Escape From Pianosa

Turns out there’s someone else in Baltimore who believes that maybe, just maybe, Wal-Mart isn’t a totally unmitigated force of evil. Him and you know, the millions of people who like to save money every day.

I’m a member of one of the local chambers, and the other day I got an email shouting the praises for the new minimum wage bill that was passed in congress.

I’m firmly in the camp that minimum wage laws harm unskilled workers by making it harder for them to find employment. There are arguments on both sides of the issue, but even if you think it’s a good thing for workers, it’s obviously not a good thing for small businesses (large supermarkets and other union employers are probably a different story).

So why on Earth would an organization ostensibly charged with the goal of promoting local businesses support a law that makes it more costly to do business!?

I’m reading Freakonomics, a wildly popular book that has also caused some controversy among real estate agents. First off, the book really is a great read and fascinating for anyone, not just amateur econ-nerds like myself.

The gist of the real estate section is that the incentives of real estate agents are not perfectly aligned with the incentives for home sellers. Sellers naturally want top dollar for their property, although they will not wait forever to get it. And of course agents also want high sales prices. So what’s not aligned?

Well, let’s say that your home is listed at $300,000 and after a week on the market, you get an offer for $290,000. That’s $10,000 less than what you wanted, a very big number to you. However, it’s not so much for your agent. If the seller’s agent is getting 3%, and has to pay half of that to his broker and the IRS, then a reduction of $10,000 in the sale price equates to a $150 reduction in the agent’s commission. Not really a big deal for the agent, money-wise.

The homeowner has a very strong incentive for wanting a higher price, while the agent only has a small incentive. The homeowner might be willing to wait three more weeks or three more months to get a higher price, while three months for $150 just isn’t worth it for the agent. The homeowner makes the final decision, but the agent has influence on the homeowner’s decision.

Now I believe that good real estate agents will recognize this situation, ignore it, and act in their client’s best interest. In fact, Dubner’s analysis doesn’t take into account another incentive that agents have–the fact that getting a higher price for their client will make for a happier client and ultimately more referrals.

I suspect that the misaligned incentives have a greater effect on agents who are more shortsighted and aren’t thinking about the longer run incentives of providing the best service possible. Any ideas on how to determine whether or not a prospective agent would be affected by the incentive to sell quickly?

Tom at The Real Estate Bloggers reports that the government is looking more closely at commercial lenders. I have a feeling that banks would be less likely to over-leverage themselves if they didn’t think that the government would be there to bail them out when things go south.

“Affordable housing” is coming to Baltimore. Why? Because politicians say so. As if making it more difficult and less profitable for developers was the best way to encourage the construction of new housing. As if Baltimore, a city experiencing a truly remarkable renaissance after being on its last legs not too long ago, should be telling developers: “hey, don’t build here!” If anything, they should be giving out tax breaks and high fives to the companies that are re-building the city.

I can understand this type of political gamesmanship in places like Howard County where there really isn’t much in the way of affordable housing for blue collar workers. But Baltimore City has TONS of affordable housing! Tons!!!

I went to an auction yesterday for a 3 bedroom house that sold for $57,000, and it had just been renovated. It was clean, safe, lead-free, and ready to move in. Does anyone think that a developer is going to build houses cheaper than THAT?

I know what you’re saying, “but what neighborhood was that house in?” And you’re right, it’s not the best (or the worst) neighborhood in the world. Do you know why it’s not so great? Because of the crime and the terrible schools.

And who’s fault is that? Please tell me, who is responsible for the crime–is it the developers, or is it the politicians?

Occasionally I will mail out letters to commercial property owners in Baltimore to see if I can’t find someone who is willing to sell at a discount. Selling to me directly saves a lot of time and money because you don’t have to involve brokers or search for a buyer (I’m already here!).

Anyone who owns a home is familiar with the postcards from people proclaiming that they want to buy your house quickly and for cash. This tactic is very common amongst residential investors and probably not very common amongst commercial investors, meaning the response rates are much higher (5-10%).

Most of the respondents are curious as to why I’ve contacted them and ask questions like “how did you find me?” Maybe they don’t know that their name, address, and most of the information they gave at settlement is available in the public record.

Usually the response is something like: “well, you know at the right price, everything is for sale,” they say with a sly grin. This is usually followed by an outrageous price, which I find amusing. These aren’t the people that are going to sell me a good deal anyway.

My favorite was the guy who had an apartment building in less than desirable neighborhood in Baltimore City and wouldn’t accept anything less than $200,000 per unit. In a neighborhood where single family houses are selling for no more than $120,000. I figured the cap rate to be about 1.5%. No thanks!

Now if I wanted a really bad deal, would I spend so much time writing letters? I guess it never hurts to ask…

This sentence sums up why the idea of ‘affordable housing’ in affluent communities will never be anything more than an empty buzzword in the political game:

“Affordable housing is a tough sell among some residents who say it brings down property values… said Sherman Howell, a member of the county’s affordable housing task force.”

That quote comes from yesterday’s Baltimore Examiner article about affordable housing in my hometown, Columbia, MD.

You see, there’s this inconvenient reality known as supply and demand. If you want housing to become cheaper, you have to increase the supply or lower the demand. Now with the great public schools in Howard County and the proximity to Washington and Baltimore, we all know that the demand isn’t going anywhere.

On the other hand, supply could go up… And really, it’s very simple. All you have to do is build more houses. Or more apartments. Or whatever. As the supply goes up, prices will fall and thus housing will become more affordable.

But wait—-did you say prices will fall? Does that mean that my $600,000 colonial will go down in value!?

By now you’ve probably figured it out-—people who already own houses in Howard County sure as hell don’t want their values to go down. And can you really blame them? Nobody wants their biggest asset to lose value. So when faced with a choice between affordable housing for others, and maintaining their property values, it’s easy to see why people will always choose the latter.

Nevertheless, such a choice can create the occasional pang of guilt.

And politicians are the greatest entrepreneurs when it comes to filling gaps in the conscience market.

That’s why we have buzzwords like inclusionary zoning, which are ostensibly indended to force developers into creating affordable housing for middle or lower-income residents.

The genius of inclusionary zoning is that it helps everyone to feel better about themselves (“look at these laws we made to help the working poor!”), while actually making it more difficult to develop new housing.

The specially designated affordable units have to be sold below market prices, meaning less profit for developers, meaning developers look elsewhere to build, and ultimately the community ends up with less housing.

Voilá! Homeowners feel better about themselves, home values continue to rise, and politicians get reelected.