Background:
About twenty years or so ago, real estate prices in many parts of the United States took off like rockets; in some cases, home prices doubled or more within the span of a year. Today, my home is worth something like 6-8 times what I paid for it in 1978. [update: in September of 2005, I sold the house for about 9.3 times what I paid in 1979]

When I bought my house, REALTORS charged commissions of about 5%.
Today, the commissions are about 6%.

Questions:
Did the cost of living of REALTORS go up as fast as the cost of homes?

Did the price of a home times the commission rate go up as fast as my salary? [my salary had gone up by 5.2 from '78 to '02]

Why didn't REALTORS lower their commission rates to more closely reflect the US Cost of Living increase, than just let the actual commissions rise with the cost of homes?

Would this fit the often-raised concept of "windfall profits?"

Would the term "monopoly pricing power" apply?

Is there truth to the rumors that when some REALTORS offered cut rate commissions about 15-20+ years ago, "someone" firebombed their homes?

Why would anyone do something like that?!

I think you can guess at some of the answers.

Updated, 07.18.2006, thanks to Whiskey & Gunpowder @agorafinancial.com

July 17, 2006
by Mike “Mish” Shedlock
Illinois, U.S.A.

Get Before the Gettin' Gets Worse

He says, “It’s time to get.” Do you agree? Please e-mail any responses to your managing editor here: greg@whiskeyandgunpowder.com .

I remain in"awe" of some of the wisdom offered by those in the real estate industry.

Please consider, “This Could Be the Right Moment to Sell”:

"‘Buyers today are more committed, which is good for sellers,’ says Susann Haskins, co-manager of the Long & Foster Real Estate Inc. Potomac/Cabin John office.

"‘When we had the frenzied buying of recent years, we saw people buying without giving thought to what they were doing,’ she says. ‘Sometimes, they would find ways to back out of contract. But today's buyers are more committed to the transaction because they've had time to see the house more than once. They've thought about it, and made a conscious decision, rather than an impetuous one.’"

I am going to nominate the above for the "silliest comment of the week" award. For starters, Haskins is point-blank wrong about cancellations: They are soaring right now versus a year ago. But more to the point, the best time to be a seller of anything is when there is frenzied buying. That fact should be inherently obvious to everyone.

Furthermore, I suspect she was harping about how great it was during that frenzy. Well, what a great time it WAS.

But it's time to face the facts, Haskins. It is a very difficult time to be a seller. Now, that may not be true in every market, but it is certainly true in many of them. You can play all of your phony games, saying how this market is more normal and how great that is for everyone, but I am calling you on it.

You know you are speaking nonsense, I know you are speaking nonsense, and, most importantly, the public is finally catching on to the fact that cheerleaders like you are speaking nonsense.

But yes, in a sense, it is a good time to sell. That sense is as in "get while the gettin' is good.”

Well, actually, it is too late for that. The correct logic now is more like "get before the gettin' gets worse.”

That logic not only pertains to houses, but, more obviously, to the stock market, and also to real estate jobs in general.

REALTORS Lobby for Laws

USA TODAY is reporting, “REALTORS Fight Discounters”:

“Traditional real estate brokers are fighting the Justice Department and lobbying state lawmakers to protect their business model, which generated $60 billion in commissions last year. Associations of REALTORS — big political donors in many states — have pushed for state rules to bar real estate agents from providing less than the traditional full suite of services.

“So far, REALTOR groups in nine states have lobbied successfully for laws requiring all brokers to provide the full services. (Oklahoma REALTORS succeeded in getting a law passed late last year, but the state attorney general said it couldn't be enforced against discounters.) Ten other states have passed laws that forbid agents to rebate part of their commission to buyers.

“The result: Brokers who offer a la carte services at lower prices have sometimes been shut out.

“This isn't the first battle between traditional real estate agents and discounters. Last year, discounters won limited access to the REALTORS' Multiple Listing Service (MLS), though the Justice Department is still suing the National Association of REALTORS over some of its restrictions.

“This time, the full-service brokers are arguing that discounters can hurt sellers who don't fully grasp the complexities of selling a home. Some buyers' agents complain that they, too, often have to bail out sellers who were trying to fly solo and ran into problems.

“‘This was an effort brought forth by the Illinois REALTORS that the agency thought was a good idea to help protect consumers,’ says Daniel Bluthardt, a top regulator in Illinois, one of the first states to pass a minimum-service law.”

"Protect the Consumers"

What a bunch of nonsense. It should not take much to figure out that this is all about protecting real estate agents from competition. Such laws are, in effect, anti-consumer, as the previous article goes on to say:

“The Justice Department and the Federal Trade Commission have tried to stop states from passing such rules, with mixed success.

“But they aren't giving up. On Thursday, the FTC will announce an enforcement action against a regional MLS for restricting access to discount brokers, and the agency says it expects to file more complaints.

“After Illinois, Texas, Missouri, and others passed their laws, discount brokers in those states either raised their prices to cover their costs for offering more services or pulled out entirely, says Tom Barnett, assistant U.S. attorney general for antitrust.

“‘We've not seen evidence that there was any need to adopt a measure that would impose that kind of harm on consumers,’ he adds.

“The Justice Department also sued the Kentucky Real Estate Commission and forced it to drop its anti-rebate law. West Virginia and South Dakota then repealed theirs. But most other states have retained theirs. And companies such as ZipRealty, which gives buyers a 20% rebate on commissions, won't do business in states that bar rebates.

“‘There's no reason to take on the extra challenge of trying to adjust our business model,’ says Pat Lashinsky of ZipRealty. ‘It's a significant hurdle for us to overcome.’

“The current battleground is in Michigan, where the association of REALTORS has gotten a bill through the state House and a Senate committee and is trying to convince the governor — who threatened to veto it — that the bill would ‘make sure everyone can compete,’ says Rob Campau of the REALTORS association.”

What is interesting to me is the fact that the U.S. Justice Department is siding with the consumer against the REALTORS. This administration seldom sides with consumers on anything. The only possible reason that I can think of is that big banks want to get in on this lucrative business somehow and want open competition to make the job easier. Who knows?

Quadruple-Whammy

What I do know is that the REALTORS have a quadruple-whammy right now:

1. Increased competition
2. Falling sales
3. Rising interest rates
4. Federal deregulation long overdue

REALTORS react the way most companies do: They demand protection.

No industry likes competition. Under the guise of "consumer protection," various states have enacted anti-consumer laws.

What the industry is worried about is the Internet.

Changed by the Internet

“The Internet changed Steven Sizemore's business model. After working for a decade as a traditional full-service agent in Oklahoma, he decided to continue as an agent, but to sell just three services: MLS listing, consulting/negotiating, and closing — each at $499. Home sellers can choose any combination at any time in the process.

“Before Sizemore started The Real Estate Place in 2000, he was a typical agent with 10-15 listings a month. Now he has 50-75 listings a month — volume that's made up for his lower prices...

“He said Oklahoma REALTORS were ‘not trying to protect consumers,’ they were ‘trying to protect their commissions’… [Duh...]

“The trend of states clamping down on discount brokers, and the Justice Department's mixed success in fighting it, show how deeply the Internet is shaking the real estate industry, says Nicolas Retsinas of the Joint Center for Housing Studies at Harvard University.

“‘The technology is so pervasive and so disruptive I think it's going to be very difficult to stick your finger in all the holes in the dike,’ Retsinas says.”

Lower prices, fewer sales, fewer jobs, increased competition, and lower commissions lie dead ahead. This is all very deflationary, of course. More amazing is the fact that hardly anyone sees it.

Whether you are a flipper trying to flip a house or a marginal real estate agent/broker struggling in this turndown, you may wish to consider "gettin' before the gettin' gets worse.”

Unfortunately for the latter group, and for the economy in general, real estate has provided close to 50% of the jobs in this recovery.

Where to "get to" is likely to become a real problem.

Regards,
Mike Shedlock ~ “Mish”