Author: admin

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Not sure how we can return to 2% and not stay between 3% to 4% inflation but a much bigger threat is on the horizon.

Looking at the sticky PCI data from the Cleveland Fed we are far from 2% and after two years we should be asking if this is the new norm.

Between decoupling, debt issuance, and demographics facing the US we should start the conversation about what is the new acceptable level of inflation and rates. None of these issues can or will get solved anytime soon. They are structural and political hence not transitory in nature. This is not about ships getting stuck in the suez or a pandemic even if it started that way. They were a trigger and Central Bank Policies were the fuel.

Too much money created inflation. Now we are stuck printing even more debt which will continue to fuel the fire, while geopolitics constrains supply and demographics worsen labor imbalances. While we might not be able to do much about demographics or debt we can do something about geopolitical decoupling that could become an economic disaster if we learned from the lessons of a century ago.

During the interwar years of 1920 to 1929, world exports boomed 83%. By 1929, America became isolationist with the passing of the Smoot-Hawley tariff bill and the start of the Great Depression. By 1932, world GDP declined by 10.1% as tit-for-tat trade tariffs were imposed. By 1931, the UK abandoned free trade with the world and solidified its trading block within the Common Wealth.

During the 1930s, trade barriers aimed to create a defense against the deflationary forces in the global economy versus fighting inflation. There were no demographic or debt problems. Most countries were reducing their national debt levels or had stabilized them and the US under Roosevelt was the exception with growth in debt with the New Deal until 1938-1939 (war run-up).

This time there is no global deflationary trend due to a recession. There is an inflationary trend that will be made worse with trade barriers and decoupling and worsening demographics in developed countries.

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Is a Recession Near?

Those calling a recession, job market and stock market corrections, and lower inflation let me point to the 851B elephant in the room smiling back at you!

The TGA is full and once it starts getting used it will unleash another wave of liquidity onto the market. The government is going to spend a ton of money starting this Summer all the way through the end of the year.

So if you are a bear probably best to take advantage now and put some stop loss. When that 851B elephant is released and starts sloshing around it will pump the economy and asset prices. Commodities are going to have fun rally even higher and inflation flipping on a 12 month basis with no cuts this year. Liquidity through government spending and transfers is going to get unleashed for one more last hooray.

Yes, there are some problems in the economy. 80% percent of the population is broke but still living paycheck to paycheck (still have jobs) and starting to cut back, another 15% are living paycheck to paycheck but still buying $10 Frappuccino’s (upper middle class racking up credit card debt but keeping up appearances), and then you have 5% mostly richer and richer baby boomers (mostly due to asset prices and their spending follows the SP500 index) are living it up being the largest buyers of homes, cruise ship bookings, new cars, air tickets, and services. It’s not bifurcation but trifurcation.

After that 851B is drained and needs to be refunded while reverse repo hits 0 then the fun starts.  2025 will be a very interesting year from equities to treasuries to politics.

Good luck everyone.

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We are seriously underestimating demographics and wealth effect changes that started after 2020.

The pandemic has changed demographics and policymakers have yet to fully understand the implications. When the pandemic hit, a large number of Americans aged 55+ decided to retire due to the health risks.

Since then they have been hit with an unprecedented wealth effect. Yes, the wealth effect that Ben Bernanke and Janet Yellen admitted they did not fully understand pre-GFC. Older Americans got the bulk of the wealth created in the last 4 years in the form of:

1. Stimulus from the pandemic spending craze of the government.
2. A fast rise in home values as they own over half of the existing housing stock (aged 55+).
3. FOMO Stocks and 401k jumped which is continuing and baby boomers are the biggest shareholder demographic group.
4. Social Security payments have gone up thanks to inflation adjustments which hit 8.7% in 2023.
5. Savings, which are again concentrated in the hands of older Americans, are now enjoying much higher interest rates than in previous years.

Older Americans after 2020 benefitted the most from the mother-of-all wealth effects. They of course decided to retire and stay retired, and now more are joining them every day. At the same time, they are spending. While Millenials are splurging on $10 Starbucks frappuccinos, boomers are buying more real estate (largest buyers by age group), booking cruises, traveling, buying cars (largest new car buyer group), and have become the fastest growing group of online shoppers,

The number of Americans turning 65 has hit 11k to 12k a day while children turning 16 has hit a peak. The payroll breakeven pace is now 100k today versus 145k pre-pandemic as Powell stated in 2022. Then you have to take into account the productivity loss of losing someone aged 65 with 40+ years of experience and replacing them with much younger and less experienced workers and that is if companies decide to replace them.

The recent 175k payroll, while hailed as a bad number, is actually a strong number after everyone who lost a job during the pandemic aka those aged 16 to 55 are back and at full employment, older Americans retired and didn’t come back, and more will join them until the early 20230s.

Unemployment is going to have a hard time rising with such demographic pressures. Companies are replacing more expensive older workers with harder-to-find younger ones, productivity growth with start to lag, and more investments in automation/AI will be needed. All of these will continue to push upward pressure on inflation. But at the same time, they now have consumers that are not rate-sensitive.

The wealth effect that got us into trouble before the GFC is misunderstood. This time we don’t even understand where the inflation we are trying to fight is coming from and feeding it with higher rates.

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Seller Agent Commission Value Breakdown and How Should Seller Agents Set Commissions?

What is value? It encompasses both tangible and intangible aspects and can be very subjective but In economics and business, value often refers to the utility, satisfaction, or benefit that a product, service, or asset provides relative to its cost or price. In economics, it can be measured.  When using an agent, sellers should understand they are paying for three things and not necessarily what they are told they are paying for:

  1. Access to the Marketplace: Over the last 100 years the real estate industry has been shaped to create a market run by brokerage companies and Multiple List Services (MLS) owned by brokers. To sell your home and receive visibility, the industry created rules, regulations, and a marketplace exclusively owned by brokers. Even Zillow and other websites that post homes for sale get the vast majority of the data exclusively from MLS systems. It is nothing more than a pay-to-play system if you want to have the maximum visibility for your home. You are paying for access and buyer agents to bring buyers and it doesn’t matter which seller agent you use. About 60% of the commission and fees paid by sellers is nothing more than paying for access. Some would argue that FSBO exists. To that I would just point out that FSBO were 7% of home sales in 2023 according to NAR, half were sold to family, friends, or someone already known to the seller, and much of the rest to investors and not the general public. In my opinion, a 93% market share in any industry would qualify as a captive market.
  1. Services offered: Services offered by agents can vary tremendously and not all services offered are specifically in the interest of the seller or used for the promotion and marketing of a home.  Marketing services that increase the visibility of your home are beneficial, but those that market the agent using your home as a backdrop are not. Taking professional photos, drone videos, 3D tours, video tours, and email/mail marketing to buyer agents and local renters of your home are beneficial as they promote your home and increase visibility. Mailing postcards to your neighbors about your listing not so much (that’s agent self-promotion). Sellers should be paying for services that are directly tied to the marketing and promotion of their home. Services offered by agents account for another 30% of the commission and fees paid by sellers.
  2. Understanding of the market: A good understanding of the real market is important. Some would equate understanding with experience but in an ever-changing market, using generic forms, and 90% of the transactions are standard it is less important today. 20 years ago it was important as sellers were dependent on the Rolodex kept by experienced agents and brokers to find buyers. It is very important in the very high-end luxury market where connections and networks to high net worth individuals are needed and many listings are off the market. In this specific niche market space, who you know is the most important value. Today, for most homes under 10 million dollars, the marketplace is open to the public and is online.

Understanding the market and buyers (especially their online behavior) is key. For example, an experienced agent (in years on the job) might just take photos and post them on the MLS. An agent who understands the market and buyers would post 3D tours, drone videos, floor plans, and video walkthroughs with the listing as those attract 37% more views, viewers spend 60% more time on the listing, are twice as likely to come to view the home in person, sell 14% faster, and sell for 4.8% more according to data from Matterport and Zillow.

Understanding micro/macro-economic and industry data and current trends to include the psychology of buyers and agents (ie did you know that black or charcoal-painted front door homes sell for more than any other color?) is important to correctly price, market, and promote a home.  Understanding of the market Services accounts for another 15% of the commission and fees paid by sellers. The reason it is smaller is that without offering the right services that complement that understanding to bring in buyers and their agents it is ineffective and therefore less important. The right pricing and strategy will be less effective without the right set of services to implement it and attract buyers.

If one uses the above weights and calculates the value an agent brings for a commission of say 5% we would get the following:

  • Access to the market weight 60% or  3%
  • Services weight 25% or 1.5%
  • Understanding the market/ethics weight 15% or .5%

How should seller agents charge for their commissions?

While the real estate industry says listing commissions are negotiable it is interesting to figure out how commissions are set. Since my background is in economics and business, we could look at different pricing strategies and see which one is most used in the industry:

  • Value-based pricing: Consists of setting prices according to what consumers think the product is worth. For real estate, based on the Burnett vs NAR, it doesn’t appear that it is value-based as services offered have little impact on commissions.
  • Competitive pricing: Consists of setting prices based on what the competition is charging. Again based on Burnett vs NAR, the difference between commissions is negligible at best.
  • Price skimming: Consists of setting high prices initially and then lowering them over time. Agents reducing their commissions over time is rarely done if ever. They will lower the price of homes to find demand but not commission.
  • Cost-plus pricing: Consists of setting prices based on the cost of production plus a markup. Since real estate commissions are based on a percentage of the value of the home and not cost+ then this is seldom used. A home valued at 500k or 700k would not have much variance in marketing costs.
  • Penetration pricing: setting low prices initially to attract customers and then raising them later. An agent that is new or one with 20 years of experience, according to evidence presented in the Burnett vs NAR case, offers little to non-existent variance in commission rate. Not me saying it just what the evidence that was provided in the case.
  • Economy pricing: Consists of setting low prices to target price-sensitive customers. Again not something done in the industry much except for budget brokerage firms that list homes for a fixed or low rate but offer little to no services. They put it up on the MLS and then sellers are on their own.
  • Price discrimination: Consists of charging different prices to different customers for the same product. This would be illegal in the industry as it is strictly regulated against housing discrimination.
  • Price leadership: Consists of setting prices that other competitors follow or match. Again based on Burnett vs NAR, even though NAR does not admit guilt, is the most likely used strategy in the industry. One can only use statistics which happen to show that the vast majority of commissions are between 5% and 6% and on average sellers pay about 5.49% of the home’s sale price on realtor fees, 2.83% going to the seller’s agent and 2.66% going to the buyer’s agent. I am not saying it the data is. People can interpret the data whichever way they want and say or not say what it looks like but one must note that NAR lost a lawsuit based on this exact issue and instead of appealing settled with the help of the DoJ to limit damages (not giving my opinion just stating facts).
  • Target pricing: Consists of setting prices based on the expected or desired profit margin. Again since commissions are based on percentages versus costs this is not used in the industry. The objective of the target pricing strategy is to plan, design, and manage costs and then set a target price. But each home is different but statistically the variance between commissions has been small.
  • Dynamic pricing: Consists of changing prices according to demand, supply, or other factors. This is to me the most interesting strategy and one that I use but is not standard in the industry.

Out of the many textbook pricing strategies that exist, price leadership seems to be the most used. It makes sense as price leadership occurs when a leading firm in a given industry can exert enough influence in the sector that it can effectively determine the price of goods or services for the entire market. You the reader, could decide to use your imagination and juxtapose the National Association of Realtors which large brokers belong to working with the Multi listing Services owned by large brokers could be seen as exerting influence on prices in a market and see if it fits the definition of price leadership. Not saying that they are colluding or being antitrust but that is for you the reader to determine.

How commissions should be set:

I can’t speak for other agents but can speak of what I do and why. My goal is not just to sell a home but to maximize returns for sellers. That’s the fiduciary duty of agents working for sellers. I understand that “Access to the Marketplace” (60%) is the main value of using an agent and “Services Offered + Understanding of the market” (40%) is how agents differentiate themselves.

I charge for the value of the services I offer and my understanding of the market versus simply access. I discount access to the housing marketplace which is standard for all agents. I offer the most competitive commission rate (Well below 5%-6% commission which is negotiable even if most commissions statistically fall in that range) which can save sellers thousands of dollars in commissions. I also do not charge broker or administrative fees (which could be several hundred dollars and are rising every year). Sellers deserve to keep more of their hard-earned equity gains without sacrificing service and quality instead of paying 60% for access which doesn’t sell a home any better or faster than any other home listed for sale on the MLS.

So again what sells a home better and faster? Marketing! I use the latest marketing tools and techniques to showcase a home in its best light. By understanding the art of storytelling, I ensure that a property’s story is compelling to potential buyers. I don’t just post pictures on the MLS and hope traffic comes but understand how buyers today search for homes online and who/what can influence them and gain their attention. This is why I offer all my listings:

  • Unlimited professional Photos
  • Matterport 3D tours
  • Floor plans
  • Drone photography and video
  • A professional home video
  • Homebuyer sales packet and brochures
  • In-home marketing (strategically place QR code information displays, and an Alexa voice device to answer questions)
  • Active marketing to local rentals in the target price range
  • Active marketing to real estate agents and mortgage lenders
  • Social media marketing
  • Open houses
  • and more

I tailor my commission rates to reflect the intricacies of the market, considering factors such as price point, the condition of the home, and other factors all of which influence the complexity, ease, demand level, and projected time needed for the sale. If a house can sell easily, quickly, and with fewer complications why would a seller pay as much or more as one that is harder, slower, and more complicated? If my job is made easier because the seller did a great job of buying a good property, making beautiful renovations and updates, took the time and energy to maintain it well then why should the seller be penalized for doing the right thing or better why are they not rewarded?

When looking at how to price my services here are some key criteria I consider in determining commission:

  1. Buyer Demand and Affordability: The level of demand at the home’s price point directly impacts the discount offered. Higher demand translates to a larger discount.
  2. Investor Demand: Similar to buyer demand, investor interest plays a role in commission rates. Greater investor demand results in a larger discount.
  3. Neighborhood Supply: The current supply of homes in the neighborhood influences the discount offered. A smaller supply correlates with a larger discount.
  4. Home Condition: The condition of the home in relation to its price point and demand affects the discount. Higher demand for homes in good condition leads to a larger discount.
  5. Updates/Renovations/Major ticket items: Homes with recent updates, particularly in key areas like the kitchen and bathrooms, as well as recently replaced major items like the roof and HVAC system, receive a larger discount. The more extensive the upgrades and the newer the big-ticket items are, the greater the discount offered. It stands to reason that when a home occupies a coveted price bracket, resides in an excellent neighborhood, boasts impeccable condition, and flaunts numerous updates and renovations, has little competition, the sale process becomes swifter and smoother.

Consequently, the seller ought to be entitled to a more substantial commission discount. Conversely, for properties entailing greater complexity, facing prolonged duration on the market, and demanding extensive marketing efforts, the discount should be proportionately smaller. Such an arrangement fosters fairness and equity in the transaction and is of course negotiated.

Sellers have been getting the wrong end of the stick for years. They shouldn’t be paying more in commissions and they should have commissions based on the level of difficulty of the sale and marketing effort and not based on the statistical median commissions heavily skewed to the right of a skinny bell curve which could or could not be evidence of antitrust because commissions are negotiable.

Posted on

Seller Agent Commission Value Breakdown and How Should Seller Agents Set Commissions?

What is value? It encompasses both tangible and intangible aspects and can be very subjective but In economics and business, value often refers to the utility, satisfaction, or benefit that a product, service, or asset provides relative to its cost or price. In economics, it can be measured.  When using an agent, sellers should understand they are paying for three things and not necessarily what they are told they are paying for:

  1. Access to the Marketplace: Over the last 100 years the real estate industry has been shaped to create a market run by brokerage companies and Multiple List Services (MLS) owned by brokers. To sell your home and receive visibility, the industry created rules, regulations, and a marketplace exclusively owned by brokers. Even Zillow and other websites that post homes for sale get the vast majority of the data exclusively from MLS systems. It is nothing more than a pay-to-play system if you want to have the maximum visibility for your home. You are paying for access and buyer agents to bring buyers and it doesn’t matter which seller agent you use. About 60% of the commission and fees paid by sellers is nothing more than paying for access. Some would argue that FSBO exists. To that I would just point out that FSBO were 7% of home sales in 2023 according to NAR, half were sold to family, friends, or someone already known to the seller, and much of the rest to investors and not the general public. In my opinion, a 93% market share in any industry would qualify as a captive market.
  1. Services offered: Services offered by agents can vary tremendously and not all services offered are specifically in the interest of the seller or used for the promotion and marketing of a home.  Marketing services that increase the visibility of your home are beneficial, but those that market the agent using your home as a backdrop are not. Taking professional photos, drone videos, 3D tours, video tours, and email/mail marketing to buyer agents and local renters of your home are beneficial as they promote your home and increase visibility. Mailing postcards to your neighbors about your listing not so much (that’s agent self-promotion). Sellers should be paying for services that are directly tied to the marketing and promotion of their home. Services offered by agents account for another 30% of the commission and fees paid by sellers.
  2. Understanding of the market: A good understanding of the real market is important. Some would equate understanding with experience but in an ever-changing market, using generic forms, and 90% of the transactions are standard it is less important today. 20 years ago it was important as sellers were dependent on the Rolodex kept by experienced agents and brokers to find buyers. It is very important in the very high-end luxury market where connections and networks to high net worth individuals are needed and many listings are off the market. In this specific niche market space, who you know is the most important value. Today, for most homes under 10 million dollars, the marketplace is open to the public and is online.

Understanding the market and buyers (especially their online behavior) is key. For example, an experienced agent (in years on the job) might just take photos and post them on the MLS. An agent who understands the market and buyers would post 3D tours, drone videos, floor plans, and video walkthroughs with the listing as those attract 37% more views, viewers spend 60% more time on the listing, are twice as likely to come to view the home in person, sell 14% faster, and sell for 4.8% more according to data from Matterport and Zillow.

Understanding micro/macro-economic and industry data and current trends to include the psychology of buyers and agents (ie did you know that black or charcoal-painted front door homes sell for more than any other color?) is important to correctly price, market, and promote a home.  Understanding of the market Services accounts for another 15% of the commission and fees paid by sellers. The reason it is smaller is that without offering the right services that complement that understanding to bring in buyers and their agents it is ineffective and therefore less important. The right pricing and strategy will be less effective without the right set of services to implement it and attract buyers.

If one uses the above weights and calculates the value an agent brings for a commission of say 5% we would get the following:

  • Access to the market weight 60% or  3%
  • Services weight 25% or 1.5%
  • Understanding the market/ethics weight 15% or .5%

How should seller agents charge for their commissions?

While the real estate industry says listing commissions are negotiable it is interesting to figure out how commissions are set. Since my background is in economics and business, we could look at different pricing strategies and see which one is most used in the industry:

  • Value-based pricing: Consists of setting prices according to what consumers think the product is worth. For real estate, based on the Burnett vs NAR, it doesn’t appear that it is value-based as services offered have little impact on commissions.
  • Competitive pricing: Consists of setting prices based on what the competition is charging. Again based on Burnett vs NAR, the difference between commissions is negligible at best.
  • Price skimming: Consists of setting high prices initially and then lowering them over time. Agents reducing their commissions over time is rarely done if ever. They will lower the price of homes to find demand but not commission.
  • Cost-plus pricing: Consists of setting prices based on the cost of production plus a markup. Since real estate commissions are based on a percentage of the value of the home and not cost+ then this is seldom used. A home valued at 500k or 700k would not have much variance in marketing costs.
  • Penetration pricing: setting low prices initially to attract customers and then raising them later. An agent that is new or one with 20 years of experience, according to evidence presented in the Burnett vs NAR case, offers little to non-existent variance in commission rate. Not me saying it just what the evidence that was provided in the case.
  • Economy pricing: Consists of setting low prices to target price-sensitive customers. Again not something done in the industry much except for budget brokerage firms that list homes for a fixed or low rate but offer little to no services. They put it up on the MLS and then sellers are on their own.
  • Price discrimination: Consists of charging different prices to different customers for the same product. This would be illegal in the industry as it is strictly regulated against housing discrimination.
  • Price leadership: Consists of setting prices that other competitors follow or match. Again based on Burnett vs NAR, even though NAR does not admit guilt, is the most likely used strategy in the industry. One can only use statistics which happen to show that the vast majority of commissions are between 5% and 6% and on average sellers pay about 5.49% of the home’s sale price on realtor fees, 2.83% going to the seller’s agent and 2.66% going to the buyer’s agent. I am not saying it the data is. People can interpret the data whichever way they want and say or not say what it looks like but one must note that NAR lost a lawsuit based on this exact issue and instead of appealing settled with the help of the DoJ to limit damages (not giving my opinion just stating facts).
  • Target pricing: Consists of setting prices based on the expected or desired profit margin. Again since commissions are based on percentages versus costs this is not used in the industry. The objective of the target pricing strategy is to plan, design, and manage costs and then set a target price. But each home is different but statistically the variance between commissions has been small.
  • Dynamic pricing: Consists of changing prices according to demand, supply, or other factors. This is to me the most interesting strategy and one that I use but is not standard in the industry.

Out of the many textbook pricing strategies that exist, price leadership seems to be the most used. It makes sense as price leadership occurs when a leading firm in a given industry can exert enough influence in the sector that it can effectively determine the price of goods or services for the entire market. You the reader, could decide to use your imagination and juxtapose the National Association of Realtors which large brokers belong to working with the Multi listing Services owned by large brokers could be seen as exerting influence on prices in a market and see if it fits the definition of price leadership. Not saying that they are colluding or being antitrust but that is for you the reader to determine.

How commissions should be set:

I can’t speak for other agents but can speak of what I do and why. My goal is not just to sell a home but to maximize returns for sellers. That’s the fiduciary duty of agents working for sellers. I understand that “Access to the Marketplace” (60%) is the main value of using an agent and “Services Offered + Understanding of the market” (40%) is how agents differentiate themselves.

I charge for the value of the services I offer and my understanding of the market versus simply access. I discount access to the housing marketplace which is standard for all agents. I offer the most competitive commission rate (Well below 5%-6% commission which is negotiable even if most commissions statistically fall in that range) which can save sellers thousands of dollars in commissions. I also do not charge broker or administrative fees (which could be several hundred dollars and are rising every year). Sellers deserve to keep more of their hard-earned equity gains without sacrificing service and quality instead of paying 60% for access which doesn’t sell a home any better or faster than any other home listed for sale on the MLS.

So again what sells a home better and faster? Marketing! I use the latest marketing tools and techniques to showcase a home in its best light. By understanding the art of storytelling, I ensure that a property’s story is compelling to potential buyers. I don’t just post pictures on the MLS and hope traffic comes but understand how buyers today search for homes online and who/what can influence them and gain their attention. This is why I offer all my listings:

  • Unlimited professional Photos
  • Matterport 3D tours
  • Floor plans
  • Drone photography and video
  • A professional home video
  • Homebuyer sales packet and brochures
  • In-home marketing (strategically place QR code information displays, and an Alexa voice device to answer questions)
  • Active marketing to local rentals in the target price range
  • Active marketing to real estate agents and mortgage lenders
  • Social media marketing
  • Open houses
  • and more

I tailor my commission rates to reflect the intricacies of the market, considering factors such as price point, the condition of the home, and other factors all of which influence the complexity, ease, demand level, and projected time needed for the sale. If a house can sell easily, quickly, and with fewer complications why would a seller pay as much or more as one that is harder, slower, and more complicated? If my job is made easier because the seller did a great job of buying a good property, making beautiful renovations and updates, took the time and energy to maintain it well then why should the seller be penalized for doing the right thing or better why are they not rewarded?

When looking at how to price my services here are some key criteria I consider in determining commission:

  1. Buyer Demand and Affordability: The level of demand at the home’s price point directly impacts the discount offered. Higher demand translates to a larger discount.
  2. Investor Demand: Similar to buyer demand, investor interest plays a role in commission rates. Greater investor demand results in a larger discount.
  3. Neighborhood Supply: The current supply of homes in the neighborhood influences the discount offered. A smaller supply correlates with a larger discount.
  4. Home Condition: The condition of the home in relation to its price point and demand affects the discount. Higher demand for homes in good condition leads to a larger discount.
  5. Updates/Renovations/Major ticket items:Homes with recent updates, particularly in key areas like the kitchen and bathrooms, as well as recently replaced major items like the roof and HVAC system, receive a larger discount. The more extensive the upgrades and the newer the big-ticket items are, the greater the discount offered. It stands to reason that when a home occupies a coveted price bracket, resides in an excellent neighborhood, boasts impeccable condition, and flaunts numerous updates and renovations, has little competition, the sale process becomes swifter and smoother.

Consequently, the seller ought to be entitled to a more substantial commission discount. Conversely, for properties entailing greater complexity, facing prolonged duration on the market, and demanding extensive marketing efforts, the discount should be proportionately smaller. Such an arrangement fosters fairness and equity in the transaction and is of course negotiated.

Sellers have been getting the wrong end of the stick for years. They shouldn’t be paying more in commissions and they should have commissions based on the level of difficulty of the sale and marketing effort and not based on the statistical median commissions heavily skewed to the right of a skinny bell curve which could or could not be evidence of antitrust because commissions are negotiable.

Posted on

The curious case of mortgage rates falling but demand not rising!

The industry is convinced that if only interest falls pent-up sidelined demand would be unleashed. But since mortgage rates started to fall in October from 8% to 6.85% today, mortgage applications have also fallen on an unadjusted basis except for one week. Today the Mortgage Bankers Association reported that the seasonally adjusted Purchase Index decreased 1% while the unadjusted Purchase Index decreased 4% compared with the previous week. Mortgage applications are 18% lower than last year and down to mid-1990 levels.

So why is demand falling when rates are falling?

• Prices are high: even if the rates have come down they aren’t low enough yet to make a dent in affordability. The largest pool of homebuyers is home sellers who sell and turn around and buy a new home. With 60% of mortgage account holders sitting on 4% of lower fixed rates, those homeowners are effectively trapped in their homes. They cannot sell and retain the same mortgage payments. Without sellers, the market will have low supply but also low demand.

• Savings: Even if rates come down homebuyers still have to come up with a downpayment and closing costs. In 2020-2021, the personal savings rate shot up to new records thanks to stimulus checks and forced savings from working from home. Today that savings rate has fallen to 2008 levels. It’s getting harder to save for that new home with inflation.

• Pulled in Demand: Contrary to the industry narrative, there was no supply issue in 2020-2021. Those were the best 2 years in total home sales since the GFC topping out at 6.1 million homes sold in 2021 (1M+ more homes sold than in any year between “08 and “19). Low rates, stimulus, forced saving, push to the suburbs and sunshine states, easy access to credit, and stock market meme stocks all helped to push demand up and unleash home sellers with large equity gains on the market. The pulled-in demand, especially in the luxury market is now dragging the market.

• Rate fallacy/Debt load: Lower interest rates are a reflection of low demand for borrowing. After years of ever-growing record borrowing, households’ appetite for debt is starting to wane. Households are now sitting on a new record of 19.7T in debt. Since 2020, households have added 3.1T in new debt. This is larger than the 2.5T household added between 2012 and 2019. Household debt has grown and now with higher rates the debt load is becoming burdensome. Debt service payments are rising as households pay college debt, credit cards, car loans, personal loans, and other debts. If it wasn’t for a large amount of refinancing of mortgages at ultra-low rates during the pandemic, US households would be drowning.

Rates are only one component.

#fed #federalreserve #rates #yields #dollar #commodities #markets #realestate #realestateadvice #realestate #realestatedata #homebuying #homeselling #homebuying #homeselling #dmvrealestate #marylandrealestate

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The markets are now believing the dot plot like it came down from the Oracle of Delphi!

What they forgot is that the Greeks also have a god named Khaos, the god of chaos. You would think after 5 years of it (2019-2023), we would have learned that volatility is the new normal. From a pandemic, to supply shortages, to a major land war in Europe, to inflation, to treasury markets stuck rolling over debt at the short end because fewer want their long-term debt.

Here we are in December, right before the holidays and Khaos has given us more gifts. Greeks bearing gifts is rarely a good sign but we opened the box and we got the Panama Canal becoming a mud puddle due to drought, flip-flop-wearing rebels taking potshots at ships in the Red Sea, Russians advancing in the snow going West, and the Middle East again embroiled in another war.

But the Bulls saw a prophecy with the clarity of Tasseomancy reading Turkish coffee cups with 2 members voting for no cuts to one voting for 6 and everyone else all over the place. So here we are with ships going around the capes like Magellan and Jacob Le Maire, the Treasury hoping the next note or bond auction works out, repo hiccups, bank losses growing, more debt coming to maturity, and households putting more on layaway all while markets hit new highs.

Somewhere above the clouds on Mount Olympus, the gods are having a good laugh watching us claiming we have seen the future from a single dot plot reading.

 

#fed #federalreserve #rates #yields #dollar #commodities #markets #homebuying #homeselling #dmvrealestate #marylandrealestate #redsea #panamacanal #middleeastconflict #dotplot

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Powell turned into Arthur Burns?

Powell turned into an Arthur Burns Pumpkin when the month struck 12!

The everything stock rally has just begun so start buying everything you won’t miss. Dollar will continue to fall, commodities will rebound, top 20% of Americans will continue spending as their portfolios balloon, the bottom will still have jobs and add credit card debt to live.

Not sure how that’s going to help bring inflation down to 2% while the government net issuance cranks up next year above 8% and we have an election year trying to buy votes for one side or another and mostly for campaign donations. The can has been kicked. Record debt will become even greater record debt from households to corporate to government.

The stage has been set for more folly and greater tears down the road. A Shakespearian tragicomedy of greed and power.

“All gold and silver rather turn to dirt!
As ’tis no better reckon’d, but of those
Who worship dirty gods.”
Cymbeline

#fed #federalreserve #rates #yields #dollar #commodities #markets #homebuying #homeselling #dmvrealestate #marylandrealestate

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Retail data is coming in for Black Friday and it’s looking good and that is bad!

Online Black Friday sales are up 7.5% versus last year, Mastercard SpendingPlus reports a 2.5% increase, and malls are full (my anecdotal observation the last 2 days). This is great for the soft landing story but bad if you expect rates to decrease.

I went to stores and watched videos of other shoppers seeing that Black Friday deals are not Black Friday deals. Retailers are not discounting much if at all. How come?

To understand this we have to go back to the pandemic. Economics is not about taking snapshots and interpreting the data but looking at actions and reactions, and reactions of reactions.

During the pandemic, we had two driving forces. The first was supply disruptions due to government actions that shut down factories, created shipping backlogs, and saw inventory levels tumble. The second was artificial demand in the form of stimulus and cheap money. Prices went up because there was not enough supply and too much demand.

Retailers’ reaction was to overorder as supply chains were disrupted and goods took longer to arrive and demand was strong. Goods inflation rose dramatically through 2021.

By 2022, the supply issues were resolved and retailers found themselves with ballooned inventory levels. The reaction was to discount. The result was goods deflation and demand waning as it was pulled in and then shifted to services. But after 3 years people started to come back to goods as they returned to their normal lives. That 3-year old TV broke, family are coming for Thanksgiving etc.

A year later, retailers’ counter-reaction was to cut orders and run off their inventory. ISM data fell, inventory draws worked their way through and retailers went back to pre-pandemic JIT (Just in time).

Retailers are no longer sitting on large inventory levels and therefore no longer have to discount heavily or even at all. Goods deflation is now over and that means the Fed inflation war just got harder.

Actions create effects that lead to a reaction that creates a new effect that leads to a new reaction that creates another effect and reaction and so on. 3 years later, the pandemic is still affecting us through secondary and tertiary effects and reactions.

As shelter inflation is still rising at 6.7% and services less energy at 5.5% now we have to deal with goods deflation ending. We can’t pin all our hopes on energy, used cars, and medical services costs. The first is highly volatile, the second a small component and the third is going the opposite direction than historically

Markets might interpret this as a soft landing revelation. It is not. It is part of a cycle of inflation until debt that has a maturity debt starts knocking on the door and starts asking for its money back.

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The real estate industry has lost touch. (Part 2)

After the recent lost case for collusion, I don’t see the industry understanding the writing on the wall, and is doubling down.

More agents and brokers are fear-mongering about buyers not getting represented because they can’t afford them. Yes, they can’t afford the current commission rates but that doesn’t mean they can’t afford something reasonable. Also, it is not like they were looking out for their interests or the interests of sellers as obvious from the lawsuits and recent verdict.

The industry is more worried about their revenues and profits versus ethics, good practices, and the public. The reason why they lost touch is because they forgot what this industry is about. They forgot who we are supposed to be which is agents.

Our job is not to sell or complete a transaction even though nearly every agent and broker I have ever talked to has said the job is to facilitate the transaction and get the sale done. This explains their preoccupation with commissions as it is tied to a sale.

Agency creates a legally binding relationship between the agent and their client. Because of agency, real estate agents are to act in their client’s best interest and owe an ethical and fiduciary responsibility to the client and not to the transaction. Only then can an agent be able to advise a client of what is in their best interest which can be or not to start or complete a transaction.

But if one is told the opposite and is paid only if a transaction is complete then one is not an agent but a salesperson. The salesperson has no fiduciary interest or responsibility to the client only that the sale is made to get paid.

MLS should not have commissions visible and bonuses for agents should not be allowed to influence behavior. Only the best interests of the client matter and that is what an agent is truly paid for. He/She is paid for obedience, loyalty, disclosure, confidentiality, accounting, and reasonable care, not the sale.


#marylandrealestate #nar #realestateindustry #homebuying #homesales #dmvrealestate #dcrealestate