Indeed we are engaged in our own industry Cirque du Soleil, a kind of three-ringed act that pushes us to the limits of our economic envelope.

How long can we strike the pose? What series of events will begin the process of reversing the downturn and return some degree of stabilization to the economy. Our collective muscles quiver under the stress of our rigid contortions.

Not too long ago we mistakenly thought, although few will now admit to their acquiescence, that TARP, auto industry bailouts, AIG cash infusions, cash for clunkers, first time home buyer credits, bank loans and the like would magically restore the economy.

Even the National Association of Realtors (NAR), our beloved national union and lobby force, with enthusiastic recklessness, endorsed just about every form of redistribution of wealth forced down our throats by President Barack Obama’s misguided group of tax and spend advocates.

Yes, ours is an industry not too unlike a three ringed circus. There are jugglers, tight rope walkers, clowns, acrobats, lion trainers and bare-back horse riders, all entertaining us while we sit in the grand stands eating our Cracker Jack and cotton candy.

We love a good circus. A good circus takes our minds off the trouble we face. The acts bring momentary relief from the pain we must inevitably face when the show is over and the big tent comes down.

The reality we must face is the choice we made, repeatedly from 2000 through 2007 to made a series of choices that led us to depart from the traditional, sound economic principles that guided our industry in favor of massive personal, corporate and national debt. The circus is over and even the clowns no longer smile.

REALonomics has taken tough positions and we have always attempted to lend our voice to a call for temperance as the circus acts rolled into the big tent, one after another while our industry, clapped, laughed, cheered, jeered and refused to admit the depth of economic adjustment that was about to engulf us.

There is another message we have pushed into the industry for serious discussion and that is the need for top-to-bottom reform, beginning with an examination of the function of NAR, local Associations and indeed our very bloated labor force.

Not many will deny the circus is over. Fewer still will acknowledge the need for comprehensive analysis of the business structure of our industry and how it delivers economic value to entrepreneurs.

A remnant of hard-liners still delivers a false message of a restored economy that will support our 1,000,000± participants, an unbelievable membership count that has no relevance to sound economic and business reality.

Our economy is irrevocably tied to global networks. The real estate industry now has its best shot at reformation. Who will lead the transformation and what forms will it take? What transcendent person, group or entity will emerge with solutions to the complex problems we face as an industry?

How will technology, economics, localism, property data and global realities be bent and shaped to create new vibrant business models that can produce and sustain profitability required for the risks inherent in the real estate business.

After all, the show must go on!

Related posts:

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

Escapism (I don’t even know if that is a word but if it isn’t it should be) ought to be a subset of study for those seeking a degree in Economics. Escapism should be a part of the syllabus with collateral reading required. It should be taught as a business discipline and be a demonstrated skill prior to graduation.

The real estate industry knows a lot about the subject of escapism without knowing much about sound economic business models. After all, the economy has always pulled Broker/Owners out of the tight corners of economic calamity into which they have been painted. Ours is a long history riddled with escapes from one economic threat to another.

Today’s shackles may be worse than the past as we find ourselves fettered with the chains and locks of slivered and temporal profitability, almost non-existent R&D, a disjointed, minimally trained, bloated and uncontrollable labor force, no product, service or brand differentiation and finally, last but not least, a less than stellar reputation with consumers, our primary source of survival.

As we enter a new decade on January 1, 2010, we find ourselves headed back into the water tank from which we have always, like Houdini himself, found a way out. We have escaped primarily because economic fundamentals were behind the real estate industry. These fundamentals are no longer the backbone of the industry.

Something is different this time around…many things are different this time around. We now face three situations never before seen or experienced.

The New Chains that Bind Us

The real estate industry encountered a fundamental operational shift when Congress mandated that lending institutions find a way to create loans for those who lacked the personal buying power for home ownership.

The Community Reinvestment Act was enacted in 1977 as Federal Law. Essentially, the law was a social experiment mandated and aimed at eliminating what many believed to be unfair lending practices by banks who that were refusing to execute mortgages with under qualified buyers for purchases in neighborhoods that were fundamentally poorer than those neighborhoods where banks preferred to lend.

Regulated financial institutions were suddenly required to meet the lending requests of traditionally unqualified parties as a part of their federal charter. Non-compliance with the edict and the eventual quotas of regulators could mean the loss of accreditation and various other penalties.

The survivability of Banks became subject to the guidelines set forth in the Community Reinvestment Act and therefore, lending requirements were modified as a pre-requisite to compliance.

Banks found themselves forced to approve mortgages that were less than prudent, at least from a sound economic standpoint.

Nonetheless, politicians reveled in the glory of the Community Reinvestment Act, heralding it as a giant leap forward in economic equality and something that could translate into new votes at reelection time.

This was the “New Chains” which created a false housing boom and investment debacle from which we still have not recovered. The primary guarantors were FANNIE MAE and FREDDIE MAC, now nearly bankrupt and in need of more capital infusion from tax payers.

We have not escaped these new chains that bind us. Our ability to break free is now out of our control as the appetite for government bailouts at tax payer expense increases unabated and now, surprisingly, supported by the National Association of Realtors.

In short, we have relinquished the powerful economic principle of self-reliance and home ownership principles that have guided the industry and home ownership for more than 100 years and this may prove to only paint us into a tight corner from which we cannot escape for many, many years.

Strange and Clever Padlocks

Our Houdini-like escapes are now fewer and more difficult as we abandon the sound “model-math” that created our prior and historical profitability. The sad truth is, we have not created “new model-math” congruent with the troubling times in which we find ourselves.

We continue to find ourselves locked-up with strange and clever padlocks the combinations and keys to which we have no apparent access.

On the one hand we are padlocked to our former selves and do not seem to have the will power to admit our addiction to transactions predicated upon easy money.

On the other hand, we are now plunging headlong into a plethora of new operating models, lending models and technology models, the rules of which are being written by those outside our industry.

Are we being written out of the New Real Estate Economy? Why is it that we cannot become the rule-makers and engage in assertively drafting our own charter for the future? Why do we seem reactionary rather than revolutionary with respect to our future? Why have we become so dependent on the creations and rules of those who know so little about our industry and how it must operate?

The keys to the padlocks of government intervention, property information management, technology and Internet tools, consumer-centric relationship models, mortgage lending rules and the direction of NAR have seemingly been placed in the hands of caretakers motivated by political power and personal greed.

Old Keys that are Now Missing or Ineffectual

The old line bricks-and-mortar retail keys that used to unlock markets for us and deliver economic escape from our heavy laden expenses no longer work as they once did.

Our ineffectual revenue management models in the form of commission and operating structures that once drove the cost-per-transaction formulas that guaranteed ROI will no longer unlock profitability.

The bloated labor force we call “agents” are simply too many and will continue to drain capital from Broker-Owners while only serving the interests of NAR’s bureaucratic control over the industry. The large labor force only favors those who collect the dues.

There are too many of us and unlike other industries that balance profit against labor force, our industry works exactly the opposite. The real estate industry is perhaps the only industry that increases its labor force while in economic decline. NAR’s membership still stands at over 1 million; a near complete contradiction of true economic sanity.

Instead of seeing our costs per transaction decline, it is actually increasing when we take into account the entire national organization operating costs.

While we should be moving north, we continue our trek southward almost blinded by our allegiance to who knows what. Broker-Owners no longer control the MLS and that lack of control will eventually render them irrelevant servants to an agent-centric culture.

Agents are no better off as they see their earning capacity at historic lows per capita and their cost of operating increasing with the delusion of technology and its pseudo advances.

There seems to be no easy Houdini-like escape for the industry unless it (we) are willing to recreate our industry by elevating its entry requirements, diminishing its fattened workforce, increasing its educational requirements and finally, bringing NAR into check as the servant of the industry.

There is no escape from the economic realities of the New Real Estate Economy and what it demands of us. However, for those who have a true sense of where we have been historically, where we are today and where we can ultimately take the real estate industry in the future, this is an exciting time.

Yes, in 2010 and beyond we will continue to face the peril of tight corners into which we have largely painted ourselves. The chains, padlocks and keys that have heretofore allowed us to escape no longer exist in forms we recognize.

For those of us who embrace the sound economic principles that guide any business endeavor and for those who choose to become the authors of the new economic rules rather than the readers of same, to these alone belong the keys that will yet provide an escape that will lead the real estate industry to self-reliance in the consumer-centric era.

Happy New Year to all.

Related posts:

1. Scratch and Sniff: Stacking the Economic Deck in Favor of Us
2. REALonomical: an Economic Mentality
3. The Third Economic Wave

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Dear Fellow REALTOR®,

Here’s our take on the Stimulus Bill and Treasury announcements made this week. We look at the Stimulus package AND the Treasury’s package holistically, in compliment with each other – mostly because that’s how the Obama team is looking at it. Your representatives, the NAR Board of Directors, asked us in November to do 4 things (with an unspoken but clearly understood mandate to PRESERVE what we already have). Here they are: 1) get loan limits raised for high cost areas, 2) make the $7,500 tax credit NOT a loan, 3) try to find ways to push interest rates down (which are higher than they should be due to systemic risk right now) by 200 basis points, and 4) help provide solutions to the foreclosure/short sale problem.

So here’s what we have achieved: (1) the loan limits will be raised to $727,000 in high cost areas, (2) the tax credit will be raised to $8,000 with NO payback [a true credit], (3) interest rates have come down 125-150 basis points, and (4) the bill has over $50 billion in it for foreclosure mitigation, with Geitners Treasury plan signaling that the second half of TARP and TALF will be used to mitigate foreclosures through a government guarantee, drive down interest rates by buying another $200-300 billion of mortgage paper from the GSES’s thereby freeing them up to do the same with new mortgages, and Fannie has just agreed to lift the cap of 4 investment properties eligible for loans and raise it to 10.

In addition, we preserved what we have – which some tend to forget is always on the table when these negotiations start up again – mortgage interest deductibility, real estate tax deductibility, and the $250,000/$500,000 cap gains exclusion (an overall package worth more than $100 billion and for some a very attractive funding source for their pet projects).

We did make a run at the $15,000 credit — and we would have loved to have gotten that or the Homebuilders $22,000 credit idea as well as their 5 year loss carry back deal, but they were considered too rich for this program. What it did do though is totally take the debate off of whether a tax credit should be reinstated at all (it expired last year) and whether it was a true credit or a repayable loan, and kept the conversation on how much it should be. It also kept the debate off of ‘what we are willing to give up to get a $15,000 tax credit’ and kept the debate again, on how much it should be. It’s pretty hard to complain when they give you what you ask for and you lose something you never had.

While we study the Treasury specifics on their major role in providing the rest of the housing solution — there is much more to come and we are working diligently with the Administration to help ‘unclog the pipeline’ and get capital flowing into housing again.

Sincerely,





Charles McMillan, CIPS, GRI
2009 NAR President

Related posts:

1. Supporting the NAR Stimulus Agenda
2. Real Rescue or Only Bandage?

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.

Related posts:

1. Government Interference has Harmed American Real Estate Wealth
2. The Federalization of our Financial System at your Expense
3. Home Price Declines Hit New Records: What Can the Industry Do?