February 6, 2008 2:14 PM
Are Realtors and lenders colluding to keep home prices artifically high?
I recently wrote an article in which I mentioned that home prices in the Denver area have not had the incredible run-up in prices, or the drop in values, which have been experienced in other formerly hot markets such as Las Vegas and Phoenix.
That elicited an e-mail to me from John McElrath, a "spiritual counselor" in Arvada. Among other things, for $100 per hour, McElrath will help you explore past lives, according to his Web site. As best as I can understand, McElrath thinks Realtors and lenders are in cahoots to keep home prices high in the metro area.
But, frankly, I couldn't understand all the points he was trying to make.
In any case, here is his e-mail to me, my response, and his response to my response.
McElrath's initial e-mai to mel: "I read this article with great interest. I was especially surprised when the article stated that Denver didn't see a huge run-up in prices.
Does that mean that an over 300% increase in the price of the average home here in the Denver area in the last 20 years is NOT a HUGE run up in prices?
I find this very interesting, especially in an era where we have seen about 40% inflation in the same period of time.
When I contacted the Colorado Association of Realtors about this issue, I was given the same old, patronizing dog and pony show about what a great place Colorado was to live.
Colorado is a nice place to live but home prices, in the opinion of a humble earner, have been out of control for 15 years in the Denver area.
I think this is due to greed and some institutional "price fixing" going on within the real estate industry itself.
I wonder what it is that seems to make the Denver housing market so resistant to anything but price rises or just maintaining the status quo when the rest of the country is suffering greatly from the mismanagement of state controls on lenders, greedy mortgage loan practices and the aforementioned "price fixing" going on within the real estate industry itself.
I think what's going on here in the Denver area is a sense by the real estate people of "let's just keep the prices as high as we can and ride out this downturn and then we can go back to gouging the public as we have in the past".
Is there an ethics portion on the test that Realtors have to take to be licensed in the state of Colorado? I doubt it, based on past behavior.
Realtors must have known that they were selling homes to people that couldn't afford them but I guess greed is a powerful motivator and once they collect their commission checks, what happens to the people that have to give up their hopes and dreams doesn't matter much to them."
My response: "I should have been more clear that I was writing about recent runs in home prices, not over a two-decade period.
For example, the median home price in Las Vegas rose something like 83 percent from 2004 to 2006. I've been here since 1983, and Denver never saw such appreciation. And prices dropped about 18.5 percent in Vegas from 2006 to 2007, while Denver's prices fell an average of 2%.
As far as your other points, I don't see how Realtors set prices or how they can collude with others to keep prices high.
I don't think prices are high because of price fixing.
The market is pretty much driven by the market forces of supply and demand.
I think the proof of that is the lowest appreciation and the highest foreclosure rate is found in the "foreclosure belts," such as Adams County, and the north I-25 corridor, where there is plenty of land and no barrier to entry.
The flip side of that is that in infill neighborhoods such as Highland and Washington Park have seen relatively healthy appreciation, because there are constraints on supply.
I was especially puzzled by what you wrote here:
"I wonder what it is that seems to make the Denver housing market so resistant to anything but price rises or just maintaining the status quo when the rest of the country is suffering greatly from the mismanagement of state controls on lenders, greedy mortgage loan practices and the aforementioned "price fixing" going on within the real estate industry itself"
Are you saying that Denver home prices should have fallen as much as Las Vegas or Phoenix did last year? But again, prices in the Denver area never rose as much as those markets in that time frame, so why should they drop as much?
Certainly, there were arguably "greedy mortgage loan practices," but I don't know what mismanagement of state controls you are talking about and price fixing. Can you give me an example of a home where the price was fixed? How does that work?
Yes, market conditions change and home prices in specific submarkets areas fall and rise, but how do Realtors and lenders set the prices?
Here's a microcosm of the market.
I know of a townhome in Denver that sold for about $700,000 last Friday.
The developer was asking $734,000 and said he wouldn't budge.
The townhome had been sitting empty since September. The buyer's broker told the developer you set the comps by building two other units and selling them for about $700,000. The developer not only sold it for the lower price, but he added a number of improvements in order to make the deal.
His choice was to sell it at a lower price, or continue the carrying costs each month until he, maybe, got his asking price.
I don't see how that was collusion.
You could argue that is how the system is supposed to work.
And yes, the value of the townhome could drop in the coming year. But it could also go up in value. That's what market do - they go up, they go down, or stay the same.
There's always going to be some dishonesty in every business, some scam artists. But for the most part, it's just the market going through cycles, not the crooks driving the overall market.
On the broadest, macro level, I think what happened across the nation is that the government wanted to increase home ownership. So they encouraged the private sector to make it easier to qualify for a loan. The looser underwriting standards all but assured that foreclosures were going to rise.
It also meant easy money for investors, who saw flipping homes as the path to riches.
In Phoenix and Las Vegas, it clearly was a case of the "greater fool," theory.
I don't think in the history of economic crashes was there ever one more obvious than this one. Once you started seeing school teachers (or whatever non-real estate professsion) on the cover of Money magazine quitting their day jobs to flip homes, you knew this was a catastrophe waiting to happen. To a large extent, I think Denver was lucky to have mostly avoided that fiasco.
And that bring me to my final point.
It's not just the "greedy" Realtors and lenders who are culpable.
How about the greedy home buyers?
What happened to personal responsibility? You say that Realtors must have known they were selling homes to people weren't qualified to buy homes. Maybe so. But if anyone should know they were unqualified, it should be the buyers themselves.
I'm sure some buyers who got subprime mortgages were sweet-talked into them, being told that they could refinance into a lower rate when their ARM adjusted. Unfortunately, their homes dropped in value and they couldn't refinance.
That's unfortunate, of course.
But I don't see how it is collusion. There is no way that a lender, whether he is honest or unscrupulous, can predict the direction of the market.
If you want, I can post your letter and my response on the blog and see what other readers have to say.
Thanks for taking the time to write.
Sincerely,
John Rebchook
Here is McElrath's response:
"You are incredibly biased, which doesn't surprise me and I really thought about responding to your points ,however, you totally lost me when you basically denied any responsibility whatsoever for selling homes to people that you know darned good and well wouldn't qualify. As far as I'm concerned, your industry took advantage of a lot of people rather than just telling them that they would be wise to wait to buy but you seem to want to push it ALL off on the buyers. You lost me there. It's like I'm talking to a brick wall. Goodbye."
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