The Wall Street meltdown continues and people are asking themselves “How come we have to pay $700 billion to bail out firms that collectively spend more than $700 billion every year paying their employees?” In recent decades Wall Street has grown from 6 percent of the U.S. economy to something like 10 percent, while providing the same basic menu of services: taking companies public, selling bonds, managing investments. The bailout angers taxpayers because anyone who can do arithmetic can see that more than $700 billion was taken out of Wall Street in the form of employee bonuses during the years of the real estate/mortgage bubble. The people who created the bubble, in many cases engaging in frauds of various kinds, were rewarded handsomely and are now relaxing in their Greenwich, Connecticut mansions deciding whether to take out the yacht or the private jet. Wall Street firms did not retain their exceptional profits during the years of fraud, but rather paid out almost all of it to the executives and rank-and-file employees who engineered the fraud. (Actually if they had retained some of these profits they wouldn’t be needing a bailout!)
The anger is easy to understand, but what is tough to understand is why the middleman’s share of the U.S. economy has grown so much. When houses were cheap and people lived in them for 20 years, the realtor’s 6 percent commission wasn’t a huge slice of the economy. Houses became very expensive and people flipped them quickly, which has raised realtor commissions to roughly $60 billion per year. We have a huge sector of the economy mostly doing stuff that wouldn’t need to be done if Americans would get a little more organized in their use of Google Maps and other Web sites (see this New York Times article on Madison, Wisconsin, where “for sale by owner” houses sold for about the same price as realtor-sold houses). The realtor commission was only the beginning of the feast for middlemen during the real estate bubble. Somehow Americans weren’t able to find mortgages on their own, so every town was filled with mortgage brokers making $100,000 to $150,000 per year. Local banks weren’t able to sell mortgages upstream without, apparently, giving tens of billions of dollars in fees every year to Wall Street firms.
The Internet was supposed to make markets more efficient, yet since the early 1990s, when Web access became universal, the American people have devoted an ever-larger share of their paychecks to middlemen.
I tend to agree with most of your points, but there is at least one value to buyers and sellers that realtors do provide: access to properties. For sellers, using a realtor allows one to not be present at the showing of a home and, thus, for the home to be shown at any time during the day. I don’t know how many realtors are bonded against damage or theft by a client, but at least there’s a professional third-party there to help guard against folks wandering through your house taking your stuff. Given that there doesn’t seem to be a big problem with theft or damage by perspective buyers being shown a home by a realtor, I think that part of the system is working.
For buyers, the lock box system allows for buyers to be able to visit most homes on the market at any time they like without prearrangement with the seller. Sometimes realtors communicate to get the seller to leave the house so that the buyer can view the property in peace, but if the seller isn’t there, there’s no need for that, and the buyer can simply go with the realtor a large number of properties on one day.
I’m not sure access is worth 6%, but I’d definitely pay something for it. I went to about 150 houses over 6 weeks when I was looking for my current place and actually entered about 90% of those. I.e., I saw somewhere between 10-16 houses a day on the majority of the Saturdays and Sundays of that 6 week period. That would have been much harder to do if I had needed to arrange with each seller individually.
One thing you failed to mention in the triangle is that
government benefitted from over inflated house prices.
With ever increase in property tax. Government also
had incentive to look the other way.
Biggest scandal is that all this inflation wasn’t even counted.
What I don’t understand is how WaMu has bad loans in their
books. I thought Fannie Mae would buy these loans from banks
thus freeing them to make more loans. Is it that there are so many
loans that banks couldn’t sell them to Wallstreet and Fannie Mae.
I for one think that they are lumping other schemes into the housing debt.
and passing onto the government.
http://www.vanityfair.com/online/politics/2008/09/are-you-sure-you-three-guys-know-what-youre-doing.html
Has it really come to this?
… and in probably most of the cases of troubled homeowners, the realotrs and mortgage brokers were the ones that gave false advise to the potential buyers just to sell the home and make their commission, knowing very well that that buyer will not be able to pay his mortgage after a year or two when the adjusted rate kicks in…
There’s no Federal property tax on residences. In fact increasing the property tax decreases Federal revenues because the property tax is a deduction on your Federal tax return. It’s state and local government that benefit. However, if your town figures the property tax rate by taking the budget figure and dividing by the total assessed value of all real estate, then increasing values don’t affect the total revenue.
If a child eats one candy from the candy store, who do you fault? In this case no one as there is no excess. If the child eats 25 candies from the store, who is at fault? Probably the glutton child. If, of a sudden, there are an additional 30 candy stores, who is at fault? The stores? Hardly! The child remains out of control.
Now substitute money for candy (which it is). Draw your own conclusion, after all, all that education must have given you some reasoning power.
And, no, the solution is not the regulating the candy stores (they will go out of business in due time). The solution is to have parents teach and not indulge! Too late for this generation.
On the issue of realtors and increasing the efficiency of real estate sales, the reality is that any attempt to reduce the role of realtors at the state government level, is met with fierce resistance. Realtors are able to work together against any candidate who wants to reform the system.
billb, open houses also serve as a decent way for buyers to see places on the market. Admittedly we bought at exactly the wrong time (unless we see tremendous inflation and the banks get left holding the debt in depreciating dollars), but we just got on our tandem bicycle and toodled around the town we were interested in on Saturdays ’til we saw something that caught our eye, then we came back with a level and a tape measure to make sure. Don’t know if it served the seller well, but we were quite happy to use Redfin for the legal stuff and not put several percent into the pocket of a cheerleader.
Philip, I wonder how the rise of the financial services middlemen contrasts with the demise of the retail middlemen. It used to be we paid a premium for a little bit of knowledge and enthusiasm about the products we were buying in our downtown stores. Now that Amazon has cut out that excess out of the economy and the people who used to be able to make a living running a shop are reduced to being glorified shelf stockers at the big box stores, is it just that we’ve seen a transfer of income from the people who used to run retail to the people who frob our capital?
We sold and purchased our house in Seattle a few years ago using (the then new) Redfin service. It was excellent but I can’t count the number of times traditional real estate selling agents refused to show us a house.
A simple call to the homeowner informing them of their agent’s actions was always interesting.
For every good, honest agent, there are 10 more that are greedy, lazy and generally disinterested in doing any work.