Wisest of the crowds

The Washington Post has a hilarious (but real) article discussing the inside of New Century Financial - the sub-prime mess to end all messes that is now bankrupt. I first read about the article at Inman blog, entitled You WILL play ball. Below is a WP sampler:

“The stress in that place was ungodly. It was like selling your soul,” said Hardiman, who worked for New Century in 2004 and 2005. “There was instant notification to everyone as soon as you rejected a loan. And you dreaded doing it because you paid for it. Two guys would come with a bat, and they were all [ticked] off because you cut their deals.”

I have posted several times about the conflicts between the appraisers, lenders, and agents here, here and here. Bottom line is that it may be time for buyers to hire their own appraisers. This doesn’t represent a new expense but rather a disaggregation of a current expense. If a buyer uses cash, rather than having the costs buried in other transaction costs, than the buyers can control quality and appraiser can get on with their jobs with conflicts.

Also, we might consider the conflicts from the lending side as to communicating affordability to consumers. Does it make sense to expect a lender, who is commissioned based on the number of closed transactions, to actually protect the customers side of the equation? I suppose the logic is that its the banks money but in truth, lenders sell loans and loan agents get new jobs. So the buck gets passed, Wall Street just play the odds (and gets a commission), and the financially illiterate get stuck holding the bag. Nothing new from “big business” but certainly NOT something part of the new business models powered by the internet - including ours.

The solutions to these and other vexing consumer problems are being addressed by market forces. Entrepreneurs like us see this problems as opportunities to add value to people by being open and transparent about our businesses. We put people at the center of our model and drive everything to satisfy this focus. Gone will be the days when trapping and or tricking a customer into a piece of business is THE model. Gone will be the oligipoly’s upon which many incumbent industries are based. Power is being pushed down to people and the economics will follow. Selling your soul in sub-prime, or any other industry, is a dinosaur waiting to happen. A lot of other charts will look like the one below over the next few years.

Kenneth Harney pens another interesting piece entitled How ’systematic inattention’ led to subprime fiasco. My favorite line:

Ninety percent of the appraisers in a 2006 national survey by October Research Corp. said they had experienced threats, nonpayment of fees and other forms of coercion. Many said they had lost business by refusing to play the game.

Harney also details a few scams worth a read but perhaps the key point is that the commercial incentives of banks and other intermediaries are wrecking havoc on the reputations of appraisers. Is it time to re-examine incentives and better structure the industry? Should buyers hire appraisers rather than bankers and agents? I discussed this earlier here.

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.

Marcie Geffner of Inman news has a great article (subscription) about the conflicts and misaligned incentives that appraisers face today. I discussed this in an earlier post entitled “inflating appraisals” but essentially I agree with Marcie’s assessment about the state of the industry. Appraisers get pinched from all sides because those people that hire them are incented to get it wrong. A bank lender gets paid on volume. A real estate agent gets paid upon close of a transaction. A seller get more money. A buyer gets a loan, a house, and a sense of fairness (admittedly a false sense of fairness).

That is not to say that all appraisals are suspect or that there is malicious intent at work. But when relationships in the ecosystem are structured such that there will be implicit or explicit pressure on appraisers, the weakest ones will likely fold putting greater pressure on the vast majority who work hard to get it correct. So it is really about shielding the analysis from the commercial motivations of others.
Marcie doesn’t quite get our model correct but that’s ok because it gives me the opportunity to pitch it. Marcie is right to suggest that buyers are probably in the best position to fix the situation by hiring their own appraisers. This is where My-Currency comes in because we identify the experts. If you are an appraiser, how will you ever reach consumers? Through an agent? No, that doesn’t quite solve the incentives issue (”get me the value or I’ll find another appraiser!”). Through a mortgage lender? No, same problem!

My-Currency gives appraisers a way to demonstrate their skills; talk about what you know; answer questions; and make value predictions about houses for sale or zip code indexes (value per square foot or days on market). My-Currency enables appraisers and other housing professionals to show the world what you know and help you connect with these customers. We offer a platform where professionals can build professional currency and hence virtual reputation.

Please let us know what we can do and stay tuned because we have new things to announce that will further our goal of serving housing professionals and consumers.

One of the nice things about creating something that forces people out of the intellectual cave is listening to massive justifications for crap.

For example, one thing that a few people in real estate industry are in love with is this idea that the value of a home is solely determined by the buyer and seller at a negotiation. Further, some are crass enough to suggest, essentially, that value is a nice concept - but that transaction prices are king. Okay, that is true in a vacuum. It is the equivalent of saying the cake is chocolate because the frosting is brown.  The cake can be anything and certainly no one would suggest that the frosting is the cake (except my three year old daughter).
Why do I say a vacuum? Because people enter a negotiation with information that they receive from all around - from every conceivable person they know. That information comes explicitly and implicitly. In economics its called “signalling“. The idea is that we receive information signaled from others during a transaction. I think you are not paying enough for my car, I shrug my shoulders and tell you as much. Do I really think your offer is low? If there were several people between you and me in the negotiation could the signal lose its strength or have its meaning altered?

So our actions are a function of this signaling effect. When you rely on signaling from someone, there are many problems, the largest being:

- How can you, the receiver (the principal, who is usually the buyer in the transaction), trust the signal to be an honest declaration of information?

The problem My-Currency’s CrowdValue technology solves is that we bring to the surface this information signaling that is happening underground. That is, we are putting you into the information loop so that you get all the information signals in an unbiased manner. We know there are people who have incentives to send you the wrong information signal. That is, people who use signaling to manipulate you. Markets (e.g., CrowdValue) come closest to solving this signalling problem because it is an open mechanism that serves as a battleground for opinions where information collides until we have reached a neutral and aggregated signal - the price. Furthermore, markets constantly adjust to new information - new signalling.
Bottom line is that markets enable transparency - transparency for all the information that is circulating and perhaps being manipulated before it gets to you.

Is this good for housing pro’s? Yes because people will have more faith in the system and hence transact more frequently. It also gives pro’s an opportunity to show the world that have information and know how to interpret it - by taking actions that are measureable against real outcomes.

So who determines housing prices? Everyone. Everyone connected to the buyer and seller and everyone connected to those connections. Negotiated transactions are final manifetations of the whole network - the whole process.  Are consumers getting all the information signals? Mostly no (hence the popularity of AVM’s). Is information passing through the hands of people who have opposite incentives and hence opening the question of whether it is an honest declaration of information? Come on, do I need to spell it out?