REALonomics

Government Interference has Harmed American Real Estate Wealth

EDITORIAL

REALonomics urged the real estate industry to reject the $700,000,000,000 government bailout program.

The National Association of Realtors (NAR) took the opposite position and even launched a national public relations campaign designed to convince us, the members, to support something that historically we have never supported, government interference in the private sector free market.

Well, here we are, a few days hence, witnessing the most massive loss of personal and real estate wealth in the history of the world.

Now let’s talk about the real estate industry specifically. The central wealth producing asset of most Americans is their investment(s) in real estate. Our industry has been dedicated to the creation of wealth through home ownership supported by one’s ability to qualify for mortgage financing and to service the debt based upon qualifying ratios.

It appears we have adopted a position that runs counter to our industry’s historical roots. But worse than that, through industry support of the bailout we have actually made a fundamental mistake in economic judgment and we may have harmed the ability of brokerage firms and agents to be effective ambassadors and cousellors to consumers.

Are we ready to exchange a long-held traditional and fundamental economic model for a new system where the notion of “bail-out” through subsidized real estate welfare is a valid competing model?

Should NAR have supported the $700 billion bail out? We don’t think so and we said so in our post entitled “Warning: RE Industry will be Harmed if Bailout is Backed by Us” on September 30th, 2008.

REALonomics calls on NAR to reverse its position and return to our historical position where we only believe in the American dream of home ownership where individuals and families, under the guidance of sound advice from Brokers and agents, purchase homes they can afford.

NAR’s support of the bail out was wrong and we should make that admission to the American people so that we can regain the trust of consumers.

Home Price Declines Hit New Records: What Can the Industry Do?

The question for the real estate industry to grapple with in the midst of the credit crunch is how can we help struggling homeowners in severely depressed markets such as Las Vegas, Phoenix, Miami, Los Angeles and San Francisco?

According to a recent Standard&Poors/Case-Shiller home price index of the top twenty metropolitan area home values, we are seeing record declines. Get a copy of the report.

Here’s the breakdown synopsis (source: Standard&Poors/Case-Shiller) (arrow highlights by REALonomics):

In these and hundreds of other markets, home value declines are taking a toll on individuals and families whose financial security is predicated almost entirely on home ownership.

There are at least three things local real estate companies in partnership with mortgage and title service providers could do for struggling homeowners.

1. Set up financial support workshops led by experienced brokers/agents designed to coach homeowners with respect to their property values, the current trends, their specific mortgage situation and how to take positive steps to stay in their homes unless they absolutely must sell at this time. Such workshops should utilize skilled mortgage service counselors (not loan officers) who can give them answers;
2. Real estate agents in troubled markets should be literally returning to the old practice of knocking on doors, not to get listings but to meet homeowners as “Property Consultants” to discuss specific home values within their neighborhoods and offer advice. In addition, brokerage firms should deliver resource information to homeowners that will advise them about market conditions, refinancing and other information they need;
3. Brokerage firms should turn a portion of their print media budget and Internet costs toward creating blogs that are specifically administered by trained “Property Consultants” who can interact with property owners and deliver solid advice in real time.

During the next 24-36 months brokerage firms who want to build and retain consumer loyalty and predisposition should take a serious look at engaging in the creation of a group of “Property Consultants” who engage homeowners who are facing uncomfortable times.

Such an emphasis sends a powerful signal to consumers that we are serious, skilled, well trained, competent and knowledgeable professionals who can and will assist them with any property question they have, including financial counseling.

Warning: RE Industry will be Harmed if Bailout is Backed by Us

URGENT INDUSTRY MESSAGE

REALonomics continues to take a position that the natural market cycles should dictate the recovery and that government sponsored bail out attempts will create additional long term issues and actually stall a real recovery.

Although many in the industry favor federal intervention we are hard pressed to find anyone setting forth specific rationale for doing so. We hear a lot of emotion but not much sound economic reasoning based upon our industry’s historical commitment to traditional capitalism as the driving force behind real estate home ownership.

Wachovia was snatched up by CitiGroup just days ago. According to the FDIC’s website, there have been 40 bank failures since 2000 and NONE of them…yes, that’s right…none of them was bailed out by taxpayers. At iVoteAmerica.com there are predictions of more bank mergers over the next several business days.

Failing banks will continue to be absorbed just as ALL of them have been absorbed to date. After all, the best investment good banks can make today is to purchase assets of failing banks for pennies on the dollar and delivering huge internal rates of return to themselves. Therefore, patience is called for and we ought not to allow ourselves to be influenced by knee-jerk politicians from either party. Forget the election for a moment! Forget your favorite party preference for a moment!

Yesterday, September 29, 2008, the stock market lost more than $1 trillion in value. REALonomics predicts that investors will surface, shifting their investment strategies to more conservative, traditional positions.

NAR is Wrong on Rescue Package

Furthermore, REALonomics believes that the endorsement of the bailout by the National Association of Realtors (NAR) is a dead wrong endorsement and a clear indicator of NAR’s desperation with the housing market and its departure from the traditional approach to real property investment where true equity was a necessity to home ownership.

Our core value has always been home ownership as the primary investment for individuals and families. Behind this core value we have heretofore (prior to subprime lending) advised our clients to utilize conservative strategies when purchasing a home, including establishing and NEVER compromising their equity position. Have we decided as an industry that this is bad advice and adopted a dangerous borrow-to-the-hilt value system?

Some of you will remember the days when we encouraged homeowners to build “true” lasting equity that they could rely on when it came time to retire. The home was a person’s primary savings and investment account. I have a question for the RE industry; “Have we decided to depart from this core value position?”

Danger, Danger and More Danger to Owners

What about real estate company owners, our favorite topic? If the bailout occurs with a massive amount of taxpayer dollars used to rescue the so called “toxic mortgages” most real estate company owners will be effectively out of business within a short time as home values will likely plummet to pre 2001 levels. The toxic loans will be discounted to unprecedented levels, impacting literally every property value in metro markets.

If a rescue occurs, all property values in the United States will immediately decline. In fact, the financial institutions are already cutting HELOCs and credit card amounts in a desperate attempt to ratchet the market downward.

If the rescue occurs as currently outline by the Senate and voted down by the House, the ability for the average American buyer to access available real estate investment capital will diminish the market by perhaps another 50%. Although REALonomics is not attempting to inject hysteria into an already highly charged situation, we believe it is important that Realtors® have a clear understanding of the potential long term risks of a bailout by taxpayers.

Just Plain Old Bad Business and Bad Policy

The rescue of bad loans is simply bad real estate business and bad real estate business is bad for the real estate industry and bad for real estate company owners.

Let the market fix itself. The market will repair itself and the results will be less painful than allowing the bailout to prevail. The fact is…actually, the truth is, we are going to be harmed. The only question is how much pain are we going to allow to be inflicted upon the industry?

If we do not allow the market to heal itself and we adopt a taxpayer bailout mentality we will be adopting a fundamental shift in the historical values espoused by the real estate industry and to a large degree we will have socialized real estate, diminishing the value of all Realtors® and the industry itself. Such a shift in policy will create a huge potential for government oversight of the real estate industry and create transaction liabilities for broker/owners, franchisors and let’s not forget appraisers and mortgage lenders.

We encourage you to think deeply upon these things.

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The Inman Comment

Once in a while REALonomics will post a comment to great articles found in Inman News. Such was the case this morning, Tuesday, September 23, 2008. The comment created some interesting communication…all good, by the way. But the comment to this post seemed to touch a pent-up industry nerve regarding where our industry is headed and what our industry focus should be as move into the Third Economic Wave in the industry’s development.

There seem to be two camps developing within the real estate industry. The first camp believes the media and negative language is the culprit that is creating a lot of the market decline and lack of buyer confidence. The other camp is the group saying, “We need to look within the industry and raise our standards making them more consumer-centric and us less susceptible to repeating the errors of the past.” REALonomics falls into the later group.

As a result of feedback here is the comment from the Inman article posted here for our readership:

The notion that positive thinking and misplaced hype can move us away from a faulty and failing economic model is more dangerous than the crisis itself because it demonstrates the lack of depth in our thinking. This crisis cannot be repaired by “making people believe the worst is over…” This is the logical result and outcome of poor economic modeling in the mortgage industry that loaned billions to buyers who didn’t qualify and the real estate industry’s fickle pretense that it exercises ultimate fiduciary in its dealings with clients.

Rather than whining, what we should be doing as an industry is recreating ourselves in terms of standards-based brokerage practices, revamping our national and state networks into consumer-centric, transparent operations and utilizing the power of NAR to send a positive signal to consumers that we “get it” and that they are going to see a new side to the professional real estate industry they deserve and one that will refuse to close a transaction where the buyer does not qualify.

A standards-based model should include heavy fines for brokerage firms that (1) hire under qualified agents who lack the academic training and counseling skills we need for consumer protection; (2) refuse to fulfill maximum (not minimum) financial training in economics and real estate investments and fiduciary training courses and finally, (3) much higher costs to enter the industry and stay in it.

A standards-based industry would include national performance reviews and ratings of brokerage firms with financial and recognition incentives for creating and maintain standards of excellence that protect consumers and their investments in real estate.

In addition, we need to look at the role of NAR and how NAR services the industry and consider refocusing its mission and resources on a newly profiled industry that really understands and accepts responsibility for its actions when counseling consumers to invest in real estate.

One thing we believe with certainty, we are never returning to what we once knew. Having said that, what is it we would like to become as an industry after the dust settles?

While the Feds scramble to resolve issues, we should be scrambling as an industry to reinvent ourselves. Such a reinvention involves painful analysis and truth-telling about where we have been and how we have operated. Only then can we begin the process of rebuilding a tattered industry that is increasingly viewed with skepticism by most consumers.

REALonomics.net”

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