Property Grunt

Tuesday, May 10, 2005

The Perfect Storm

Sarah Connor: What did he just say?
Gas Station Attendant: He said there's a storm coming in.
Sarah Connor: [sighs] I know.
The Terminator

"I sense a perfect storm of high interest rates, a housing bubble, mortgage fraud, DOJ and Fannie Mae. When this hits New York, all sorts of nastiness will come out. I have myself a front row seat."

The Grunt wrote this to Janis of Inman after a moment of contemplation upon reading a recent Inman news article giving the rundown about realtors trying to kneecap discount brokers by passing laws requiring all real estate brokers to institute a minimum level of service. It sounds like a good idea in maintaining the quality of service that is provided to customers however it prevents discount brokers from presenting other alternatives to the consumer that are more cost efficient.

It all comes down to money. If you are a full service broker who is after a seller that is already considering a discount broker you are going to have to offer a carrot to the customer, which usually means lowering the fee which realtors dislike doing.

By passing these laws under the guise of helping the consumer the realtors are guaranteed their commissions at the cost of innovation, the destruction of other business models and restricting the consumer to only a certain number of choices costing them more money. Department of Justice is unhappy about this and has amassed their army of investigators, lawyers and other personnel by preparing a suit against the National Association of Realtors.

This is just another example of the problems that has plagued the real estate industry which include the following

· According to Inman news and the Washington Post, Fannie Mae, in a concerted effort to clean house, issued an ultimatum preventing all employees from buying or selling company stock in order to prevent employees from inadvertently violating security laws. Fannie Mae is making an effort to insure that a bad situation does not get worse since it would definitely raise a few eyebrows if employees went on a massive stock buying orgy and however the flipside is that the measure prevents employees from taking off with their money once the kool aid is being handed out

· Mortgage fraud has run rampant like Family Guy’s DVD sales. Mortgages weblog has a ton of stories of people being screwed over and in an recent entry Eliot Spitzer, attorney general of New York State ,is heading an investigation on predatory lending tactics against minorities and senior citizens.

· The Realtygram blogger made national headlines when it exposed a scandal involving investor fraud that occurred under HUD’s watch.

All these elements are slowly coming together and I believe we are in the midst of a perfect real estate storm where each element compounds each other resulting in the next big bad.

Throw in climbing interest rates, a real estate bubble and erratic oil prices and its only a matter of time when people will start getting kicked out of their houses and foreclosures reach a fever pitch. If the number of consumers affected increase to epidemic proportions, the public is going to want some answers on why everything went wrong.

Of course, personal responsibility will play a key role in their situation however the evidence shows that many consumers were playing against a stacked deck and when all is said and done the government will be called upon to address those issues.

Since it is one of the most high profile markets in America there is no doubt in my mind that once everything hits the fan all eyes will be on the New York market especially with those with money on their minds.

Already the founder of, Richard Barton, has entered the embryonic phase of a new online real estate service to assist buyers and sellers in their quest for a home and he isn’t alone. When these online real estate services storm the beaches of Manhattan, the powers that be of the real estate brokerage community will be ready to mow down anything that comes on their shores and perhaps will have the upper hand but their actions will not go unnoticed by DOJ. If there is evidence that certain factions of the real estate industry unfairly undermining the competition the DOJ will begin the carpet-bombing campaign to beat them into submission.

The Grunt has not heard of any word of unfair practices preventing different types of business models from operating in Manhattan. As far as the Grunt knows, there has been no talk of anti-trust actions in the New York market because brokers are too busy getting listings and making deals to even care. Other business alternatives including craigslist are not considered a threat because people understand that having a broker to take care of the all of the headaches of selling and buying a home is to their advantage. However there is a small yet significant number of sellers and buyers that are choosing to go on their own but its not enough to concern the brokerage community.

Which leads to the possibility that the closest that New York would get to the storm would be the edge. But if someone comes up with a better idea that benefits the consumer but not the real estate professional and is met with heavy resistance by certain entities in the industry in its implementation expect Uncle Sam to pitch a tent in Central Park and give the whole industry a full body cavity search. Please bear in mind the Grunt is not accusing anyone of anything but looking at the national scene it seems that all the pieces of something bigger are coming together.

The Grunt isn’t too thrilled at the prospect of being outsourced however I am a fervent capitalist who is for anything that helps the consumer since it is the American way. It is to the advantage to the brokerage community to embrace change and determine what role they will play. Whatever happens it’s going to be quite a show when the storm comes and the Grunt will have the best seat in the house.