February 2009

La Renaissance: the ‘08 Genesis

REALonomics constantly pings. We bounce signals off objects located throughout the causeways of the real estate industry. We measure and interpret the returning signals, defining the shadowy shapes to see what model trends are emerging. We engage in measured prognostication, endeavoring to avoid hyperbole and reckless abandon.

Dating as far back as 1996 we ventured out on the limb of what was then described as a fringe lunacy model; the erasure of market boundaries followed by the demolition of bricks-and-mortar and the emergence of low overhead cyber real estate models, such as e-Partner. We predicted with accuracy the economic transformation that would overwhelm significant portions of the real estate industry. REALonomics continues to refer to the transformation as “The Third Economic Wave – the Consumer-Centric Era.”

Just as certainly as the flow of history produced a Renaissance in the south of Europe from the 14th – 17th centuries, REALonomics believes the ‘05-‘08 market collapse (it’s finally okay for us to call it a “collapse”) will prove the genesis to usher in the more tangible features of an industry business model predicated on “new real estate model math®.”

REALonomics is ready to give you our predictions of changes that will and must occur to produce the momentum that will finally catapult us into La Renaissance. Like the Renaissance, the transformation of our industry will be dependent upon our ability to focus on the centrality of man (the consumer) as the economic modus for the rebirth of our industry.

Four movements will create the ‘08 Genesis of our rebirth.

1. Third parties will empower the consumer with free property information
2. Peer-to-Peer conversational platforms will connect buyers directly to sellers
3. Open market (borderless) brokerage models will emerge as a mainstay
4. Core service providers will redefine their labor and product models

Let’s elaborate on each, in order.

Third Party Property Information Providers. Our ‘08 Renaissance will be fueled primarily by an unleashing of accessible property information without the inhibiting confines and controls of local associations…this single movement will fan the flames of transformation and allow the creative juices to redesign an ailing industry with fresh new business models. Unfortunately, the transformation of our property information service model will not come primarily from within the industry.

Preference for Peer-to-Peer Dialogues. A new “hyper-consumerism” will continue to flourish as consumers increasingly choose peer conversations as a first course of action in the real estate transaction blueprint over the traditional consumer-agent dialogues of the former era. Community-based blogging (such as CityBlogUSA) and sub-culture information streams will arise, changing how we must make our presence relevant to the transaction and more importantly, our justification for payment.

Borderless, Brickless Brokerage. New companies will implement multi-state, even national open market brokerage models that lack the constraints of city and zip code assigned market models of the previous era. Some of these companies will have little or no experience with traditional real estate brokerage. This movement will help redefine the old franchise models into more regionally based enterprises.

Redefinition of Core Services Delivery Models. Further erosion of the profit points within mortgage and title enterprises will create what REALonomics calls “spin-modeling” and break down the larger corporate entities into smaller, highly effective competitive components that are assigned cyber market niches as their primary sphere for revenue development. Spin-offs of independent business entities will create new economic models for core service providers.

We are all going to be a part of our industry’s Renaissance drama. New dreams will be realized as 2008 becomes the Genesis for transformation.

Happy New Year from REALonomics!

Dear Santa…

Bush Throws the Baby Out with the Murky Mortgage Bathwater

RAW Election Year Politics

Once again, President George Bush has committed the unpardonable conservative economic sin; he has interfered with market forces by launching his sub-prime mortgage bailout program known as a “Streamlined Foreclosure and Loss Avoidance Framework.”

Predictably, Democrats, such as U.S. Senator Charles E. “Chuck” Schumer (D-NY) marched out to microphones and cameras, denouncing the initiative as not aggressive enough because it fails to include those with one late mortgage payment and begins to late for some borrowers. Yea, yea, yea. Our expectation is that the Dems will fuel this sentiment further by proposing even more far-reaching solutions.

Has Bush thrown the healthy baby out with the murky bath water? REALonomics reviewed the plan and found it lacking the type of clarity and protection for the real estate economy that is needed for this crisis.

Bush’s formula is another sub-prime mutation that will further derail the recovery, create a false support system for the mortgage industry and result in dragging all borrowers in the uncharted economic waters. Furthermore, REALonomics contends, as do many mature minds within the industry, that Bush’s plan may lead to a plethora of litigation problems for the mortgage markets.

Naturally, counter to the best economic minds in the industry, the National Association of Realtors endorsed Bush’s bail out scheme with a statement from its President Richard Gaylord claiming, “The loan modification program introduced by President Bush and U.S. Treasury Secretary Henry Paulson is a good first step in helping deserving families keep their homes.” We believe this is more than a “loan modification program.” It represents a modification to a fundamental economic precept in the real estate industry; natural market cycles are an integral component of a healthy real estate economy.

REALonomics contends there is a likelihood of the initiative delaying true recovery, based upon real cyclical economic principles such as supply and demand, inventory absorption rates, price adjustment cycles and investor involvement in foreclosure properties.

What the ASF Statement actually does is create a laboratory for mortgage underwriting experimentation. REALonomics analysis indicates that the ASF initiative may create an incubator into which we place the current mortgage genome that could mutate into a life form that infects all borrowers. Indeed a grafting of a new species of mortgage lending into the branches of our economic model. Will this action rewrite the sound traditionally acceptable DNA code for FICO and debt to income ratios that have guided the mortgage industry for decades?

There is no government bailout of Broker/Owners who are currently facing the most difficult real estate market, perhaps since the Great Depression. After all, that wouldn’t garnish many votes, would it?

The ASF Statement makes REALonomics wonder what sorts of new mortgage schemes will emerge as the slime escapes the laboratory and finds its way into the veins of a desperate mortgage industry. In effect, all of us will be thrown out and those without sub-prime loans will also be impacted by further declines in home values and another left hook to the head of an industry already out on its feet.

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Read the ASF Statement for yourself.

Bail Out or No Bail Out

Should the Federal Government intervene in the sub-prime mortgage crisis? That’s the new REALonomics poll.

If so, what form should the bail out take? Is there any connection between election year politics and the proposals being set forth by politicians about how to deal with the impending results of adjustable rate loan interest rates that are scheduled to increase throughout 2008?

More importantly, what is the position of the real estate industry? Should we allow the capital markets to run their course with respect to the current mortgage and foreclosure crisis? What responsibility, if any, does the mortgage industry itself have with respect to what has been created as a result of its policies and practices?

Vote now in the REALonomics poll on this page!

Post your comments about the government’s roll in this crisis.

Make suggestions for the next REALonomics Poll.