Wisest of the crowds

No not what you are thinking - not social, ethnic, or racial discrimination. Redfin discriminates on price. PRICE! The 60 minutes piece was a yawn for me personally but it does give Americans the right to start to push back. See the posts and comments at TechCrunch, Redfin, Inman, BloodHound for an early read. Whether it becomes a consumer zeitgeist or fades will be seen but the open question is this: will price variation become mainstream in american residential real estate?

There is an old economic idea called price discrimination that is popular with every micro-econ 101 student, and their professors, that says you reach more customers and make more money by offering variation in pricing. Its sort of definitional for anyone who believes in supply and demand. It works like this: when you go to see a baseball game, there are a 100 variations in pricing to meet everyones needs and to tap into every possible cross section of demand. For example, there are ticket prices for corporations who entertain in luxury boxes and ticket prices for those who mostly prefer a beer and some sun in the bleechers. Ticket prices for season holders and ticket prices for last minute shoppers. In short, EVERYONE can have their demand met for baseball. A small example with the mighty SF Giants here.

What would happen if every ticket was the same price? Mayhem and lost profits. Some people willing to pay more for MLB tickets will transfer their money to an underground marketplace that will use price discovery to allocate tickets. Meanwhile, people at lower price points will be shut out resulting in further lost revenues to MLB. Thats why we have pricing variation. Its better for everyone because everyone gets an allocation and the business folks maximize their revenues.
People might argue that the price variation exists is in the underlying house price and not in the intermediary execution price (brokers & agents). If that were true, then why did trading volume in financial markets explode when electronic execution came into acceptance? (For a slightly more technical explanation {very slightly!}, see my earlier post here).

Redfin discriminates. So do I. It makes sense and it is better for everyone. Many people have commented that Redfin basically passes their work load to external agents to facilitate their transactions and to make their business model work. I can certainly see how that might play out. But if the consumer is footing the work load “bill”, don’t they deserve to get a rebate? Don’t consumers deserve the right to choose their level of service? In the end I believe that consumers will still depend on full service agents because housing is complicated and its something we do rarely. But by offering price variation, we get to grow the pie. Anyone else out there a discriminator? Anyone else want to make more money?

Yesterday, Russel Shaw at Bloodhound Blog posted a note he received from a young person sniffing the real estate industry. Entitled “I’ll bring you a big basket of cash if you’ll let me sell your house for free” Shaw responds to the young persons overt question whether the industry is crowded and the covert question as to whether pricing can be used as a competitive weapon. Shaw tells the young person not to use pricing to differentiate (and yes there are too many agents). This got me thinking. If EVERY industry has price discrimination, why doesn’t housing? (yes there are firms like Redfin and FSBO’s but traction is light) This is not whether orange people get better prices than purple people. Not that kind of discrimination. This is you using e-trade for stock execution rather than Morgan Stanley. Does variation in transaction costs make sense for housing?

I am not an economist but here goes.

The graph above is what Shaw is saying. There is one price for transactions (or something like that) and that you should stick to it. An economist would say that given the demand at that price, sales will be S1. Lets see if we add new prices…..

So by adding new prices, we tap into a larger amount of the total demand. From an industry perspective, price discrimination (price variation) yields HIGER total number of transactions. This is why airlines use it. This is why software companies use it. This is why EVERYONE uses it. Ever clipped a coupon? Ever cashed in on frequent flier miles? This is price discrimination at work.

So the one thing to consider that might debunk this basic economic notion is whether the demand curve (in blue) is in fact oddly shaped. Lets take a look….

So if demand is the same regardless of price then Mr. Shaw is correct. In fact, if demand in the real estate industry is oblivious to transaction costs than Mr. Shaw and all the other realtors are bloody idiots for not raising prices. So I guess the question is this: is demand for housing sensitive to transaction costs or not? If it is, like most things, then everyone stands to be better off by offering differing levels of pricing (and service). If demand for housing is not sensitive to transaction costs…then put your orders in for those new german cars because margins are about to get much better.

Giddy up little doggy!

Since returning to SF from London a little over a year ago, my wife and I have delayed looking for a house until we have decided where we want to live. Our eldest child just went through the interview process in the private schools (San Francisco public schools are poor with only a few exceptions) and lucky found a spot so we are only now truly testing our will to raise our kids in the City.

I spent all day looking at single family houses across the city’s open houses. Here’s how my search went:

-Started with Google base via My-Currency (developement site) for listings

-Re-Checked listings at SF MLS (this site sucks!)

-Re-re checked listings at Trulia and Redfin

-Re-re checked listings at various local firms

-got annoyed at the fragmentation of listings

-Found a few properties

-Checked for tax & prior purchase records at Zillow (some there, some not)

-Checked analytics at My-Currency

-Checked analytics at Trulia

-Read Robert Shiller’s assessment of housing and got scared (recommended reading:”Long-term perspectives on the current boom in home prices”, March 2006)

-Tried to find a good open homes site and failed so grabbed the SF Chronicle Sunday pull-out (yes paper…I still read paper).

-Got annoyed that I had to type in the addresses of a bunch of properties to decipher agent language about location (hint to one exuberant agent: Lyon at Geary is NOT Lower Pacific Heights jackass - not even close!)

-Reviewed some of the price predictions for square feet in various zips in our alpha site.

-Got annoyed again that this is taking so long

-went to open houses

-got frustrated with descriptions that are BS (hint to another exuberant agent: a large closet off of the kitchen is NOT a bedroom unless your dog or cat need bedrooms in your house)

-got pitched by 10 agents (unsuccessfully).

-Learned that one property sold for a whopping $600k over to $3.5 (this may be a lie since the agent was using it to justify her pricing)

-Came home after a full day of research and tours exhausted and feeling no smarter

We real-estate entrepreneurs have a lot of work to do to get this right because this is taking too long, there is still substantial holes in the listings aggregation of all sites including the MLS, and is is still difficult to get things down to numbers. Here’s my review: For listings go to Redfin (only a few cities) or Trulia. For tax and property records Zillow or Redfin. For statistics Trulia. For open house, go fish. For area price predictions and agent reputation, My-Currency (coming soon!)

This Redfin Consumer Bill of Rights thing got me thinking …Glenn has it all wrong. Here is my list:
1. Shut your pie hole! You get the services we prescribe. One size fits all.

2. Shut it! The way your agent makes money is his or her business even if it results in misaligned incentives ( this is an economics doohicky that means giddy-up!)

3. You are committed to an agent if that agent saw you first or called it first. Next time wear your cloaking device idiot.

4. Your agent’s job is to put lipstick on the pig. All other services are redundant and therefore easily dismissed….cut your own #$@!ing grass!

5. Agents are trained by Jedi Masters to find that singular point of harmony between a buyers and sellers interests….plus money more is better than less (duh!).

6. There will be no commission refunds. Full stop.

7. The only houses for sale are the ones your agent takes you too see….trust them implicitly.

8. Have an open discussion about a house for sale… as long as it is in your toilet and by yourself. We will not tolerate free speech in NARmerica.

9. See only partial information available about a house for sale. Too much information confuses you silly little consumers. Here, have a lollipop!

10. Be sure your agent will show your house to everyone but the cheap bastards that will never pay the sticker. Good agents can tell..trust us.

Redfin, a real estate start-up that is known for shaking things up a bit has launched a new initiative entitled The Real Estate Consumer Bill of Rights. Redfin CEO Glen Kehlman shows a lot of courage and perhaps even more media savvy by undertaking this effort. I will spare you the details, so here is the list without the explanations he provides:

1. Choose the services you pay for.
2. Know how your agent makes his money.
3. Know when you are committed to an agent.
4. Know what services your agent will provide.
5. Have an agent that represents only your interests.
6. Know the commission refund you can get before you buy a house.
7. See all the houses for sale.
8. Have an open discussion about a house for sale.
9. See all the information available about a house for sale.
10. Be sure your agent will show your house to everyone.

A lot of people have spent considerable time weighing in. Notable positive reviews include Kevin Boer of 3 Oceans Real Estate ,and Joel Burlesome of Future of Real Estate. Notable undeclared bloggers are and Ardell Dellaloggia of Rain City. Notable undeclared bloggers include Christine Forgione of NY Houses for sale. A thorough and negative review comes from Greg Swann of Bloodhound. All worth a read.

This is a complicated issue that I am still assessing but in principal, I like anything that gets people talking about making things better for us consumers. In this regard, I support Glen’s efforts.

There are some areas that deserve some more thoughtful consideration, particularly when the answer results in a request for MORE legislation. My experience with private Board deliberations versus on-the-ground reality for some of the largest financial institutions in the country is that big business uses big government to create advantages for themselves vis-a-vis their competitors (large and small) and the silent majority of consumers. There is nothing Machiavellian about this reality. Ours is a system that wants all sides to speak-up. Unfortunately, those who speak the loudest (usually via money) get heard. So creating more layers of laws means we make change more difficult and less likely. Also, we cede legislative influence to money politics. When was the last time you paid into a lobbying fund?

Glenn can’t fight the fight with money so he is enrolling the people. Bravo! Is it good for him? Yes, absolutely. Discussion of this is a waste of time. Why else would he propose it? Does this matter? No! Glenn has started a discussion and I am much better informed as a result (are you?). Do I see the validity of some of the arguments from opponents such as separating commission paid by buyers and sellers so that we get better align of incentives and flow of money into the ecosystem? Yes, very much so! So let’s keep the discussion alive and thriving and then let’s demand some changes where we agree. Glenn, thanks for getting us started.