find the fascinating back and forth here on AgentGenius.  One of the more interesting comments there comes from Russell Shaw, who says:

REALTOR.com is cluttered on every page with banner and tower ads that endlessly attempt to “distract” the shopper (who was attracted there in the first place with our listings) to click on the banner ad and wind up on that agent’s site. In short, our listings are nothing but bait for MOVE to sell ads to other agents so they can attempt to poach the client that would have naturally been ours.

Setting aside the utterly idiotic fees they charge, if it weren’t for NAR’s original bungling of REALTOR.com (*giving* it to Homestore, aka, MOVE) all these “other sites” like Trulia, Zillow, etc. would not even exist. Not at all. They were created because NAR gave away our name.

In Canada, http://www.realtors.ca/ is FREE, as in included with their dues to Canadian Realtors. Enhanced listings and all. (Emphasis added)

Verrra interesting… so here’s some unpaid, free “consulting” for Move, Inc.  It’s worth every penny you’ve paid for it.

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Sell Your House for Top Dollar!

It’s a very personal, a very important thing. Hell, it’s a family motto. Are you ready, Jerry?  I wanna make sure you’re ready, brother. Here it is: Show me the money.

- Rod Tidwell, Jerry Maguire

I was recently researching a somewhat different topic (deflation, inflation, and price sensitivity in real estate) when I came across a paper written in 2007 by a trio of economists at respected institutions.  This paper has me in a tizzy.  I need to know what you think of it, and how we as an industry might answer it.

The paper is called The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com (PDF) and the authors are Igal Hendel and Aviv Nevo at Northwestern University, and Francois Ortalo-Magne at the University of Wisconsin.

The findings are… disturbing to say the least if you work in or near the real estate industry:

After controlling for houses and seller heterogeneity, we …find no support for the hypothesis that the MLS delivers a higher sale price than FSBO. Considering that realtors charge a 6% commission versus $150 for FSBO, FSBO sellers come ahead fi…nancially. The lack of a MLS premium does not mean realtors do not provide value to the seller. It means instead that the cost of the convenience provided by realtors seems to be the full commission.

And more:

The raw price comparison shows that the average sale price of homes that sell on FSBO is higher than the average price of homes that sell with a realtor. The characteristics, reported in the city assessor’s database, of houses sold on the different platforms are somewhat different. However, after controlling for these observed characteristics a significant price gap persists. Naturally, platform selection is the main suspect behind the persistent premium. We take several approaches to deal with selection. All the approaches support the same conclusion: MLS does not deliver a price premium.

Emphasis are mine.  If you are so inclined, read the whole paper.  I read through it, but didn’t have time to dive in.  For that matter, I don’t have the Ph.D. in economics to really criticize their work.

Turns out, the New York Times had covered this paper, both in an article and on its Freakonomics Blog.  This is from the blog:

But the paper supports the argument that, unless you’re the kind of person who needs a little help through a “stressful and maybe difficult period,” and unless you’re unwilling to wait a little longer to sell your house, then the commission that you pay your Realtor is in essence a big fat tip.

Oh wow.  This is a problem, y’all.

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A really fun discussion on Twitter with Robin Greenbaum (@cobrokenation) led me to just do a very quick, very back-of-napkin, and likely very inaccurate comparison between two rental units.  As Robin pointed out, since comparisons are very difficult, depends on many factors, and the like, no matter what I come up with, this is likely to be wrong.

Nonetheless, I’m curious to see if we might see any interesting bits of data.

One unit is a 1BR at 22 River Terrace, a luxury rental building constructed in 2001:

22 River Terrace

Detailed info can be found here, but the vitals of the unit are:

Floorplan, 22 River Terrace

725 sq. ft., monthly rent of $2,880, 23rd floor but facing east (aka, no river views).  I know the floorplan is hard as heck to see, but it’s pretty standard fare for NYC apartments.

The second unit is located at The Verdesian, a LEED Platinum certified building located right by 22 River Place.  See the map here.

LEED Platinum certified, The Verdesian

The Verdesian is a newer building, built in 2006, and LEED Platinum is not given to just about anybody with a solar panel or two.  There was quite a lot of thought and technology devoted to the building.

The unit here is a 1BR as well:

Floorplan of 1BR at Verdesian

The vitals here are:

750 sq. ft, $3,065 per month, and east-facing on the 13th floor.  Clearly, the little alcovey “Den” area means a smaller living room, but the floorplan might be better for some, worse for others.  Who can say?

On a straight $$/sq.ft. basis, however, the difference is only $0.12 between the newer, eco-friendly unit and the older, non-green unit: $3.97/sq. ft. for 22 River Terrace vs. $4.09/sq. ft. for The Verdesian.  If we hold the square footage equal at 725, that means a monthly rental difference of $87.00.

To my untrained, unpracticed, and non-realtor eyes, this seems rather insignificant and would tilt the decision towards the Verdesian.  According to GreenbuildingsNYC.com, the Verdesian’s advanced systems, EnergyStar appliances, and various other design & architectural choices, means a 40% savings on electric bills for residents.

According to ConEdison, the average NYC resident can expect to pay $104.97 per month in electric bills.  A 40% savings on electricity alone is $41.99 per month.  Nearly half of the “green premium” (if that’s what it is) is taken care of simply from savings in electric bills.

Now add in the fact that The Verdesian is five years newer, and offers “Fresh filtered air, continuously humidified or dehumidified, depending on climate conditions” to every unit, and it isn’t clear to me that the green premium starts to head towards zero.

Again, comparing different units, different buildings, with slightly different amenities and the like is hazarding error.  But it does seem significant to me that the actual cost difference may be as low as $45 or so per month — less than the cost of a cup of Starbucks latte per day.

If this is true, then the green premium at least in the NYC rental market is heading towards zero, and renters really have to ask why they would go to a non-green building vs. a green building.

I for one would love to see some real comparisons by real professionals — realtors, appraisers, I summon thee!

-rsh

PS: Note that I am a heretic when it comes to anthropogenic global warming hype, so this has nothing to do with religious views on carbon footprints and such nonsense.