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[Boston Fed] Calibrating Real Estate Broker Commissions

September 14, 2009 | 11:40 pm |

An interesting study from an economist at the Boston Fed that discusses the relationship between a seller and the real estate broker hired to sell in the property. What’s interesting to me is that the conflict of interest is measured by the costs associated with the delay in selling the property. That’s a clever way to quantify.

Real Estate Brokers and Commission: Theory and Calibrations
by Oz Shy (What a cool name!)

The conclusion of the 6% model:

The findings suggest that while the pressure brokers exert on sellers to reduce prices generates faster sales and hence improves social welfare, the usual commission rate of 6 percent exceeds the seller’s value‐maximizing rate if the sale is handled by a single agent. On the other hand, if several agents (such as the buyer’s and seller’s brokers and the agencies that employ these realtors) split the commission, then a 6 percent commission rate may be required to motivate the broker to sell at a high price.

On the plus side…

Two-sided market and network effects: Real estate brokers are connected via computerized networks that expose them to a large variety of houses for sale. Buyers are aware of that and will therefore hire an agent who is also connected to the same network. Sellers know that buyers tend to hire agents who are also on this network, which induces more sellers to enlist. This “snowball” effect can potentially magnify until all sellers and buyers connect via agents to the same network of realtors.

When I went to sell my last house, I toyed with doing it myself, but rationalized that I would receive less exposure and the my net would end up being more than if I sold it myself, before I figured in the hassle/time factor and my fear of screwing up my biggest investment.

On the down side…

Conflicting interests: Agents may provide sellers with certain information on the housing mar- ket in order to lead them to settle on a lower price compared with the price that would maximize sellers’ expected gain. Lower prices would increase the probability of finding a buyer and would also shorten brokers’ expected waiting time until the transaction takes place, allowing them to collect their commission sooner.

There seems to be a lot of weight given to the idea that real estate brokers want the price as low as possible to lift transaction volume.

While I agree there is a structural conflict, I think the premise as presented is overly simplistic. Yes, if the price is lowballed, the property will move quickly.

In my 23 years of interacting with brokers in my appraisal work, in a number of housing markets, I have found that the sellers generally hold sway over the brokers. The idea that the seller simply accepts the broker’s price recommendation is not real world. Of course there are good agents and bad agents just like any profession.

In fact, the sellers are armed with a lot more information than ever before – a lot of it is incorrect or misleading and in my experience, causing sellers to be less reliant on the agent’s initial advice.

There are all sorts of models out there trying to find an alternative to the traditional brokerage model or fit in as an alternative to the traditional model. Some ideas will be successful and some won’t, but to date, there hasn’t been an “ah-ha” model to arrive.

So until the industry will remain conflicted.

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[The Housing Helix Podcast] Jason Bram, Senior Economist, Federal Reserve Bank of New York

September 3, 2009 | 7:38 pm | | Podcasts |


I was fortunate to have Jason Bram, Senior Economist with the Federal Reserve Bank of New York join me for the podcast. We covered a lot of ground including regional employment, securities industry employment versus all other employment, the rent versus ownership ratio and confidence versus sentiment.

Jason referenced a few charts during the discussion including the forward looking Index of Coincident Economic Indicators.

Note: The views expressed here are those of the interviewee only and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.

Check out the podcast

The Housing Helix Podcast Interview List

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.



[Over Coffee] Morning Quote: Too-Big-To-Feed

August 25, 2009 | 12:02 am | |

Many consumers seem to be feeling better about the economy (not good, just better than earlier this year). Well so do the central bankers – a la The Fed – at their annual Jackson Hole summer retreat.

Mr. Hoenig tried a few economist-jokes too. Playing off the phrase “too-big-to-fail” – a reference to banks that would topple the financial system if regulators let them collapse – he joked with the audience that he doesn’t want the Jackson Hole meetings to get too big. They could become “too big to feed.”

A number of ironies here but the overwhelming takeaway is that they are feeling better about the economy. While the economy “bites,” perhaps it’s now good enough to eat.



July 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices

August 17, 2009 | 5:40 pm | |

Since the direction of the housing market is now largely determinate on bank underwriting practices, and this is a fairly abstract thing, unlike mortgage rates, I like to look at this report from the Fed called (released at 2pm today) Senior Loan Officer Opinion Survey on Bank Lending Practices.

The message seems to be that bank underwriting hasn’t gotten any tighter over the past several months, but it is still constrained.

Residential mortgage loan demand (prime) has done better than other types of lending.

In the July survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households, although the net percentages of banks that tightened declined compared with the April survey.2 Demand for loans continued to weaken across all major categories except for prime residential mortgages.

And fewer have tightened underwriting standards further:

The net fraction of domestic banks that reported tightening their lending standards on home equity lines of credit fell to roughly 30 percent, from 50 percent in the April survey



[Beige Book] Less Bad = Begun To Stabilize, Moderated

July 30, 2009 | 12:57 am | |

The Federal Reserve just released the Beige Book which provides anecdotal commentary on the economy nationally and across the regions of its member banks.

Here’s real estate and mortgage excerpts from the overall report. The macro take away is the pace of economic decline has “begun to stabilize” or “moderated.”

Residential real estate markets stayed soft in most Districts, although many noted some signs of improvement.

Real Estate and Construction

Residential real estate markets in most Districts remained weak, but many reported signs of improvement. The Minneapolis and San Francisco Districts cited large increases in home sales compared with 2008 levels, and other Districts reported rising sales in some submarkets. Of the areas that continued to experience year–over–year sales declines, all except St Louis–where sales were down steeply– also reported that the pace of decline was moderating. In general, the low end of the market, especially entry-level homes, continued to perform relatively well; contacts in the New York, Kansas City, and Dallas Districts attributed this relative strength, at least in part, to the first–time homebuyer tax credit. Condo sales were still far below year–before levels according to the Boston and New York reports. In general, home prices continued to decline in most markets, although a number of Districts saw possible signs of stabilization. The Boston, Atlanta, and Chicago Districts mentioned that the increasing number of foreclosure sales was exerting downward pressure on home prices. Residential construction reportedly remains quite slow, with the Chicago, Cleveland, and Kansas City Districts noting that financing is difficult.

Banking and Finance

In most reporting Districts, overall lending activity was stable or weakened further for most loan categories. In contrast, Philadelphia reported a slight increase in business, consumer, and residential real estate lending. As businesses remained pessimistic and reluctant to borrow, demand for commercial and industrial loans continued to fall or stay weak in the New York, Richmond, St. Louis, Kansas City, Dallas, and San Francisco Districts. Consumer loan demand decreased in New York, St. Louis, Kansas City, and San Francisco, stabilized at a low level in Chicago and Dallas, and was steady to up in Cleveland.

Residential real estate lending decreased in New York, Richmond, and St. Louis. Dallas reported steady but low outstanding mortgage volumes, while Kansas City noted that the rise in mortgage loans slowed. Refinancing activity fell dramatically in Richmond, decreased in New York and Cleveland, and maintained its pace in Dallas. Bankers in the New York District indicated no change in delinquency rates in all loan categories except residential mortgages, while Cleveland, Atlanta, and San Francisco reported rising delinquencies on loans linked to real estate.

Banks continued to tighten credit standards in the New York, Philadelphia, Richmond, Chicago, Kansas City, Dallas, and San Francisco Districts; and some have stepped up the requirements for the commercial real estate category, in particular, due to concern over declining loan quality. Meanwhile, Cleveland and Atlanta reported that higher credit standards remained in place, with no change expected in the near term. Credit quality deteriorated in Philadelphia, Cleveland, Kansas City, and San Francisco, while loan quality exceeded expectations in Chicago and remained steady in Richmond.


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[Over Coffee] Morning Quote From The Home Front

July 29, 2009 | 6:00 am | |

From Caroline Baum’s excellent column: Conan’s Couch, ‘Daily Show’ Ready for Bernanke:

Alan Greenspan prided himself on being opaque. The former Federal Reserve chairman used to joke that if the audience thought he was being clear, they probably misunderstood what he was saying.

Bernanke believes in transparency. With everyone hanging on every word of every report, every pundit, every TV show, every government official release etc., I’m not quite sure this doesn’t create a lot of more volatility. But if we could have the Fed Chairman on the Daily Show?

My life would be complete.

Aside: The IRS is more popular than the Fed.


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[Getting Graphic] Quality Is Not Job1: Why Home Mortgage Underwriting Is So Strict

June 1, 2009 | 11:23 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Source: NYT

Click here for full sized graphic.

It’s 2 out of 3: GM joins Chrysler on the bankruptcy production line, so my take on Ford’s advertising slogan seems relevant.

Bank and automakers’ similarities end with GM and Citigroup being removed from the Dow Jones Industrial Average today.

Automakers WANT to sell cars.

Banks DO NOT WANT to make loans.

Here’s a compelling reason for banks’ recent need for self-preservation.

In Floyd Norris’ column this weekend titled Troubled Bank Loans Hit a Record High

OVERALL loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to statistics released this week by the Federal Deposit Insurance Corporation.

Bank underwriting is notoriously difficult right now and who can blame them? They have to make loans in an economic environment where:

  • Housing prices are declining
  • Mortgage defaults are rising
  • Unemployment is rising

Banks are in survival mode at the moment.


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[No OCC, OTS in T-E-A-M] Reducing Banking Regulatory Clutter

May 28, 2009 | 10:34 am | |

Empirical evidence says that the myriad of alphabet soup regulatory agencies didn’t work to prevent the systemic breakdown of the financial system on a global scale, stemming from CMBC activity. Of course, I’m not naive to think that they would have prevented it, but I do think the scale of the crisis was significantly larger as a result of the lack of logical oversight.

It’s not about lack of regulation, it’s about limited coordination, lack of responsibility and most importantly, departmental turf wars.

Hopefully this may change in a few weeks as the administration takes the wraps of an emerging plan to reorganize regulatory oversight.

Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.

Ideas include

  • Federal Reserve – becomes a powerful systemic risk regulator
  • Create a new agency to protect consumers of consumer products
  • Merge the SEC into CFTC to protect investors from fraud
  • OCC and OTS would go away and their responsibilities would be distributed to FDIC and the Federal

One of the key issues, which runs parallel to investment banks being able to select the most favorable ratings agency or mortgage brokers to pick their own appraiser, is the fact that banks can pick whichever regulator is most lenient: FDIC, OTS or OCC.

Seriously, a regulator that is competing with other agencies to get more banks to work with them to justify their existence is inherently flawed.

Of course the American Bankers Association is against this:

“As a practical matter, I think the idea is a nonstarter,” said Ed Yingling, president of the American Bankers Association. He said the administration should focus on the two ideas that command the broadest consensus: the creation of a system risk regulator and a resolution authority for collapsing companies. “That’s probably all Congress can handle,” he said. “They can propose a lot of things, but there’s a real risk in doing so that you just overload the system.”

Good grief. Use of the word “Risk” and “Overload” seems kind of quaint at this point, doesn’t it?

The proposal also urges creation of a new government agency to conduct “prudential regulation,” with supervision authority over state and federally chartered banks, bank holding companies and insurance firms, the source said.

Yes the Fed will have new powers, but seriously, why have any of these agencies if they aren’t very effective? In the current format, it all seems like a colossal waste of taxpayer dollars unless the system is streamlined and reorganized. However, the turf wars will move from the regulators to Congress as everyone tries to hold onto their power base.

The new bank regulatory agency could prove controversial because it would consolidate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and strip supervisory powers from the Federal Reserve and the Federal Deposit Insurance Corp.

Ideally, it is in everyone’s benefit to reduce the regulatory clutter and create clean lines of responsibility and authority. My worry is that we don’t jettison enough of what didn’t work after the power struggle/compromise struggle shakes out.

Housing doesn’t stabilize until banking/credit stabilizes. Period.


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[Geithner Stress] SNL Calls Out The Low-ball Exercise of Ignorant Bliss

May 13, 2009 | 10:08 am |

Kudos to SNL for being able to carry this off – it’s as good as an earlier Geithner skit.

Robert Kuttner, in his piece in the Huffington Post called Collateral Damage and Double Standards writes about a recent Fed conference on the stress test:

At one point in his remarks, Bernanke, recounting just how rigorous the stress tests were, explained that “More than 150 examiners, supervisors, and economists” had conducted several weeks of examinations of the banks. That kind of let the cat out of the bag. If you do the arithmetic, that is about seven supervisors per bank, and all of the stress-tested 19 banks were hundred-billion and up outfits. When an ordinary commercial bank, say a $10 billion outfit, undergoes a far less complex routine examination of its commercial loan portfolio, it involves dozens of examiners.

So the stress test was not a set of rigorous examinations at all, but a modeling exercise using the banks’ own valuations of their assets.

It’s kind of like trying to help the economy by providing aid to large corporations who are most visible, yet represent only a small portion of the economy. On second thought big banks don’t represent a small part of the economy so I guess I am referring to the absence of help to a large portion of the banking system – lenders with less than $10B in assets.

A slow leak of information, talk of green shoots and glimmer fill the headlines when it comes to banking. It’s $75B rather than $3.6T we should probably be talking about.

Why does this matter to real estate? Cause it’s linear.

Banks => Credit => Housing

Actually I am not sure I disagree with the Geithner/Bernanke mindfreak that we are seeing since it seems to be helping restore some confidence in the future of the economy. I guess I get irritated when I know am being managed or perhaps, (my) ignorance would be bliss (ful).


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[FOMC Parse] Nowhere To Go, Although Badness Troughs

April 30, 2009 | 3:44 pm | |

The Federal Open Market Committee cut the federal funds rate another 25 basis points to 2%. The WSJ breaks out the announcment FOMC statement in a feature called Parsing The Fed.

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing.

With talk of green shoots and everyone digging hard to find silver linings, the Fed announcement was consistent with other news as of late. In other words:

Things are getting worse but not as fast as before.

I’ll take that.

GDP was -6.1% however consumer consumption is up since January which suggests this may be the trough of its decline. The recent Case Shiller index results brought similar comments about housing, that the worst may be over but demand and prices are still falling and have more to go.


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Too Big to Fail Meets Too Failed to be Saved

March 12, 2009 | 11:27 pm | |

It’s becoming apparent that several of the large institutions that are in the vortex of bailoutdom are teetering: namely AIG and Citi. They were deemed too big to fail, bit now we are wondering if they are too far beyond saving.

I am struggling with this concept and am rambling here, but now is the time to fix things for the long term benefit. I am sick of quick fixes.

The Too Big to Fail policy is the idea that in American banking regulation the largest and most powerful banks are “too big to (let) fail.” This means that it might encourage recklessness since the government would pick up the pieces in the event it was about to go out of business. The phrase has also been more broadly applied to refer to a government’s policy to bail out any corporation. It raises the issue of moral hazard in business operations.

The top 5 banks are showing significant signs of weakness.

Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their “current” net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

The industry never thought macro enough to consider systemic risk – as in “What happens if it all goes wrong?” Seems pretty basic.

The Federal Reserve appears to be trying to reform its ways and perhaps even the concept of too big to fail. Fed Chairman Bernanke just spoke to the Council on Foreign Relations

Until we stabilize the financial system, a sustainable economic recovery will remain out of reach. In particular, the continued viability of systemically important financial institutions is vital to this effort. In that regard, the Federal Reserve, other federal regulators, and the Treasury Department have stated that they will take any necessary and appropriate steps to ensure that our banking institutions have the capital and liquidity necessary to function well in even a severe economic downturn. Moreover, we have reiterated the U.S. government’s determination to ensure that systemically important financial institutions continue to be able to meet their commitments.

…while former Fed Chairman Greenspan has been attempting to re-write history.

David Leonhardt, in his piece “The Looting of America’s Coffers” said:

The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

Last week, Sheila Bair of FDIC told 60 Minutes she would like to see Congress attempt to set boundaries for banks to remain as banks. In other words, they grow beyond a certain level, they become some other entity but can’t be bailed out if something goes wrong. Perhaps this implies a higher risk which is understood by investors, forcing the institution to decide whether it can afford to be bigger.

Let’s get our act together real quick or we also too big to fail?


Aside: Why make billions, when you can make millions? – Austin Powers


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[SNL Goes Geitner] 1-800-Ideas?

March 10, 2009 | 12:03 am | |

Play the clip

[Be patient for clip to load: Like waiting for financial stability: video takes about 2 minutes to load]

I’ve been a bit video-centric as of late. It’s simply amazing to think that the US Treasury Secretary can be parodied on SNL and most people get the humor. Geithner has gotten a pass so far.

Here’s his proposed plan submitted last month and press release.

  1. Financial Stability Trust: A Comprehensive Stress Test for Major Banks, Increased Balance Sheet Transparency and Disclosure, Capital Assistance Program

  2. Public-Private Investment Fund ($500 Billion – $1 Trillion)

  3. Consumer and Business Lending Initiative (Up to $1 trillion)

  4. Transparency and Accountability Agenda – Including Dividend Limitation

  5. Affordable Housing Support and Foreclosure Prevention Plan

  6. A Small Business and Community Lending Initiative

Housing doesn’t rebound until financial stability is established.

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