There’s always something to howl about.

What If The Real Estate INDUSTRY Didn’t Control The Real Estate Market?

I have the heart of a trader.  If you read Mortgage Rates Report, you know that I’m fascinated with the forces that make markets move up, down or not at all.  One of the things I’ve noticed, since I started writing on Bloodhound Blog, is that the real estate industry is:

That lopsided opacity was the real reason for the eventual implosion of the real estate market. We hid market information from the buyers while the Baby Boomers moved through the home ownership life cycle.   A huge generation, yearning for “The American Dream of Homeownership”, assured strong demand for houses in the post-World War Two housing boom.  Banks were all too happy to hand out money, even when forced to lend by the Government.  Lew Ranieri saw a 25-year boom ahead and found a way to create a shadow banking system that could “bury bad loans”.  Any agent dealing with a short sale understands the problem of buried loans because she’s heard:

“Well, we aren’t quite sure WHO owns this loan”

Kind of sounds like the forensic audit of Bernie Madoff’s books, doesn’t it?  That’s what you hear when the jig is up on a Ponzi scheme:  confusion, wagon-circling, and practiced deflection.  It eventually catches up with the schemers.  I’m firmly in the camp that no matter how many incentives we offer to stave off the inevitable forced sales, or to provide a middle-class tax cut, or to bribe the next generation of buyers, the simple fact remains that we have more houses than we need in this country…and the people just ain’t buying like they used to.

It’s partly the National Association of REALTORs fault.  They’ve hoarded supply data and intentionally suppressed demand data since inception.  Suppressing the demand data resulted in a valuation system that relied on false positives (comparable sales) as a standard that contributed to the Ponzi-like atmosphere in the real estate market.   Think about it.  When we ask agents about rising demand, they point to dwindling supply as a measure of it.  That deflects the question.

It’s party the appraisers fault, too.  They allowed themselves to be the lap-dogs of the NAR without ever addressing the demand-side of the equation.  Ask an appraiser about demand, he’ll point to the “absorption rate” which, as I’ve said, is a measure of available supply.

Let me give you an example of the unholy alliance between NAR and independent fee appraisers:

Have you ever been to the Port of Long Beach, CA?  This is what it looked like last Fall. The linked article shows that there are literally thousands of Mercedes and Toyotas, waiting to be warehoused rather than shipped to dealerships.  Can you imagine if the Kelley Blue Book guy came out to “appraise” the new Mercedes, to set the market?

C’mon boys!  Let’s get these vehicles into the sheds!  We can’t let the Kelley guy see the results of the poor demand.  Floyd?  Can you get those last three bills-of sale for the Kelley guy?  He needs to set a value for this model.

That’s how appraisers valued property until last year; they ignored current listings and went off historical data.  Nobody cared because we were in the middle of a long-term market paradigm where demand was greater than supply.  Remember, that chunk of people just turned 65 so they’re pretty much out of the market.  That paradigm is shifting- ask Gary Keller.

Oh, lenders weren’t innocent either.  Lenders (and their counterparts on Wall Street) were so willfully absorbed with the next quarter’s profits (produced by the shadow banking system) that they grew a cabal so powerful that its failure is defined now as “systemic risk”.  The days of what Greg Swann refers to as “flinty-eyed bankers” gave way to the crap-shooting S&L cowboys and gun-slinging investment bankers.

In the end, we had to  sell the former Second-World countries on the compunction of Joe the American so we could keep the taps running.  Joe the American turned out to be a bad bet and the Second-World sovereigns are pushing back.

We ignored the demand-side of the trade.  Now, when Mao and Ivan tell us to mark those mortgage bonds to the market, we have no reliable pricing service because we can’t see what the demand, property by property, is.  We can’t build a pricing model worth trusting because we have no idea about the true demand for the collateral behind the loans. This mortgage-backed securities market collapse goes deeper than the Fed’s unexpected flight from support.  It started when a bond fund manager suggested that our nation’s collateral, and confidence, was in jeopardy of being downgraded.  This rise in mortgage rates is as much a fear of  systemic failure as it is of inflation…

…and it ain’t over yet.

I met a guy last month who thinks he has a solution. It’s so simple it’s silly; an open market, like the NASDAQ, for real estate.  Watch offers for houses, in real-time, be accepted or declined.  NASDAQ Level Two Quotes go beyond the bid and ask; they show the “size” of the market for those prices. The implementation of that transparency greatly reduced the previous NASDAQ market manipulation, that stymied the individual investor to favor institutions.  It isn’t perfect but exposure to that data makes the market operate more efficiently.  Apply that model to real estate and you will quickly determine what the “real” market is for a property.

Prudential California tried a similar approach with its range-pricing model. The range pricing model reflected a bid and ask price but withheld any “size” of those numbers…so the numbers were useless.  Range Pricing then, is a marketing gimmick, not real market transparency vis-a-vis the demand side of the trade.

How then, can we solve this problem so that confidence is restored in property valuation?  I gotta tell you that The Second-World Nation investors don’t trust our Government.  Our Government doesn’t trust Wall Street.  Wall Street doesn’t trust the banks.  Banks don’t trust real estate agents and the public doesn’t trust anyone right now.  Money flows where trust goes so restore trust in the valuations and the money will start flowing again.

Prominently display the terms and dates of the rejected offers, verified by participating market professionals, in the MLS system, and you solve the demand side of the equation because you identify the “size of the market”.  Share that information with the banks and they’ll start trusting you.  Show it to the prospective buyers and they’ll throw their arms around you in joy.  The sellers will “get real” about the market, also.

We all know that ain’t gonna happen because “The Man” doesn’t want to release his clutch on the market.

That’s the real problem.  We don’t have a real estate market, we have a real estate industry created market.  Since the real estate industry isn’t going to restore confidence in the real estate market, I suppose we’ll have to look elsewhere…

…like this guy I met.

Expect to hear a lot more from me, about this topic, as I learn more about it.  Now, you’ll have to excuse me while I go pester this guy via e-mail.  Thanks for letting me vent.