“monopoly, it’s a cartel, it’s an oligopoly,”

that derives its . . . → Read More: The Real Estate Cartel]]> A cartel refers to a small group of producers of a good or service who agree to regulate supply in an effort to control or manipulate prices.  Larry MacDonald writes that according to Ned Goodman of Dundee Corp. the real estate industry is a

“monopoly, it’s a cartel, it’s an oligopoly,”

that derives its power by controlling access to the Multiple Listing Service.

A study by Stephen Brobeck and Patrick Woodall of Consumer Federation of America titled How The Rel Estate Cartel Harms Consumers and How Consumers Can Protect Themselves states the following about the real estate industry,

Begin Copy and Paste

Can across-the-board 6% or 7% commissions be justified?  We respond with a series of questions that suggest there is not one shred of a justification for this fixed price.

• Do all brokers offer services of exactly equal value?
• Should novice brokers who have just received their license routinely charge the same prices of highly skilled brokers who have been practicing for decades
• Should listing brokers who just list houses on a multiple listing service receive the same compensation as those who look aggressively for buyers?
• Should buyer brokers who work hard to find the best house for a client receive the same compensation as those who just show their own listings or those of their firm?
• Should these brokers who persuade buyers to purchase their listings receive twice as much compensation as those who split the commission with a second broker
• Should facilitators (often called “transactional brokers”), who do not represent the financial interests of either sellers or buyers, receive the same compensation as agents who agree to serve the interests of either party?
• Are brokerage services on a sale of an $800,000 house worth four times as much as these services on the sale of a $200,000 house?
• Are the services of brokers worth the money?
• Does a “double-dipping” broker deserve, for instance, $24,000 compensation on a sale of a $400,000 house? Are these services worth far more than the value of many new cars or complex, technology-dependent surgery by highly trained medical specialists
• Why are comparable brokerage services offered in other economically developed countries much less expensively than in the United States?
• Why can brokers in those countries do well by charging 2-4% commissions or much lower fixed fees?

End Copy and Paste

My 2 Cents on The Real Estate Cartel

A cartel formation is one path to making insane amounts of easy money.  The marketing of home ownership as the American dream is bogus.

The American Dream, as expressed by James Truslow Adams is

life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement” regardless of social class or circumstances of birth.

When complete control if exercised over the most expensive purchase of people that is funded by debt, it provides a lot of leverage to the players who are part of this equation.  Control of debt provides power.  Voluntarily relinquishing leverage is not consistent with independence and therefore in unAmerican.  Is the formation of a cartel or a real estate cartel kosher?  I am not sure about the legitimacy of a real estate cartel within the context of capitalism.  What is troubling is that the tentacles of the real industry do suck out lot of money that society can spend on important needs.

I have met many several real estate agents but I haven’t run into one that is completely trustworthy.  Typically, home buyers and home sellers employ real estate agents and brokers through a “standard” or “solid” home purchase agreement that is designed to protect the real estate agent and the real estate broker and to throw the home buyer and the home seller under the bus, if and when necessary.   I don’t think that there is a standard home purchase contract.  There are standard/required clauses in a home purchase agreement.  The real estate agent plays the roles of

• a friend,
• an enemy,
• a sociopath and
• all three

at times, at different phases of a home transaction.  The notion that a real estate agent is on the side of the home buyer or home seller is an illusion, unless it is in writing.  If there are no “good” or “ethical” real estate agents and this may be partially linked to the nature of the real estate industry, then the foundation of the real estate industry is dubious and harmful to the society.  And unless sheeple expect and demand better, and act less foolishly, they will get what they deserve.  Trust but verify is a Russian proverb that President Ronald Reagan was fond of.  When it comes to the real estate industry the rule must be Don’t Trust and Verify Everything.

Brice Banctel, Kyle Mooney, Leila Sanii, Shuyi Wang of Case Western Reserve University, documented the pros and cons of a Rental Occupancy Permit Program in their study titled, Chagrin Falls, Ohio-A Study on the Impact of High Percentage of Rental Units . . . → Read More: Solon Ohio Rental Real Estate Properties Occupancy Permit Discussed]]> Example of a Rental Property Occupancy Permit

A Rental Property Occupancy Permit

Brice Banctel, Kyle Mooney, Leila Sanii, Shuyi Wang of Case Western Reserve University, documented the pros and cons of a Rental Occupancy Permit Program in their study titled, Chagrin Falls, Ohio-A Study on the Impact of High Percentage of Rental Units on the Community.

Pros of Rental Property Occupancy Permit

Having a database of rental units within the community would give the city a snapshot at any point in time of the renters who have to this date not been tracked.  The city will know how many renters exist, where they are living, and how they can be contacted.  If the city wants to contact the renters for any reason, they have the ability to do so.

Cons of Rental Property Occupancy Permit

There will likely be some resistant property owners who reject the idea of an additional fee per unit and may increase rental rates to cover the fee.  In addition renters themselves might object to having to submit their information to the local government, citing privacy concerns.

Cleveland State University’s Dennis Keating is reported as indicating that Solon has recorded about 500 foreclosure in the past four years.  Perturbed by the possibility of decline in home values due to foreclosures, single family home owners from Solon’s well heeled subdivisions (Signature of Solon, Thornbury, Chagrin Highlands) took the shortest route to the Solon City Council and Planning Commission.  A rental occupancy permit ordinance was placed taken off the back burner and placed on the front.

It is difficult to determine if a single family home is owner occupied or renter occupied by looking at it.  So, how did the City of Solon identify single family homes that are renter occupied?  The City’s Planning Department identified rental properties in Solon by examining the water bill records; if the billing address for the water and/or sewer bill was different than the physical address, that property was designated as a rental property.  This method provides an underestimates but it considered accurate enough.

Planning Director Rob Frankland presented a rental properties map authored by Solon’s Geographical Information Systems coordinator, Tim Howard, to the Solon City Council.  The Planning Director indicated that as the housing stock ages, the rental properties in Solon are likely to increase.  If the number of rental properties are predicted to increase, will they have a negative influence on property values?  Authors Brice Banctel, Kyle Mooney, Leila Sanii, Shuyi Wang’s study concluded that in Chagrin Falls, there was no impact of a large number of affordable rental apartments and condo properties on property values.  However, in the real world, there is a negative perception associated with renters and rental properties.  Whether this perception is verifiable with quantitative data is not known.

Statistics of Rental Real Estate Properties in Solon Ohio

Number of rental real estate properties in Solon Ohio = 1,228
Number of single family rental real estate properties in Solon Ohio = 266 (21%)
Number of two family rental real estate properties in Solon Ohio = 52 (4%) and
Number of multifamily homes or apartments in Solon Ohio = 910 (74 %)
Number of landlords who own rental properties in Solon Ohio = 302

Map of Rental Real Estate Properties in North Solon, Ohio

Map of Rental Real Estate Properties in North Solon Ohio-Click to enlarge

Map of Rental Real Estate Properties in South Solon, Ohio

Map of Rental Real Estate Properties in South Solon Ohio-Click to enlarge

Statistics of Rental Real Estate Properties by Ward in Solon Ohio

Solon Ohio Ward 1 – 46 Units
Solon Ohio Ward 2 – 416 Units
Solon Ohio Ward 3 – 35 Units
Solon Ohio Ward 4 – 18 Units
Solon Ohio Ward 5 – 48 Units
Solon Ohio Ward 6 – 538 Units
Solon Ohio Ward 7 – 127 Units

Solon’s Ward 2 and Ward 6 have the largest number of rental units because of the apartment properties in these wards.  Ward 7 has the largest number of single family rental homes because the the homes on ABC streets (Arbordale Avenue, Brookdale Avenue, Copley Avenue) are priced below $200,000 and are attractive to real estate investors.  Since these streets are located close to the reputed Solon Schools, the homes make a good fit for renters with school bound children.  With rents for these homes ranging from $1,000 to $1,800 its reasonable to assume that the landlord is able to pay the monthly mortgage and the maintenance costs with the rental income.  In my opinion, a home purchase on the ABC Streets of Solon is likely to have minimal degradation in property values even under reality based macro economic conditions.  Most complaints regarding exterior maintenance to the City of Solon are from Ward 1, 2, 3 and 7.

Owning a home or renting a home is fundamentally a major financial decision.  A home is a immovable liability in any area of that does not have an increasing population and job opportunities.  The psychological and cultural importance of owning a home is exaggerated, knowingly and unknowingly.  The . . . → Read More: Homeownership is a ball and chain in a transient nation]]>

Homeownership in a transient society

Owning a home or renting a home is fundamentally a major financial decision.  A home is a immovable liability in any area of that does not have an increasing population and job opportunities.  The psychological and cultural importance of owning a home is exaggerated, knowingly and unknowingly.  The cliche is that you can’t put a price on it; the fact is that homeowners do place a price on home ownership through the home mortgage.

Real estate agents ridicule renters by saying that “they are throwing away money”, this notion from overpaid sales professionals should to be taken with a truck load of salt.  Renting is analogous to the modular design concept, the important advantage is flexibility.  Non-modular design is analogous to homeownership, it ties into obsoletism.

The assumption that young people will be able to pay off a 30 year mortgage and live in a debt-free house (as their parents or grand-parents did) is false in the present and the foreseeable economy.  In the olden days, job security kept people in one city or town and with guaranteed salaries and benefits, they were able to pay off their mortgages since many knew that the first house they bought could be one they would live in forever.  Job security existed because the labor force was local, competition was less and outsourcing was non-existent.  There is no more job security (as there was 30 or 40 years ago).  Many people undertake at will employment.   Today, young and older people, are being forced to move, wherever it is necessary, in search of jobs and education.

So, you could buy a house in Boston today, but if you got laid off from your job, you would firstly make efforts to find employment in the city where you own a home.  However, if your only job offer was in Colorado, you’d have no choice, but to move.  This reality is something that is excluded in the overall discussions on home ownership in the popular media today, i.e. lack of job security leading to more transient lives.  A factor for this exclusion could be the flow of advertising dollars from the greater real estate industry to the popular media (television, newspapers).

Don’t get sucked into this, as Warren Buffet reportedly called it, mass delusion for home ownership

We do not inherit the land from our ancestors, we borrow it from our children-Native American proverb

Kermit Baker, Chief Economist of The American Institute of Architecture confirms that the fat McMansion lady has indeed started singing.

“We continue to move away from the ‘McMansion’ chapter of residential design, with . . . → Read More: McMansions, Starter Castles, Garage Mahals are dead]]>

We do not inherit the land from our ancestors, we borrow it from our children-Native American proverb

Kermit Baker, Chief Economist of The American Institute of Architecture confirms that the fat McMansion lady has indeed started singing.

“We continue to move away from the ‘McMansion’ chapter of residential design, with more demand for practicality throughout the home. And with that there has been a drop off in the popularity of upscale property enhancements such as formal landscaping, decorative water features, tennis courts and gazebos.”

Decorative water features reminds me of the gigantic water foundation that Paul Vitti (Robert De Niro) gifts to psychiatrist Ben Sobel (Billy Crystal) in the movie Analyze This.

“For decades, the real estate industry has operated under the principle that the less information buyers and sellers have, the better it is for agents, lenders, title companies, and all the other folks who eat from the trough.  But the real estate tide seems to be turning, as the housing . . . → Read More: Real estate industry is a closed information loop]]>

The closed loop

“For decades, the real estate industry has operated under the principle that the less information buyers and sellers have, the better it is for agents, lenders, title companies, and all the other folks who eat from the trough.  But the real estate tide seems to be turning, as the housing and credit crises of 2008 have heightened awareness in Washington, D.C., and on Wall Street about the catastrophic consequences of a closed information loop – Michelle Singletary of  Washington Post quotes Ilyce Glink in “Buy, Close, Move In.”

Only individuals who itemize deductions can benefit from the Mortgage Interest Deduction (MID), and the value of the deduction increases with the marginal tax rate. If the government wishes to promote home ownership, . . . → Read More: Reduced Mortgage Interest Deduction (MID) coming?]]> Urban Institute’s publication titled, Reforming the Mortgage Interest Deduction by Eric Toder, Margery Austin Turner, Katherine Lim, Liza Getsinger suggests that

Only individuals who itemize deductions can benefit from the Mortgage Interest Deduction (MID), and the value of the deduction increases with the marginal tax rate. If the government wishes to promote home ownership, a refundable tax credit available to all taxpayers would be more effective.

Henry Paulson, former US Treasury Secretary, recommends that

We should go further and reduce the subsidy for home ownership that helped create the crisis.  The central place of home ownership as part of the American dream reflects a bias of our society that is unlikely to simply end.  Policymakers may well decide that we should continue to facilitate lower-cost mortgages through a subsidy to mortgage credit guarantors.  Even so, the scope of the subsidy should be reduced by rationalizing and reducing the missions of the FHA and the successor(s) to Fannie and Freddie.  I would recommend limiting the availability of the subsidy to smaller mortgages or lower-income buyers or both.  And the price the government charges this new private-sector entity for its credit guarantee must be high enough to leave room for a robust private-sector mortgage market that serves taxpayers and homeowners equally. The benefits of a reduced subsidy for home ownership are clear.  But we cannot move toward this model until the housing market is stabilized and housing prices are likely to rise.

Mortgage Interest Deduction

Signature of Solon Golf Community Subdivision

A Signature of Solon resident approached City of Solon Planning Commission and stated that she believes there have been builders in the Signature . . . → Read More: Signature of Solon rental properties cause concern]]> The City of Solon Planning Commission is discussing an ordinance proposal which will require that owners or agents obtain Occupancy Permit for rental units.

Signature of Solon Golf Community Subdivision

A Signature of Solon resident approached City of Solon Planning Commission and stated that she believes there have been builders in the Signature of Solon neighborhood who have built homes and rented them prior to obtaining an occupancy permit.  Additionally, many Signature of Solon model homes were built but not sold and have become rental properties.  Many of these Signature of Solon rental homes are neglected and improperly maintained which is damaging to the Signature of Solon community. This resident was concerned that the appearance of some of the homes will affect overall resale in the Signature of Solon neighborhood.

It appears that due to  the economic downturn, builders and homeowners associated with some  Signature of Solon properties are renting homes out of necessity rather than facing foreclosure.  There have been some foreclosure filings on properties located on Royal Portrush Drive, Capilano Drive, Vahalla Drive, Bellerive Drive, Merion Court, Prairie Dunes Court, Sotograde Court in Signature of Solon.

Foreclosure decreases the property value by 28% (Campbell, John Y., Stefano Giglio, and Parag Pathak. 2009. “Forced Sales and House Prices.” NBER Working Paper 14866).  Some builders are facing property foreclosures because lenders have become conservative by cutting their line of credit.  Common sense lending standards mean that lenders expect builders to have their own skin in the game.

Home-equity loans and lines of credit are second mortgages.  Second mortgages are made after a primary mortgage is in place.  If a homeowner defaults, the proceeds of the home’s sale go first to the lender that holds the primary mortgage.  The second-mortgage holder gets whatever is left after the primary mortgage is satisfied.  Lenders are rightly shying away from secondary mortgages and rental occupancy permits will not loosen the line of credit leash.

Signature of Solon does allow home rentals, however,  a deed restriction stipulates that home must be owner-occupied for the first year to ensure that landscape work and proper maintenance is completed.  However, Signature of Solon does not request the tenant’s name.  Chagrin Highlands subdivision in northeast Solon also has a deed restriction similar to Signature of Solon.

A deed is the legal document that transfers ownership of real estate.  It contains the names of the old and new owners and a legal description of the property etc.  The deed is signed by the property owner.  Deed restrictions place limitations on the use of the property by the property developer.  It is my belief that some property owners may use a bypass  to get around a deed restriction.