I don’t mean for this to become a real estate blog – there’s plenty enough already, but if there’s one thing that bugs me, it’s the incorrect use of statistics.

Recently I received a well intention e-mail that was a forward from Joe Brown, President of Coldwell Banker Residential Brokerage, Silicon Valley~Monterey Bay. A full version of the e-mail can be found here and other real estate websites, but here’s the part that really bugged me:

We are part of an area where jobs are very strong and the ability to buy a house is high.  The housing affordability index is now at 25% for California (up from 14% no so long ago).  This is greatly due to prices decreasing in outlying, less desirable areas of the state.  More particular to our local areas would be folks who are deciding that it is time to invest their fortunes in real estate.  When one gets a roof over his/her head, stability, and a tax write-off, sooner or later one realizes the excellent investment that real estate is.

I’ve bolded the part that I want to discuss. For those of you who aren’t familiar with why housing affordability for first time buyers is important, think of housing like a pyramid: first time buyers have to enter the market, so that people who own can sell their properties, and use that money to buy (presumably upgrade) to a bigger/better property. If the housing affordability index too low, it means that there aren’t enough potential first time buyers, which means the pyramid is endanger. Think of first time buyers as plankton (the graphic at the top btw.)

Ok, so now that we know why this index is important, let’s look at the numbers. It is claimed that affordability in California has gone up from 14% “no [sic] so long ago” to 25% now. Pretty dramatic, huh? This is excellent news right?

Well, let’s take a look at the press releases from where this data is derived:

That’s right – in the two time periods, the assumed downpayments went down, the purchase price went down, and interest rates went down as well. Hence, affordability went up dramatically.

To explain why that is, here’s the verbatim text from the press release for 2006:

The minimum household income needed to purchase a median-priced home at $548,430 in California in December was $134,200, based on an average effective mortgage interest rate of 6.33 percent and assuming a 20 percent downpayment.

…and for 2007:

The minimum household income needed to purchase an entry-level home at $480,670 in California in the first quarter of 2007 was $96,910, based on an adjustable interest rate of 6.3 percent and assuming a 10 percent down payment.

Ah hah. You see, in 2006, it was about purchasing a “median-priced home”, but in 2007, it is now about a “entry-level home”. 

Technically there’s nothing wrong with changing the assumptions. That’s fine. 

But is it really right to make this comparison?

The housing affordability index is now at 25% for California (up from 14% no so long ago).

As I continue my search for a new rental somewhere in San Carlos and Belmont, I recalled some experiences that my colleagues and friends have had renting in Redmond/Bellevue, WA and some of my visits there.

Let’s just say that if I were moving from WA to the Bay Area, I’d be pretty appalled at generally how old, small, unkept, and cruddy most of the rental stock around here is. The times I’ve visited rental homes there, I’d always been impressed by how nice they were.

But the most interesting difference is this rumor I’ve heard that some complexes actually waive the security deposit if you’re a Microsoft employee. If that’s true, that completely blows my mind . Having rented in California for 7 years, and knowing many other rents, I’ve long come to expect that security deposits were nothing more than an additional $300-$1xxx on revenue for the landlord. Could this possibly mean in other places, you actually get back your full security deposit? Or that it’s actually held for… security?

Of course, there’s also the general price difference (~$1380 vs ~$2170 for a comparable 2 bedroom) – but that’s no surprise.

Between that and the income tax (0% WA vs 9.3% CA), I’m sometimes surprised more people haven’t moved to Redmond already. Me? I’ll never move there – people drive too slow there.

Sometimes I wish California wouldn’t require two party notifications for recording phone calls - that way, I could record all phone conversations. You never know what you might just miss.

For example, tonight my fiancee and I were driving around San Carlos and Belmont, looking for possible apartments to rent. We came across a sign that offered 2 bedroom/2 bath/elevator on the 1200 block of Cherry St, between Laurel St and Walnut St. A picture of the complex is to the right.

Since I was driving, my fiancee called. I thought it was a bit odd that she ended up saying things like “No, we’re not married yet, but we are going to be soon.” and “We’re in our 20′s.”

And that’s where my wish that all calls could be recorded comes in.

Those answers make sense since the manager of the complex had grilled her about our ages, our marital status, and then hung up immediately after saying that it was an “old” complex and that we’d be having babies soon. Wow! An apartment complex manager and fortune teller. I think it would’ve been fun to have captured that on record.

Looking at the Craiglist page on Fair Housing and the relevant parts of California Government Code, it appears this may have been discrimination – or it might not have been. Either way, I don’t think we’ll be living there.

This just adds to the list of other indignities I’ve faced when it comes to real estate. At this point, I think I’d rather deal with car sales people, than hear more ridiculous exaggerations about square footage, cleanliness, and parking availability. I’m just thankful that I’m not looking for a place to rent in Manhattan (which means meeting shady people at corners, with envelopes stuffed with cash), nor have I had to sign a contract to promise to take care of the squirrels and have my (non-existent) children paint pictures of a house to as part of a offer. Sheesh.

The Internet has done wonders in getting information to people. In terms of commerce, it’s really done an amazing job of reducing the “matching” problem – connecting buyers and sellers. It’s done a great job and reducing the need for a middleman, enabling buyers and seller to have better results. Plane tickets, hotel reservations, clothing, computers, insurance, contact lenses…

And then, there’s real estate.

A former colleague of mine tried to buy a house recently without an agent – here are some relevant quotes from his most excellent and informative tale:

Mike’s Lookout » Blog Archive » Adventures in Real Estate – Buying without an Agent
In January, I embarked on a quest to buy a home without using a real-estate agent. The reason for doing so is not because I thought that agents have no value, but just because I didn’t value their services at their asking price of $35,000-$45,000. (3% of $1.5M is $45K) There are very few things that I ever spend that much money for; and a few weeks of part time service from an agent does not seem worthy of that price. $4K to $5K seems like a more appropriate price.

[snip]

The offer is the hardest part of the process for several reasons. First, you may be dealing with an Agent that is fundamentally opposed to buyers working without agents. While Agents are legally required to present your offer to the seller, they are not required to put a positive spin on it. So, when you run into these agents, your offer is may be rejected just because you don’t have an agent. I had this happen to me at least once. The Agent first claimed that what I was doing was illegal. When ultimately convinced that my offer was legitimate, she took it begrudgingly. Nonetheless, the offer was rejected.

[snip]

In my case, I was ultimately not able to buy without an agent. We put in four offers on our own, none of which were ‘low-ball’ offers. Three of the four offers were for over-asking, and one offer was for more than $100K over the asking price. However, all four offers were rejected.

Unfortunately, each offer we made was accompanied by at least 4 offers from other parties. When the seller has multiple offers to select from, unless your offer is considerably higher than the others, the seller is likely to take a ‘traditional’ offer in favor of yours. From the seller’s point of view – and this is fair – your offer is riskier. You don’t know the process as well as an agent does, and maybe the reason you don’t have an agent is because you are less serious than other bidders. The seller doesn’t want the transaction to fall through, and taking someone else’s offer may be the safest bet, even if they are leaving a small amount of money on the table.

So, in conclusion, I don’t think you’re likely to buy a house without an agent if there are competing offers. If yours is the only offer, I do believe this process can work, but it is a lot of work to you.

Sadly this tale isn’t uncommon. In fact, instead of looking for ways to enable the Internet to provide more information to people – well… look at what’s going on: Arizona is trying to ban Zillow. Real Estate brokers refuse to show properties to people using discount brokers. There was even a story (can’t find it right now) about Realtors hiding properties that were listed by For Sale By Owner folks. All to, presumably, protect their old way of doing business and serving as a middle-man.

I’m not sure that we can count on our government to fix this situation anytime soon – look at #11 on this list:

LobbyWatch – The Center for Public Integrity

#	Companies and Organizations	Reported Lobbying
1	Chamber of Commerce for the U.S.A.	$204,614,680
2	Altria Group Inc	$101,220,000
3	General Electric Co.	$94,130,000
4	American Medical Association	$92,560,000
5	Northrop Grumman Corp.	$83,405,691
6	Edison Electric Institute	$82,866,628
7	Verizon Communications Inc.	$81,870,000
8	Business Roundtable	$80,380,000
9	American Hospital Association & State Affiliates	$79,205,772
10	Pharmaceutical Research & Manufacturers of America	$72,720,000
11	National Association of Realtors	$68,810,000
12	ExxonMobil Corp.	$59,672,742

(And before someone calls me a hypocrite, yes I do realize that the company I work for shows up 12 spots below on the list.)

Now I’m sure there are honest and ethical real estate agents – that it’s a few bad apples that are spoiling the cart with their bad behavior above… but in this day and age, should real estate agents be like travel agents – moving up the market by serving those who have very specialized needs?

If you can trade stocks for free now, why do you still have to pay 6% to sell a home?

Finally, as a buyer, this should definitely concern you – after all, as Mike notes – you’re paying for this 6% for the life of your home in the form of taxes:

The saddest part of real-estate commissions is that you pay them every year after you purchase. In addition to paying $90,000 up-front for real-estate agents on a $1.5M home, you’ll also pay $1080 each year in increased taxes as long as you own your home, since the agent’s fees are rolled into the assessed value of your home!

(Note: for non-Californians, a $1.5M home isn’t unreasonable. Click here to see some.)