[shawnee_]

There are so many sites and nothing centralized has really taken off. Even when you boil it down to one city.

Wrong. There IS something centralized: it's called the Multiple Listing Service, and ONLY Brokers and Realtors have "access" to it. They are salespeople, and salespeople compete only with each other. That 6 percent commission is the unwavering aspect of their model -- they built it to ensure that it always gets dropped into their shark tank. Consumers do not benefit from this system, ever, and every single entity in the real estate industry wants to keep it that way.

Even the fact that brokers exist is a sign of market inefficiency. Why do I need an intermediary to find an apartment?

You don't. However, brokers are not the intermediaries; they are at the top of the pyramid scheme. After studying this industry from every possible angle, my conclusion is that purveyors of the current system are rotten to the core. Their lobbying group (the National Association of Realtors: http://www.opensecrets.org/lobby/top.php?indexType=s) is about as rotten as a swimming pool of maggot-covered dead skunks that's been sitting in the sun for a week.

The pecking order is as such:

  Broker Realtors + Mortgage Brokers  
  Agent Realtors  + Mortgage Loan Agents (Bankers)
  Leasing Agents (Realtors)
  Property Management Companies AKA "Landlords"
   

And all of them, working together, have only one incentive, and that is insanely high rents (yes, rents). As long as rents are high, the rest of their system is safe, and home ownership remains an unattainable pipe dream for most people. Which it really is, unless you're one of them. Realtors with their glossy booklets and shiny websites sell the illusion of ownership, and it works! Poof, and all of a sudden, it becomes so "necessary" to have a Realtor to help people navigate the scary world of shopping for a home. (See also: the housing boom of 2006.)

Build an excel spreadsheet that shows how much interest vs principle people pay on a typical 30-year loan over time. Now figure out how long it'll take to pay off the commission that your Realtor earns for his 2.5 hours of "work" on your behalf. Oh, and don't forget to include every penny of your life savings you've already forked over as the "down payment." (Down payments don't go toward equity, they go to pay the salespeople!) Pity the people who have been hoodwinked into thinking that their house payments are actually going to equity, that that 30-year mortgage means that they're going to own their house some day. The banks are too smart to let people do that, that's why they invented refinancing!

As long as the greatest portion of income people earn goes to rent, neither savings nor long-term equity can be obtained. As long as people are unable to build equity, they are trapped in a system that essentially forces them into paying whatever rents are demanded of them. Most people who live in Silicon Valley know this: 1K for a 0 bedroom apartment? Really?

The solution for consumers is NOT going to come by making it easier for Brokers and Landlords / Agents to hook up and control prices, that's for sure. This is a recipe for disaster on a grand scale.

[patio11]

This comment would be better if you dialed down the invective a few notches. As it is I think your passion gets in the way of seeing reality as it actually is:

home ownership remains an unattainable pipe dream for most people

This is objectively untrue for any sensible definition of "most": 67.4% of inhabited housing units in the US are inhabited by the owner.

Is home ownership going down? No, by any sensible measurement, it is increasing, across all races and most income groups. For folks who are often the have-nots in the US economy, home ownership increased rapidly (did people think "sub prime mortgages" existed solely to inflate bank revenue numbers? The flip side of that coin is giving loans to people who would historically have been classified as too risky for a mortgage gives houses to people who historically would have been too risky to qualify for a mortgage.)

http://en.wikipedia.org/wiki/Homeownership_in_the_United_Sta...

An addition underappreciated side-effect of financial engineering in the last twenty years is that, even post-bubble, down payments have gone from "your life savings" (which, at 20%, they really were) to "optional for many people and often and achievable in 3~5 years of dedicated work" (norms are in flux now, but there are a lot of banks which will take 5% as sufficient skin in the game for a prospective owner with decent credit).

I have no significant disagreement with you regarding the value add by Realtors and the 6% commission structure, although that is not inviolate, particularly in the current climate. (5% of something beats 6% of nothing every day of the week.)

[tptacek]

Did people think "sub prime mortgages" existed solely to inflate bank revenue numbers?

Yes. Read _All The Devils Are Here_ for an excellent exposition about how the subprime market was first invented as a vehicle to get private banks out from under the thumb of Fannie Mae, then turned into a vehicle for boiler room speculation, and then fed back to Fannie Mae. The interests of homeowners were not a primary feature of the development of the subprime market; in fact, one open secret of the phenomenon was how few of those loans actually went to first mortgages on owner-occupied sole residences.

[defen]

> This is objectively untrue for any sensible definition of "most": 67.4% of inhabited housing units in the US are inhabited by the owner.

Are you sure that 67.4% of inhabited housing units in the US are actually inhabited by the owner? If I take out a 30 year loan on a house and then move in, the bank still owns that property. I would expect the number to be significantly lower than 67.4% when you factor in rentals + people living in homes with refinancing or otherwise not-fully-paid-off mortgages. But I don't actually know what the number is or where to find it.

[tptacek]

The bank does not own your mortgaged house. They have a claim on it when it comes time to liquidate. It's easy to see that the homeowner "owns" the house: they can rent it to anyone else at any rate, raising rates as the market changes; the bank is stuck with the terms of the 30 year mortgage.

[defen]

Good point. But there does seem to me (never owned a home) that there is a qualitative difference between someone who owns their home in the clear, and someone who is using their home as collateral for a loan, which I thought the original poster was getting at. I might be way off though.

[tptacek]

Sure there is: one homeowner has a couple hundred thousand dollars of secured debt, and the other doesn't. In neither case is there any practical difference vis a vis the house itself. The homeowner who "owns his home free and clear" can still lose the house owing to any other major debt; there are even states where you are likely to lose your house in a conventional bankruptcy.

[T-hawk]

> It's easy to see that the homeowner "owns" the house:

More to the point, the homeowner is the one exposed to appreciation or depreciation on the open market. The bank has a fixed dollar value worth.

[rmc]

home ownership remains an unattainable pipe dream for most people

This is objectively untrue for any sensible definition of "most": 67.4% of inhabited housing units in the US are inhabited by the owner.

Pedantically, "Most homes are occupied by their owner" is not the same as "Most people own their home"

[shawnee_]

As it is I think your passion gets in the way of seeing reality as it actually is

This is my soapbox issue, yes. But there's no invective here, just a bit of "why!?" b/c I hoped to see a YC company in this industry on the side of the little guys/gals, not the 500 pound gorillas.

[pg]

How exactly does this conspiracy manage to overcome market forces to keep rents artificially high?

[shawnee_]

Market forces can't really work effectively on the problem when there is information asymmetry, can they? Market forces presume rational behavior, and perfect information.

I will assume that the expected result of this startup (why YC invested in it) is that the market will somehow become more "efficient" because communication between brokers and landlords will be facilitated.

I will predict that the actual result of this startup will cause the market to become less efficient, due to the increased cost of information asymmetry. By hooking up brokers with landlords, the information asymmetry between the "producer" (both landlords and brokers would be considered "producers" of listings) and the "consumer" (the renter or home-buyer) becomes even greater.

A pretty interesting paper that explores the idea that the costs of derivatives are increased as a result information asymmetry: www.cs.princeton.edu/~rongge/derivative.pdf

So, the "cost" is being doubly passed on to the consumer from both the broker and the landlord. The market is not more efficient, it's less efficient.

In general, financial experts suspect that the sheer volume of derivative transactions probably allows many kinds of manipulations to go undetected. We are highlighting one particular kind of manipulation where this undetectability as well as its financial cost can be made precise. from http://www.cs.princeton.edu/~rongge/derivativeFAQ.html

[patio11]

Markets do not presume perfect information. They're a hack around the lack of it, because perfect information would make a price discovery / resource allocation mechanism unnecessary: you'd just use your godlike powers and pick the best investment at the optional price every single time. One of their handier properties is that they quickly aggregate valuable-but-imperfect information from an incredibly broad group of people to discover prices. They're certainly not perfect, but they often work.

[shawnee_]

You're right, my typo. I can't remember the exact verbatim text that my economics textbook cited, but one of the underlying assumptions of "market forces" economics is that information isn't unduly restricted; it's more or less accessible to any parties that want it. In this example, the MLS is blatant restriction of information, and it definitely creates information asymmetry.

[tptacek]

Far be it from me to stand athwart your argument against realtors, but: how effective can they be at seizing control of the market via the MLS? Yes, you have to be a real estate agent to list there, but when I bought my house in '05, I had no trouble at all getting access to MLS listings.

The MLS --- which, I probably agree, is a shady system --- is not some secret parchment guarded by the Stonecutters. Pretty much anyone can get access to it.

[thaumaturgy]

MLS availability varies from region to region according to the local board of realtors. And, even in regions where the MLS is generally available, that availability may be limited to specific agencies, with others not participating at all.

(Once upon a time I did some I.T. and software maintenance work for a number of local realtors and the local board.)

Oh, and also, various MLS interfaces (e.g. Paragon) provide a lot more information on properties than non-realtors have access to.

[pg]

Let me try again. Suppose I decide to rent out my house. The price I can get for it depends on how much people like it compared to other houses that are available. How is the amount of rent that I can get being gamed upward, in a way that it isn't if, for example, I decide to sell my car? (Unless you believe that used car prices are also inflated across the board.)

[thaumaturgy]

I'm renting a house now, and I've been shopping around for a store/office space for a few months now.

And, yes, prices are being held unnaturally high. If they weren't, I would expect to see far fewer empty storefronts than I do now -- and I've recently seen this not just in my local small town, but also in Sacramento, in the Bay Area, and even in Seattle.

Locally, I know for a fact that there are a number of property owners that would prefer to have their space sit empty rather than rent it out for the amounts that people are willing to pay right now. I've talked to them.

Housing is not that much different, except that at the moment there is higher-than-usual demand for rental properties, so the "market forces" are driving the prices upward. Still, unless you are a property owner who foolishly can't afford to let a building sit vacant, you can get away with charging higher rent than other people are for similar properties.

I agree with the person here saying that these effects are due to information asymmetry. As a prospective renter -- either for commercial or for housing space -- in order to find the best possible deal, I must invest a lot of time contacting numerous people, reviewing various Google Maps mashups, reviewing classifieds, and wandering around town. As a landlord, to set a price I simply have to take a quick glance at what nearby properties are going for, add a little bit to that amount, and then wait.

Eventually, a prospective renter will come along, because they don't know where the better deal is.

[jetaries]

The power the brokers have over landlords' is very limited, even in hot rental markets like Boston and NYC. The landlords set the price, and the brokers try to rent them (first hand experience). Unlike sales, typically, there is no exclusivity in rentals, it's first come first serve. Whoever rents the apartments get the prize. Which creates tremendous competition among brokers.

It is in the brokers' best interest that the landlords lower their price and pay a finder's fee. This makes the apartment easy to rent. The idea that somehow brokers bound together to control the price is simply untrue (this notion is somewhat true in sales). Landlords control the price based on supply / demand.

Everyone tend to think that brokers themselves represent market inefficiency, which is also debatable. Everyone knows Craigslist, and if they wanted to be on it, they can. Now, why do landlords go through brokers at all, knowing there is Craigslist?

Last but not least. The reason that renting is such a unpleasant experience lies in the nature of the business, and also what I call the Craigslist's dilema. If you are interested, I'd be happy to write another article to further elaborate on this point.

[notahacker]

I agree with your point about competition, and I also believe that a broker/agent with a sufficiently large list of property can add value to a search process (they ought to be better at identifying properties that fit your requirements than a couple of grainy photos and a list of bullet points, and competition induces them to show you the most suitable properties first).

Isn't the problem with Craigslist simply spam? The property for rent listings on Gumtree (UK equivalent of Craigslist which is very useful for finding flatshares which don't involve intermediaries) are rendered unusable by spam for fake properties put in place by letting agents who will then subsequently offer you something more expensive and less appealing that actually is on the market. Essentially the agents collecting lists of tenants with multiple fake properties crowd out anyone trying to directly list real properties.

[ssharp]

"Wrong. There IS something centralized: it's called the Multiple Listing Service, and ONLY Brokers and Realtors have "access" to it. They are salespeople, and salespeople compete only with each other. That 6 percent commission is the unwavering aspect of their model -- they built it to ensure that it always gets dropped into their shark tank. Consumers do not benefit from this system, ever, and every single entity in the real estate industry wants to keep it that way."

As much as the industry would like to thwart progress, they can't. There is too much money in this industry for their not to be "rebels" looking to take market-share by keeping prices low.

Companies like Redfin are offering flat-fee listings, with typical realtor services, including MLS listing.

There are quite a few "flat fee MLS" services as well that offer bare-bones services to buyers, mostly getting their house into MLS. While access is still restricted, a couple hundred dollars isn't a huge barrier.

I am currently selling my house and am using a flat-fee MLS service. I pay, I believe, $400 to have my house in MLS. I can then determine what commission a seller agent gets.

In a "traditional" MLS transaction, the seller agent gets 3% and the buyer agent (if there is one) gets 3%. Most realtors will negotiate that down, and I've personally offered 2.5% to seller agents on my house.

As to how worth-it the agent system is, a lot depends on your market. If you're in a large market, I'd expect the value of agents to go down because alternative systems are likely to be in place. I live in a small market and have used MLS, a sign in my front yard, Craigslist, and a few newspaper ads to market my house. I can say that 90% of inquiries have come from buyer agents through MLS. I'm going to have to give up a few thousand due to the 2.5%.

[defen]

So do you have any idea where the solution is going to come from? I really like your analysis of the current situation.

[mistermann]

You and I must live on different planets, that doesn't remotely sound like the world I live in. And I have a great distaste for this industry.