Truck and Barter

Realtors use Regulation to Kill Competition

This is an excellent example of what public choice economics teaches you about government regulation; concentrated benefits and disperse costs means those who benefit will have legislation and regulation written to enhance their "professionalism", market power, political influence, and profit.

In this particular case, federalism has clear benefits. National Realtors have less influence on the central government, and the Bush administration is trying to use the DoJ to prevent Realtor-dominated state government agencies from stifling competition:

The Department of Justice has two blunt warnings for the American home real estate establishment:

• Do not block efforts to save consumers money through rebates of real estate commissions.

• Do not stand in the way of discount "fee-for-service" firms that will list sellers' properties for a fixed-dollar amount but not perform all the traditional brokerage services, such as holding open houses or advising on buyers' offers.

On April 8, the department sent a highly unusual message to the Oklahoma legislature urging it not to pass a state Realtor association-supported bill that effectively would squeeze low-cost, fee-for-service real estate brokers out of the state by redefining the service requirements for holding a brokerage license....

"The state association [of Realtors] came to us and said, 'We think you should do this,' " Thorburn said. Setting minimum standards for services -- including requiring brokers to assist clients with offers and negotiations -- would help ensure that home sellers would have competent representation during a sales transaction, Thorburn said. It would, for instance, eliminate the possibility that discount brokers could simply "charge $500 up front and tell [sellers] that 'I'll list your property, I'll put you on the MLS, I'll give you a sign for the front yard and then say, you're on your own, good luck.' " Some sellers might find themselves confronting a well-trained buyer's agent in negotiations, said Thorburn, and might not make smart decisions -- a result that would not be in the seller's best interest.

To Realtors out there: don't you dare defend the use of government regulation to exploit your customers on the grounds that they are fools and idiots. They are not fools for choosing to go their own way; Realtors who think so should have their licences revoked. If your customers are too stupid to wheel and deal with a buyer's agent, how are they competent enough to select you to represent them?

Real estate transactions costs are, in my opinion, extraordinarily and extravagantly high. Part of that is due to an unnecessary complexity in the transactions process; part of that is due to public ignorance of what is exactly entailed. In fact, I'd argue that "consumer" organizations should be on the front lines against these attacks on competition, and should be trying to minimize the costs in other ways.

For quite some time, government policy has been to increase the share of home ownership through the use of repurchasing secondary markets, interest deductions on income tax, and interest rate subsidies; policy has not been to increase understanding of complex transactions, or to reduce transactions cost.

Could it be that government homeownership policy has been effective because the government didn't try to lower the profits of Realtors?

Choosing to Live-Aboard

High housing prices in the DC area have shifted, at-most, a few hundred people into living on boats:

"People think that we're outside of normal life, like a step above homeless, a step beyond trailer trash," she said. "The land people just don't seem to understand it."

I grew up spending summers and warm Spring and Autumn weekends on a boat; that was fun. But I never had to go to the office without a hot shower....

Apparently many potential live-aboards want all the creature comforts, but fail to realize how much space that requires.

The most common source of difficulty is in failing to adopt a simple enough lifestyle, and the size and complexity of the boat itself is often a major aspect of the problem.... Nearly everyone understands that the move will involve a simpler lifestyle, but few understand what this really means. We often hear something like this: "We really want to have a simpler lifestyle. As long as I can take a hot shower every day, have plenty of ice for drinks, and can run my home computer on board, I'll be fine. All we need for accommodations are a master stateroom with a double berth, four guest berths in two cabins so we can bring our friends, two heads, and standing headroom throughout." All of the items on this list are obtainable even in a condition of poverty, ashore. However the average person may be completely unaware that this reasonable-sounding list is only obtainable at great cost afloat, in an exceedingly large boat for most people.

NYC Rent Control

This is what is still rent-controlled in NYC:

Rent control applies to rental units in buildings constructed before 1947 that have been continuously occupied by the same tenant or a legal successor tenant since before July 1, 1971. Rent stabilization generally applies to apartments in buildings with six or more units built between 1947 and 1974, to some loft buildings, and to some buildings whose landlords participate in tax-abatement or other government programs.

Then we get an executive denying that the building owner is a member of homo economicus:

"We don't look at this process as a mechanism to move out of rent stabilization," said Neil L. Rubler, an executive vice president at the Olnick Organization. "We spend exactly as much on an apartment renovation as we need to deliver a first-class product in keeping with the property's tradition. If we do get the legal rent over $2,000 we, of course, will deregulate the apartment."

Uh, huh. Might it not be worth it to get the legal rent to $2001, permitting unlimited future rent increases? Just asking.

The new market-beating strategy is to offer subsidies and tax abatements for agreeing that 20% of new apartments will be rent stabilized for 20 years. That this necessarily increases short-term market rents and taxes is not ususually recognized. But most proponents would probably argue that the costs to some are worth the benefits to others.

Of course, one can debate about who are really getting the benefits. In March, the NYTimes pointed out that under the old system, the rich were getting richer!:

It is far more difficult, however, to get a good deal in the affordable rental buildings of Manhattan, where vacancies tend to come in just a trickle. Part of the scarcity problem, Dr. McCarthy at the Ford Foundation points out, is that "many lower-priced units are occupied by more affluent people."

"I'm not against rent control," he said, "but there's a tendency of people to sit on desirable affordable properties. And it's not unusual to see some people paying less than 10 percent of their income for rent while some others pay more than 50 percent."

I guess it's time for a new crop of people to win the rent control lottery.

I bring this up again and again because it comes up again and again. For me, the most potent anecdote about the political motives behind rent control came from Stiglitz' Principles book. It was about former NYC mayor Ed Koch's rent controlled 6-room apartment in Greenwich Village going for $441 a month, when valued at $1200 a month.

I think later editions of Stiglitz dropped the reference to Koch. I cannot find a major news source for the Koch accusation, which is one of those anecdotes that seems to have spread without authentication.

UPDATE: Another excellent example of the type of person who actually benefits from rent control - people who own investment properties:

Josephine Hemsing is a lifelong renter who bought her first piece of real estate last August.

Along with her husband, Dan Cameron, she runs Hemsing Associates, a public relations firm that works with classical musicians. They live in a rent-stabilized apartment on the Upper East Side and also rent another apartment for an office.

Content for the time to live and work as renters, they still felt the time might be right to buy a condo that they could rent to someone else. They reasoned that would allow them to build up equity in a property that, in the future, they might want to occupy themselves.

The couple looked at several apartments before finding a one-bedroom condo at the Concorde, a luxury building at 220 East 65th Street, which they bought for $590,000 last August. Their broker, Lynne Roberts of Bellmarc, helped them find a tenant who pays $3,000 a month. Regularly scheduled mortgage payments, taxes and common charges total about $3,500 a month, Ms. Hemsing said, and the couple have also decided to make additional payments on the loan principal.

"I realize there's a frenzy going on but that's not why I was involved," Ms. Hemsing said. "I felt that I had come to a point in my life where I had to take some money and invest it."

Not Fair Market Value

The City of Alexandria, VA insists that it assesses real estate at "fair market value":

Each year, the Department of Real Estate Assessments appraises each parcel of real estate in the City to assess its estimated fair market value. These values are used by the Department of Finance to bill for and collect the real estate tax, which accounts for approximately half of the City's annual revenue.

Actually, the City uses a software package to automate the assessment process based on historical data. In a fast-paced sellers market, in which average price increases have been reported at 25% annually, this type of assessment can dramatically undervalue properties. In this post, I will demonstrate this with actual data.

Now, my tax bill has gone up considerably since we bought in October 2001, all due to increases in "fair market value". And as David Bernstein noted (he lives in adjacent Arlington County, most likely in a reasonably small house I probably cannot afford), you can hear the "great sucking sound" for miles around. Personally, I would love to see an historical study of the productivity of city employees over the past 10 years, as tax revenue has soared... In any case the City has been underassessing it's resident-owners for years now, and I'm thankful for it.

Despite my glee over paying less that I could, reading public economics texts has taught me that tax rates and tax assessments are just implicit prices for a tremendous assortment of government services. Prices should broadly reflect market values of those services.

Personally, I don't think any such thing as an "efficient tax rate" exists when the funds that flow from thousands of diverse people are used to produce hundreds if not thousands of goods and services.

In this massive exchange context, "efficient" means "low" but "enough". But for some reason I've come to believe that "efficient" should also mean honest and transparent. If not useful to aid in the market efficiency local government financing of goods and services, at least it can give homeowners an honest assessment of current market values. (This easy-to-read paper (PDF) gives several points of view on property tax efficiency).

The most recent assessment for the City of Alexandria was completed in January. And its clear to me that assessments for condominium apartments in my building are way below actual market prices -- even though data is readily available to the assessors' office: three dozen apartments were sold here last year and thirteen have already been sold this year.

Given so much data about sales, just how close is "fair market value" to actual market prices in my condo-apartment building?

Fortunately, the city puts online all sales of all real estate in the City. The data used for the 2005 assessment are also online for all to see.

What's great about the former data is that it shows that already in 2005, the average apartment is selling for $30K (19%) above assessment.

What's great about the latter data is that it shows sales in 2004 and assessments for those same properties in 2005. Upon examination, it becomes immediately clear that the "fair market value" used is actually the historical average sales prices for the entire previous year -- the sales prices of last June. This is how the city gets "fair market value", which might be OK for a stagnant market like Buffalo, but is not OK for DC.

---

There are 5 types of properties in my building: 0, 1, 2, and 3 bedroom apartments, and commercial space. So here's a time-series chart that normalizes the different styles and sizes into one figure: 2005 assessments divided by actual sales prices:

What the regression figures tell you is that, on average from 1/1/04 to 3/15/05, the 2005 real estate assessment became lower than the spot price by about 0.07% every single day . Over a month that means the assessment loses 0.07*30=2% compared to the spot price. Over the year, the assessment loses 0.07*365=25% compared to the spot price.

Since we know with great liklihood that this will happen, what I'm suggesting to our benevolent despots in Alexandria City Government is that a more accurate "fair market value" be implemented.

For taxation purposes, you should utilize all sales information for the previous several years -- not just the last year. Use all that information to forecast the average prices to the middle of the current tax year, not the middle of the previous tax year. By adjusting your method, you could get the increase in next year's assessments today. In a fast moving sellers' market, your historical average only guarantees that the city will underassess nearly all properties.

For the sin of advocating abolition, economics became the dismal science. For advocating honest assessments, economics could become marginally more dismal.

---

Questions: 1) If governments want to maximize tax revenue, why haven't local governments gobbling up the windfall from sellers markets already switched over to forecasting next year's prices? Are they waiting until times get lean again?

If I were a budget maximizer, I would play a coy game. Right now I would simultaneously increase the assessment amount and decrease the tax rate. Then later on, I would raise rates to "historical norms" to justify myself.

Buffalo, NY to Become a "Hot" Real Estate Market?

In what seems like one of the most astonishing forecasts so far this year, John O. Norquist predicts that the new urban architecture of continually-depressed Buffalo, NY will lead to a boom real estate market over the next twenty years:

Buffalo may find itself in the forefront of tomorrow's urban revival, the keynote speaker for the "Smart Growth Is Smart Business" series told nearly 300 people Tuesday evening.

John O. Norquist, president of the Chicago-based Congress for New Urbanism and former mayor of Milwaukee, was the inaugural speaker at Nichols School for an eight-part series that will run through Dec. 8.

"I think Buffalo in the next 20 years will prove to be one of the best real estate markets in the United States," he began. Then the tall, bearded Norquist quipped, "You can start the process of ending your feelings of depression any time now."

Flashing images on the screen from cities around the world, Norquist made a case for the comeback of mixed-use city blocks with apartments above retail stores.

"Buffalo has a good architectural heritage with mixed-use buildings," he said. "This is illegal in most cities...."

"Some might have called it cluttered," he acknowledged, "but it has tremendous real estate value per acre. In fact, downtown Buffalo has higher value per acre than any other part of the city, because the urban core produces wealth and value."

By maintaining the old, he said, Buffalo has a treasure just waiting to be revealed.

Folks, I'm not convinced architecture can save Buffalo. After all, this is the Buffalo of $190,000 six-bedroom homes we're talking about. This is the Buffalo that lost 11% of its population in the 1990's. In 2000, the median value of homes was $59K, compared with $149K in the entire state. While the unemployment picture of Buffalo City improved markedly in 2004, the unemployment rate is still at 7.2% compared to a national rate of 5.4%. It's possible that Buffalo will see large gains in real estate prices, should the economy (and the weather) improve markedly, but I'm not convinced.

I really have only one question regarding this rosy forecast: Is Mr. Norquist investing his own retirement savings in Buffalo real estate?

Building in NYC Without Unions

Well, it is almost unbelievable that a developer has managed to do this in NYC:

Much of the work at River Lofts and virtually all of it at 60 Spring Street and several other projects has been done without union labor, and this has put Mr. Boymelgreen on a collision course with the city's construction unions.

Union members have held almost daily rallies outside 15 Broad Street -sometimes setting up a large inflatable rat - and during a recent interview they could be heard chanting outside. Mr. Boymelgreen said he decided to handle the conversion of 15 Broad Street without union labor for the simple reason that it was cheaper that way and it allowed him to bring his condos to market at a more competitive price.

But pressure from the unions has clearly taken a toll. Mr. Boymelgreen says union protestors have threatened his workers. He accuses them of putting sugar in gas tanks and pouring cement down sewers. He says a bulldozer was stolen from the River Lofts site, and another disappeared from a construction site in Brooklyn. But he has done business with union contractors on some of his projects. Most notable is the building at 88 Leonard Street, an all-union job where work has begun on the foundation.

Edward J. Malloy, the president of the Building and Construction Trades Council of Greater New York, said he was unaware of any interference by union workers with Mr. Boymelgreen's projects. He said he hopes the two sides can work out their differences. "He is a major new player in real estate in New York City," Mr. Malloy said. "We would like to just hopefully convince him that building union has more positives than doing the work the way it's being done today."

While it's easy enough to read between his lines, how can the reporter, William Neuman, print Mr. Malloy's words without remarking about Malloy's flagrant dishonesty?

Wow

Daniel Weintraub says he's "trying get his mind around this story". Frankly, I don't have much of one left after reading it. What they are going to do is create a leftist cocoon and then wonder why surrounding communties vote the wrong way. I suppose they won't mind much not having to come into contact with red county people. They'll call them stupid:

Hoping to get a leg up on rising home prices, Davis is climbing the economic ladder to reach the next rung of families who need help finding affordable housing: those earning nearly $100,000.

The City Council has approved a plan requiring builders to make 25 percent of homes in new developments affordable for middle-income buyers, defined as families of four who earn $72,240 to $96,320 annually. The rule is on top of an existing 25 percent requirement for low-and moderate-income buyers, who earn $30,100 to $72,240 for a four-member household.

In addition, officials want folks who work in Davis to get first dibs on the affordable homes. Some who don't work, however - including retirees and those with disabilities - also would get preferences. Meanwhile, the city is studying a cap that would limit residential growth to 250 units annually.

There is also a need to keep out the undesirables:

"We're very excited about it," Mayor Ruth Asmundson said. "This council has been saying we want the people who work in Davis to be able to live in Davis to maintain the quality of life we have. They have to have a vested interest in the community."

Appearantly, only the right people are allowed:

"We're talking about folks like nurses, police officers, firefighters, teachers and administrative personnel at UC Davis," Emlen said. "Some professors even fall into that category, depending on where they're at in their tenure."

On the plus side, members of my extended family will benefit from this since they are business, property owners in one of the surrounding exurbs of Sacramento. If the city wanted make housing affordable, they would increase supply. Something that the counties to the north, and my relatives, will be happy to give people.

Edit: I should add what this means. Up to half of all new housing built in Davis will be non-market with restrictions on who may buy these units. The proponents have particular people in mind as to who could get them. What this means is that the non-controlled housing will be high-end and affordable only to the well off. This is a form of a tax and some recent studies have shown to be significant. The other housing may end up being market priced, but of lower quality and restricted on who may purchase beyond income requirements. In other words, the middle will end up being squeezed out with only high end housing and lower quality housing being built. What surprises me is how blatantly discriminatory the preference is.

More Violence in Chixoy

If your land--and the land of all your neighbors--has been confiscated by the government, and you are all given shoddy replacements, your options are limited--that is, unless you live in Guatemala:

GUATEMALA CITY (AP) - Hundreds of angry farmers seized Guatemala's largest hydroelectric dam Tuesday, threatening to shut off power to large parts of the country unless the government agrees to return nearby lands to them.

The farmers forced their way into the Chixoy dam complex in the northern province of Alta Verapaz, seized the control room and were trying to force employees to close the gates that supply water to the facility's turbines...

President Oscar Berger urged the farmers to hand over the facility. "This is no way to negotiate or solve conflicts," Berger said.

The farmers are demanding the institute give them land around the dam. The agency expropriated that land - and gave residents other plots - in order to secure the dam's watershed and catchment basin.

However, the estimated 500 farmers say they were given land of inferior quality in compensation.

The takeover of the plant, which supplies about 60 percent of the country's electricity, comes on the eve of a deadline set six months ago by various peasant groups for the solution of the problem.

You might remember the Chixoy Dam Massacres, even if only because the survivors wanted the World Bank to pay reparations for financing the project.

This is what the state of nature looks like, and it ain't pretty. I am uncertain how one is to "negotiate" with a government that was complicit in murdering 444 of 791 of your fellow men, as they tried to expropriate your land.

Planned Communities & Wi-Fi

I had never thought to just park the car in the middle of Cameron Station and see if there are wireless signals I could connect to.

Turn off engine.

Turn on computer.

Seven unsecured wireless networks with internet access--including one from Cameron Perks Coffeehouse!

I'm sad to say that the lack of network security doesn't surprise me. But if someone doesn't protect their wireless network, are they implicitly giving permission for anyone to use it? Can an unprotected wireless network owner be held liable for damages that their wireless networks cause to connecting computers, even if others connect without explicit permission?

Tricky Transaction Cost Strategies

As some may or may not remember, I recently relocated to the Washington, DC area (Falls Church, so stress on the "area" for those who don't know the layout). Not having the time or capital to invest in buying, I was once again plunged into the ugly world of renting an apartment.

I found a place for a price I was willing to pay and just moved in. During the process of investigating the place, I was told repeatedly that the management company had a hassle-free, 30-day, don't-like-it-you-can-leave-for-free policy. At first I thought, well, ok, that's nice. But I didn't think much about it until later.

Later, of course, when I was considering taking them up on the offer and getting out of the place I now find myself. The apartment is passable, but has some features that, on the margin, would put it below other places I had seen. Of course, I didn't know of these until I moved in.

Which, conveniently or inconveniently depending on which side of the table you're sitting on, is when I thought more about the 30-day policy. While it's pitched as a way to guarantee that "you'll be happy" with your home, it really does something much different: it prevents the management from having to be responsive to situations that are brought up during move-in.

In both time and money (though mostly money), it's not worth it for me to leave, despite the numerous problems I've encountered. None of them make the place "unlivable" by any means. They are, however, enough that I sought out plenty of people to complain. In the midst of an argument, I realized what was going to happen should I suggest that I wanted to leave. "Fine," I heard the likely reply "we'll get you your security deposit right now."

The cost to the management company is very small should I decide to leave, especially when the housing market is as tight as it is here. I, on the other hand, have to face considerable costs should I wish to pack up again, find a truck or movers, locate a new apartment, and get out of the deal. And I'm on the low end of the spectrum of this situation. Recently, in the management office, I witnessed a similar problem being voiced by another tennant: a blind man with a seeing-eye dog that had been given a place without specific features he needed. His ire over this was met with cool patience: he is always free to leave if it's that bad. I didn't see how it worked out in person. Rather, when I went to voice my own complaints, each person in the leasing office mentioned to me that he had stayed (they knew I had seen it, and at least pretended to be upset that it had gotten to that point).

"That's no victory," I said. "In fact, it probably simply reinforces your poor performance." I spoke calmly, but could tell the manager was offended. I tried to explain the problem: the guarantee dramatically lowers the cost to them when someone is very unhappy because it is included in every contract that the lease can be nullified within 30 days. The fact that the residence company only has to hand over the small check (they don't require a full month's deposit) means they didn't lose out on much in principle or interest. And the time to end the contract is very different than a long argument between landlord and tennant about the condition in which the apartment ought to be when moving in takes place. In contrast, the blind man would have to begin his search again for a place that fit his needs, then go through the process of packing and moving all over again (which, I'm assuming, is quite a bit more of a hassle than it was for me). Knowing that, the company can let the problems with the current place be more significant than other apartment complexes, and still retain tennants. We're free to leave because it's so easy for them to end the contract, or to dawdle while answering service requests that they just don't face much cost in turning the apartments over.

To which the manager told me, "No, the guarantee is there only for your protection."

Local Redevelopment

The economy in the Washington DC region continues to boom with incredibly low unemployment and incredibly high housing prices. Outlying regions are growing housing as fast as slow-growth restrictions permit, but inner regions, like Alexandria, VA are almost completely developed. Hence, old commercial sectors--like Landmark Mall--will be razed and replaced with a combination of dense housing and open-air shopping. They will also add housing to a BJ's wholesale club:

Freeman execs say they would like to take advantage of zoning that would allow for a residential component to the 120,000-square-foot BJ's Wholesale Club but would need approval from the city and the store, which has options on a long-term lease. Although the company has a residential division that builds golf communities, it has never done an urban project and is considering potential development partners.

San Francisco Real Estate Blog

Via Jeff Jarvis comes Bill Quick's SF Real Estate Blog. It's concerned with real estate in general, as well as the SF market. Check out this post about real estate blogs in general:

If news (as dispensed by the blogosphere) is a conversation, as Jeff Jarvis of BuzzMachine claims, then we in the real estate fields should be natural participants in the ongoing chatter among ourselves, our clients, and our vast information resources. Blogs are the best way I know of to start - or take part - in that conversation.

Any resource that helps people understand the rules and responsibility of acquiring, owning, and dispensing with property gets my approval.

Preventing Foreclosures

Many mortgage companies are offering low-cost or no direct cost involuntary job loss insurance along with mortgages, as a means of cutting down the transactions costs of foreclosure.

The move to attach monthly payment insurance programs to home loans is not a case of sudden corporate charity or heartfelt compassion for the unemployed. It's a bit more complicated. When borrowers lose their jobs because of layoffs or overseas outsourcing, their mortgage defaults are financially painful for more than their families.

Lenders and mortgage insurers get hurt, too. When unemployment-triggered defaults extend for months and lead to foreclosure, the costs for lenders and insurers can run into the tens of thousands of dollars per home. As a result, many are now eager to provide backup payment insurance designed to keep the homeowning household afloat -- and in the home -- until the breadwinners find new employment.

Amtrak and Opportunity Cost

Amtrak owns Penn Station, and doesn't see why it should move next door and rent the planned Moynihan Station:

Amtrak notes that it already has a sweet rent deal.

‘‘We own Pennsylvania Station, and we pay no rent,’’ Mr. Black said of the current station below Madison Square Garden. ‘‘We wouldn’t want to incur new rent.’’

I shouldn't find it incredible that Amtrak representatives don't understand that owning property is not costless, but I do.

While it's true Amtrak doesn't have to pay to rent for Penn Station, it's also true they don't collect rent from another company. The real cost to Amtrak of owning Penn Station is the highest sale price or rent they could receive if they were to put it to its best alternative use.

Amtrak representatives seem to preclude the opportunity of Amtrak profiting by selling or renting Penn and moving to other rented quarters?

In fact, that was part of the original plan:

According to Mr. Gargano, Amtrak had committed to paying about $3.9 million a year for the space. He also suggested that Amtrak could lease its current space below Madison Square Garden for more money than that.

Of course it's also possible that this is just strategy:

Amtrak may simply be bluffing to get a better rent deal and that the agreement is not in any danger after all.