Why the real estate business is due for a collapse

I don't have anything against realtors and, were I planning to stay in the country for more than 6 months, I would be working towards getting my license. But I still think the industry is headed for a major shakedown, and let me explain why.

Loss of their information monopoly. It used to be that the only resource for real estate information was through a real estate agent. However as more and more listings appear online and more and more websites appear to centralize this data, it becomes a lot easier for buyers to locate homes on their own. While real estate agents used to be the only people who knew enough about the recent comparable sales to evaluate a property, new tools like Zillow make it easy for anyone to access that information. And while most people will only make a few real estate transactions in their lifetime (thus they rationalize the need for an "expert"), columnists and blogs (like this one) are demystifying the purchasing process, and showing how it's no more difficult to buy a home than a car (and you don't have agents help you find cars).

In addition on the selling side, marketing has constantly gotten better and cheaper through the advent of the internet. With on-line postings getting such a wide audience, the need for a specialist to do this for you has shrunk considerably.

The flood of inexperienced agents over saturating the market. The one thing that real estate agents had going for them was the moniker of "expert on buying and selling homes". However with insane numbers of people becoming agents, this is rapidly losing it's credibility. In Miami there is one realtor for every 17 people! The result is that many buyers and sellers get stuck with terrible "experts". When Biff and I bought our first property we were saddled with a terrible agent. Not only did our agent do a terrible job at locating properties we'd be interested in (we ended up finding the house on our own) but she made some really stupid mistakes, like trying to use white-out to alter a typo in a legal document! Biff made her go make a fresh print of the document. And she still got her cut of the purchase.

Ethical considerations. Most real estate agents will go crazy at this one. They swear up and down that they are acting strictly in the best interests of their clients, especially the buyer's agents who get more money if their client spends more. But no one believes them because evidence to the contrary comes out all the time.

In the Detroit suburb of Commerce Township, seller Courtney Tursi is offering a two-year lease on a BMW X3 SUV to the agent who finds a buyer for her contemporary, two-level, four-bedroom, 3.5-bath lakeside home at the end of a private street....... "I said, 'You know what, Courtney, this will get more people to look at the house,'" Waquad says.

If agents were truly looking out for their clients interests, incentives for buying agents (like larger commissions or a BMW lease) wouldn't increase the chance of selling a property. But research shows time and time again that these incentive do work. (In the above example the house in question recieved more inquiries, though not more visits)

In the book Freakanomics, Stephen Levitt ran some numbers to see if real estate agents sold their homes the same way they sold other peoples. According to his research, realtors hold their own homes for 10 days longer than average and sell for 3% more than average (not to mention they keep their 3% commission). His explanation was simple, holding out longer for the bigger price is typically only worth a couple of hundred extra bucks for the realtor (and therefore not worth the delay), even though it could result in tens of thousands of dollars for the seller.

Real estate agents are rapidly on their way to becoming the next used-car salesmen. No one likes them, everyone distrusts them, and no one wants their kid to grow up and become one. An industry based on information brokering can only last for so long when the public doesn't trust them.

Now all of this doesn't mean that I think real estate agents are going away. But I think that their roles will be changing and their fee structures will be going down like the Titanic. Right now that's near impossible given the sheer number of agents who milked the boom dry. But the next couple of years, with the sales going way down, will hopefully wean most of the weak agents off the market. And then the industry can move towards the future.

Journalists are a dime a dozen

I know this blog is supposed to be about real estate investing. But sometimes I find something in print that drives me crazy. If you want to read an extremely poorly written article by a paid journalist, then go read this article at MSNBC. Then I'll explain why it's a shame that man pulls a paycheck.

Done reading? OK.

Let's look at this man's "findings" and discuss. First of all let's take a look at the purpose of the article. He's trying to compare costs and savings between single people and married couples. Sounds like a noble goal. But that's where he went wrong.

"We looked at the monthly expenses of three New York City households..."

Are you serious? He's comparing THREE people? Since when does three data points (only one per set) give you any sort of reasonable conclusion? I could do the same thing to make married people look good by comparing myself to Bill Gates. He's married.

Seriously though, the real crime in this article is that he makes a lot of conclusions from this extremely poor starting point. Like my college math teachers taught me "You can have the best proof in the world, but if your assumptions are wrong then it's just a waste of time." But let's continue to analyze his "findings".

"For example, only 9.3 percent of the couples' $14,200 monthly gross income goes for rent, compared with 23 percent of the single person's $7,500 monthly pay"

Remember that we're only comparing 1 married couple to 1 single person. We can look at this numbers really quick and determine that the single person pays $1725 a month for rent while the married couple pays $1320. Why is that? Does the single guy work in a pricier part of town? Does he have a 3 bedroom suite? Does the author really believe that, based on his "evidence", he can conclude that married people pay less rent (not spend a smaller percentage of their income but actually pay less rent) than singles? Do any of you actually believe that? Because his "facts" do.

"The married couple also gets some relief on both federal and Social Security taxes, thanks to the slightly lower tax rates associated with joint filing. They pay out a combined 29 percent of their salaries, compared with the 35 percent the single person pays"

According to this table from the IRS that is completely false. According to the IRS table, both of them would end up paying an effective income tax rate of about 21.7% (the married couple pays very slightly higher). Social Security taxes are a direct 6.2% on the first $90,000 regardless of whether or not you are married (unless you are self-employed).

Marriage can actually cost more during tax season if both partners work. If you look at the table I linked to above, if my fiance and I each make $120,000 a year (I wish) then we are each in the 28% tax bracket. If we get married and file jointly for $240,000 a year, we are well into the 33% tax bracket. Costing quite a bit more come tax day.

"Married couples tend to start saving for retirement early on, while singles generally wait until their 40s. So while wedding bells usually lead to a smoother path to retirement, they produce a more expensive month-to-month life — and they mean less free cash in your pocket."

There's actually two problems here. First the author claims that married couples tend to save more for retirement. Is this based on his highly scientific study of three households? Because he doesn't quote any other sources. If so, then this statement is blatantly misleading you.

But let's assume that he actually did some real research and found this out. He tries to convince us that because married people save more early on they have a more expensive month-to-month life? Since when does saving money lead to more expenses? His final conclusion "less free cash in your pocket" is correct, but just because the money you saved is inaccessble until you are 65 doesn't mean your life is more expensive. Your month-to-month expenses aren't directly affected. It's pure bull-crap.

"While there are plenty of renting couples and home-owning singles, married people account for 77 percent of all homeowners, according to the Center for Politics."

Finally a statistic with an credible source. To bad it's a worthless statistic. 77% of all homeowners are married seems to indicate that married people are more likely to buy a home. But that's what makes this so tricky, and very misleading.

What if I told you that 5% of all homeowners were plumbers? It would seem like not very many plumbers buy homes. But then what if I mentioned that only 1% of all adults were plumbers? Now we can actually take a look and realize that plumbers are far more likely to buy a house than any other adult.


"Add it all up, and Chestnut's married clients shell out practically all of their monthly income on living expenses, scraping to save anything beyond a retirement plan contribution. The single earner, by contrast, socks away more than $300 per month, nearly 5 percent of his or her pay."

Once again we are back to our three families, who can prove nothing on their own. But why stop with one error when you can print two? Not only is the data behind the statistic bad, but the statistic itself is misused. The single earner saves 5% of his income a month while the married couples can only save for retirement. What if the married couples putting 30% of their income into retirement funds? Who's the better saver now? Of course it couldalsos be that the married couple is saving very little, but their marriedneighborss (not included in this huge study) save a considerable amount.

"Once children enter the picture, married couples are really in financial trouble ... The total cost of camps, day care, books, toys and after-school programs? Try $4,000 a month."

Does anyone actually believe that this is normal? I mean at this point the article gets ridiculous.

In any case I think I've proved my point. Just because you read it in print doesn't mean the person who wrote it has a decent head on his/her shoulders. This article is a perfect example of what happens when some nitwit gets his hands on a very small set of data and decides that he can make broad conclusions from it.



and he gets paid to write... I ought to apply to be an author at MSNBC...

Think I'm wrong? Post your comments. If someone can somehow prove that this article is anything other than a embarrassment of journalism, I'll make a full retraction.

Rent... and collect rent.

A short while ago I wrote a post about rules I've broken that while I'm investing in rental homes, I actually don't own my personal residence. I rent.

I don't think I've ever read a book or an article that came out and admitted that sometimes it's better to rent than to buy. But I think it's definately true. So here's my reasons for renting.

1) I plan to move, possibly at the end of the year. My fiance and I are considering moving to London in January. However, while an excellent reason to not buy, this has only become a possibility in the past 3-4 months.

2) I live in Washington DC, but buy 3 hours away. A townhouse up here will run a minimum of $300,000 (closer to $400,000). Each of the houses I own were bought for less than $200,000. AND I bought with a partner. Simply put, I couldn't afford a very large down payment on a house here (less than 10%).

3) While home prices skyrocket, rents have stayed low. My rent is only $1205 a month (less actually, since I don't live alone). Since my brother pays $555 I'm left with a tiny bill of $650.

Running some quick number on a mortgage calculator I can see that if I bought a $350k townhome and paid down the $22k I've put into the company, then got a 6% rate for a 30 year mortgage (I have excellent credit, and we'll assume I did this back in January-ish), I'd be paying $1,966.53 a month, just on the mortgage. Add in insurance, property taxes, Home Owners Association Dues (always expensive in townhome communities) and PMI (less than 10% down, remember?) And my bill would likely come to somewhere around $2,500+ a month.

If my brother moved in at the same rate I'd have to pay over $2,000 a month. To be able to afford that I'd have to cut out my 401k and put all my money into the house. Now that I have a fiance that might be a more manageable number, but it would still severely restrict our ability to save.

So instead of buying, I've chosen to buy homes for other people. It's a lot more work than owning your own home (all the same repairs, plus the people skills and extra accounting skills), but it's far less costly.