Corruption, Not the Fed, Has Busted the Housing Market

Unprecedented is the word of the year. I liked transitory better, but I was out voted by a bunch of real estate agents. They like the word unprecedented, as it seeks to shift blame - diversion - one of the "D" words in Dimensions of Deception. I "d"igress.

The National Association of Realtors has one of the most active lobbying groups in Washington D.C., called the Real Estate Round Table), and boy have they been busy this last year ($44 million). According to their own website, they are responsible for removing pesky reforms, such as 1031 exchange and certain unnamed tax incentives ( ahem depreciation schedules) from the Build Back Better Bill. Before he was elected, Biden promised to curtail the 1031 exchange abuse that has allowed masses of second home buyers to buy homes that they then turn around an rent out on a short term basis (Airbnb), thereby removing longer-term rental inventory from the market. All the people who needed extra space during the pandemic caused the run-up and inventory shortage? Right, well that is a gross oversimplification. Most of those buyers already had homes or other investment properties in the cities they were fleeing. They did one of two things. a. They bought vacation homes that they claimed were primary residences in order to get a lower interest rate. That's called occupancy fraud, by the way. Or, b. They sold the investment property they owned and used the appreciation to pay cash for another "investment" property that they run as an Airbnb business and gain a big tax write off. Bonus, they can even use this investment property for vacations for a couple weeks a year.

The low interest rates were a big part of the bonanza, to be sure. But had Biden actually enacted the reforms he said he would, we probably wouldn't be in the predicament. I wonder how much the National Association of Realtors paid him/Dems. See Opensecrets.org.

Finally, the other straw that broke the camel's back, is the new method, and un-reformed methods of appraisal. The NAR wanted desktop appraisals - quick and dirty - no drive-by or visit to the property needed to determine its value. Faster means fewer questions for underwriters and the sooner the real estate agents get their money. Biden cowed to their whims and sold this turd as something to combat racism in appraisals. Let me tell you, people, there probably has been more than one case of a racist and unfair appraisal, but even the NAR admits that most minorities found the racism they experienced in their transactions came from the real estate agents themselves, not the appraisers. Anyway, it was easy propaganda for Biden.

The appraisal process needs a lot more reform than just preventing bias. In my opinion, a huge part of the inflation in home prices can be directly attributed to real estate agent commissions. You see, the real estate commissions are included in the sales prices of the homes and are therefore part of the appraised value of the home, even though commissions add no real value to a home. Commissions are not a new roof. A house that sells a few years after the last time it sold, is not magically worth 6 percent more (commissions), plus real appreciation. But the NAR doesn't want that changed. The more they compound their commissions in appraised home values, the more they get paid, the more all houses are "worth."

For example, a house that sold for $500,000 just before the pandemic in 2019, would have had $30,000 in commissions built into the sales price. So, it really sold for $470k, but because the commissions are wrapped up in there, the house appears to have been worth and sold for $500k. A year later, the house next door goes on the market. It's virtually the same house - cookie cutter style. The appraiser sees the house next door sold for $500k, so the newly listed house must be at least worth that, plus real market appreciation. In reality, the appraiser should have valued the 2019 sold house at $470k pre-commission, and used $470k as a starting point for determining the value of the house that just went on the market. Since houses seem to change hands rather often these days, building high commissions into the value is not diluted with time. They are all aware of this. They knew what they were doing. It's a ponzi scheme, and now a bunch of Americans are going to lose all their equity overnight. Corruption. You should be mad. I'm mad for you.