How to Boost Home Sales Permanently…at No Taxpayer Expense

September 7th, 2010 by Al Lewis (alewis)

To boost housing sales, the government has tried every kind of intervention in the market except one:  facilitating it.   


Typical impediments to a functioning market include high transactions costs, lack of transparency in those costs, and misaligned incentives.  Real estate brokerage fees are poster children for all three.   Removing these three impediments would create a vibrant market, with more liquidity, which in turn means more sales.   The good news is the entire housing market can be reconfigured by a single rule change:  tying the level of the Fannie Mae down payment requirement to the level of the embedded commission paid by the seller. 



Once buyers realize that the size of their checks depends on the size of the seller’s brokerage commissions, they will flock to the web.  Once sellers see buyers home-shopping en masse online, most will themselves migrate to the web.  Replacing 5-7% commissions with internet-level transactions costs means higher proceeds for sellers but lower prices for buyers…a sure way to turbocharge sales.


The bad news is that, absent this rule change, these three impediments will continue to stall this long-overdue migration.  While every other high-cost broker-based marketplace has largely shifted to the web, the real estate brokerage industry has maintained these impediments, in order to perpetuate and even expand its full-service brokerage model.  40 years ago you used one broker to buy securities or a house.  Today, you normally use none to transact stock, but two for most real estate transactions.  Hence impediment #1: high, labor-intensive, transactions costs.


Transactions costs don’t stay high on their own.  Something has to keep them up, in this case the second impediment — lack of transparency.   Real estate brokerage fees are invisible to the buyer despite the fact that they can add six figures to mortgage payments over 30 years, making them not just the biggest hidden expense in housing, but in most people’s lives.  They are included in the price of the house, broken out only in a single line in a single closing document.


The third impediment is that lack of alignment between buyers and “their” brokers:  While several internet sites list houses for sale by owners, few brokers advise their clients to look online because sellers may not pay their commissions.   Yet homebuyers assume their broker is working on their behalf and they figure their broker is free anyway so why not let them do the initial screen?


Clearly, reforms are needed but realtors are regulated by states, and most state regulatory agencies are run by – you guessed it – realtors.   This proposed change in down payment rules would allow federal lenders to circumvent intransigent state regulatory agencies altogether because it is a lending innovation not involving brokerage regulations.


An example might help to see how one simple lending innovation could reconfigure the entire marketplace:  Assume a 10% required down payment in a market with 6% commissions.   At closing, the buyer’s true equity – meaning the lender’s protection in the event of foreclosure – becomes 4%.  If the lender accepts a 4% cushion anyway, what if government lenders replaced the fixed 10% down payment with a variable one of 4% plus the real estate commission?   Lenders also use the higher down payment requirement to “signal” ability to pay, so they can still make people show up with a certified check for 10% and lend back up to 6% on the spot, or automatically activate a 6% line of credit once the borrower has established a track record of on-time payments.


This policy change would not cost the federal lending agencies or taxpayers a dime – indeed, it would probably save them money by avoiding foreclosure sales due to the 6% added buyer liquidity — but imagine the impact of this simple change on the marketplace, especially if banks followed (which they would).


Price sensitivity would soon work its behavioral economic magic, as few buyers of, for example, a $200,000 house would put $20,000 (10%) down when, with a little extra effort finding online sellers, and perhaps some advisory fees on their part, they could pay the minimum $8000 (4%) instead.   Sellers, knowing that buyers now have a major incentive to shop for houses online, would list online, “tipping” the entire market.  Web entrepreneurs would accommodate this shift, charging buyers and sellers internet-level fees to be matched up.  The archaic broker-centric model will be supplemented and ultimately supplanted by much less expensive advisory, marketing and, of course, appraisal services to support homebuyers and sellers. 


Just like in the stock market, where commission deregulation triggered a trading boom that has ultimately helped boost transactions and hence liquidity exponentially, drastically reduced transactions cost would increase housing sales substantially.  First-time buyers could enter the market without taxpayer subsidies.  Sellers could realize higher net proceeds while buyers pay a lower price.  Investors and builders would flock back into the market, because transactions costs are a huge percentage of short-term investors’ total costs.    Homeowners could sell out faster if their income prospects change, and could move more easily as job markets shift. 


Of course, people who want full service brokerage could continue to get it, whether as sellers or buyers.  The difference is that full service becomes an option, not a de facto obligation.   Meanwhile, the rest of us will share in the benefits of low transactions costs – smaller down payments, more choices, faster and easier sales, more mobility, fewer foreclosures, and ultimately more money in everyone’s pockets.

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3 Responses to “How to Boost Home Sales Permanently…at No Taxpayer Expense”

  1. littauergal Says:

    your best idea yet. you need to tell someone other than the 20 people who read your postings.

  2. thinkoobfan Says:

    the Democrats are owned by the realtors — this wil never happen

  3. mikeq Says:

    really great, Al. Your best ideas make you sound like a Republican. Keep it up!

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