I take on big media.
For years I subscribed to a personal finance magazine that shall remain nameless. I read it, not for its hot stock picks, but for what I assumed were its insights into the fundamentals of markets—in other words, for the overview it provided. Its tone was civil, credible and conservative.
Well, after the dot-com crash, you’ll remember that stocks just kinda bumped along. Silicon Valley real estate's ride was even bumpier, but out of the corner of my eye I noticed that, nationally, home sales were taking off.
I also noticed changes at my esteemed but unnamed personal finance magazine. Its civility was wearing thin. A certain “we’re mad as hell and we’re not taking it anymore” indignation was creeping into the reporting, although the indignation was still measured. Elliot Abrams’ crusade against the securities industry was getting plenty of play and now, suddenly, the magazine was intimating that maybe the industry wasn’t always the investor’s friend. “Yeah, I wondered about that, but I didn’t know it was this bad”, I mused. But hey, it must be true—it was in the pages of a well-respected magazine. Oh yeah, an editor or two publicly accepted responsibility for leading readers down the garden path during the boom, although readers were also sternly reminded that their greed and credulity were ultimately to blame.
Hmm, mea culpa and lots of finger-pointing. Something big was up.
Also disturbing was the magazine's unusually high rate of employee turnover. New Managing Editors introduced themselves with unaccustomed frequency. Familiar writers disappeared or were downsized, superseded by other, less substantial writers. More and more, real estate insinuated itself into the coverage. Lengthy, insightful articles on markets became conspicuous by their absence. Not only was the magazine’s content changing, but also its look, both slouching toward a dismal mix of Ladies Home Journal and American Home Handyman. Gradually, almost imperceptibly, the magazine was shunning Wall Street and openly courting the worst in Joe Lunchbox.
I grew uneasy.
I think I’ve told you that I’m a real estate agent. Imagine my chagrin, then, when this unnamed and heretofore trusted personal finance magazine declared war on my profession.
Its opening salvo was an article condemning the full-commission brokerage as a rip-off and dinosaur. I read it, shocked not only by its unfamiliar tone—dumbed down, shrilled up—but by its unapologetically biased reporting. This was obvious pandering to the real estate conspiracy theorists, and as blatant a piece of wrong-headed advocacy as I had ever seen. Yet I knew that, all across this great land of ours, readers were musing, “Yeah, I wondered about that, but I didn’t know it was this bad”. But it must be true—it was in the pages of a well-respected magazine.
Aside from its tone, this article was different in another way. For the first time, this unnamed personal finance magazine had written on a subject I knew. And it was obvious that I knew a lot more than the magazine did. For the first time, I knew that I could have written something better. I was paying good money for this?
I fired off an e-mail, not to the Senior Editor who wrote it, but to his boss, Managing Editor. It was intercepted by one of Managing Editor’s flunkies, who zinged it to Senior Editor. His response follows, in quotation marks. His quotes from my e-mail are in arrows, thusly <<>>. My responses to his responses are indicated as such. (You'll figure it out.)
Senior Editor starts off with, “First off, thank you for your reasoned response to the article—much of the email I've received from realtors has been less than civilized.”
My response: Yeah, feature that! Here’s a nice example of feigned Boy Scout naiveté: tar and feather an entire industry and then act faintly dismayed by the howls of protest. Bemoaning the lack of reason and civility is another nice touch, after writing a piece that has all the reason and civility of a subway mugging.
“Anyway, here are a few points I hope you'll hear me out on:”
Then he quotes me: <<Your featured discounter is making half the money she made as a full-commission agent, yet you report without batting an eye that she's planning to sell franchises.>> His response: “(The discounter profiled in the article) is an entrepreneur, and it's commonplace for entrepreneurs who leave established firms to take a paycut while they build their businesses. Frankly, I'm confused why you find her situation so remarkable. If I quit (the magazine) today to start my own financial magazine, I wouldn't expect to earn as much in my first couple years as (the publisher) is paying me today.”
My response: Frankly, I’m confused why you’d compare the start-up costs of a small, hole-in-the-wall real estate brokerage in a one-horse town in a low-cost-of-living state with the start-up costs of a national financial magazine headquartered in the high-rent district of the navel of the universe. I think you’ll agree that small brokerages are thick on the ground while mainstream nationally-distributed magazines are relatively few. And if this doesn’t say something about the relative costs of entry, some quick research on the Internet tells me that a national magazine spends several million dollars just for printing and distribution. Even a small niche magazine has substantial fixed costs that a brokerage doesn’t.
I’ll give you a few other reasons why it’s relatively easy to launch a mom-and-pop brokerage. You don’t pay for inventory—sellers provide it. You don’t pay your sales force—sellers do. Marketing costs are minimal—your agents do most of the advertising, and usually pay for it themselves. Staff and space costs are also relatively minimal.
So comparing this Podunk real estate discounter to a national financial magazine is comparing apples to oranges. Which is yet more proof that you don't know diddly about the real estate industry, and not much more about the publishing industry.
<<In one paragraph [I say] you quote two academics who charge that the industry supports the 6% commission by boycotting discounters. Yet in the next paragraph you acknowledge that the Internet "has eroded such tactics" (and in fact, made them impossible). Why didn't the fact that you could refute a key claim so easily have you questioning their credibility?">> “There's really no question that boycotting quashed previous attempts at discount realty. As we said in the story, the Internet has made boycotting harder, but that hasn't stopped listing agents from using the specter of boycotts to dissuade sellers from hiring discount brokers. In fact, we quote a real estate ‘coach’—someone who teaches realtors how to defend their commissions from discounters—who explicitly advises agents to use the threat of buyers' agent boycotts to get listings. The founder of Assist-to-Sell tells me this kind of thing happens to his brokers and agents all the time.”
My response: This is ingenuous. When buyers are finding homes on the Internet, industry collusion can’t explain why a discounter’s listings aren’t shown. Boycotts are a handy excuse when the real reasons may well be poor pricing and presentation; in other words, poor performance by the discounter, an idea you're probably not going to hear from "the founder of Assist-to-Sell". The boycott explanation is predicated on the unlikely idea that the real estate industry is a monolithic force organized against competition even down to its grass roots level, when in fact agents are fighting hand-to-hand in the trenches every day for commissions. For every agent who won’t show a discounter’s listing, there’s one who will and be happy to collect the crumbs, either for the money or for the client good will down the road or simply to not lose a buyer. Whether that’s good for that agent, the industry and ultimately the consumer is open to question, but few agents think long-term.
Then there’s the discounter model that’s seemingly designed to discourage other agents from showing and selling the discounter's listings. And it’s an elegant model. Discounter offers a $500 commission instead of 3 percent of the sales price, knowing (and hoping) that many (but not all) agents will indignantly cross that house off their list. “Not only did this jerk steal a listing from me”, they fulminate, “now he’s asking me to subsidize him”. That leaves Discounter the odds-on favorite to represent the buyer (if any) and get both sides of the commission. $500 doesn’t sound like enough for a listing broker to play games for, but every little bit helps when you’re charging the seller only a small flat fee. Say your total commission you'll get to represent just the seller is $6950. Keep the $500 supposedly intended to compensate the cooperating broker, and you’ve just boosted your income by 7 percent. Listings not getting shown? Golly, you’re the victim of an anti-competitive industry, which makes you the darling of academics and the consumer media. But doesn’t the seller still benefit, regardless of who brings him a buyer? Not if you think that an agent who represents both buyer and seller has an inherent conflict of interest. Not if you have qualms about a home-selling business model that's seems predicated on not having the seller's home shown by other agents. And not if you wonder about the quality of an agent who's seemingly willing to play games for $500.
This particular discounter model places the typical buyer's agent in an ingenious ethical, legal and financial quandary. Buyer’s Agent knows that a $500 commission isn’t a going to keep her in business, and that’s scary if you think that buyers should always have their own representation. Even the most rabid agent-hater would admit that anyone should have the right to walk away from a less-than-living wage. You'd also assume that academics and financial writers would understand the concept of “opportunity cost”: as an independent contractor, each agent is running a small business that’d quickly go broke if it didn’t select the most profitable opportunities. But if buyers’ agents don’t show and sell discounters' listings, they risk losing buyers who’ve seen those listings on the ‘net. And if buyers’ agents don’t disclose to their buyers that they’re not showing them discounters' properties, they’re breaching their fiduciary responsibility.
As I said, an elegant model. And when I described it as such to another agent, he almost took my head off. I guess I see elegance where others can’t.
Think I’m just paranoid? Flat-fee brokerage Next Generation Realty’s Web site says that they “(a)ct as dual agent… We work for both the seller and the buyer…” (At least they’re up front. Two other brokerages I know also offer sub-standard commissions and then, just to make it even less likely that an agent from another brokerage will show their listings, restrict access to them.) So how can a Next Generation franchisee who sells houses for $6950 (or about $3500 after taxes) put food on the table in Silicon Valley, the country’s most expensive place to live? Maybe the fact that they offer in-house mortgage and closing services is a clue. Could it be that their real estate services are just a loss leader? Hmm, what if the real estate agent of the future is nothing more than a Blue Light Special? I wonder what that would do for the industry’s professionalism? Isn’t this why the NAR® is so upset about banks getting into real estate?
But you know what? We’re not going to see this question addressed by an academic’s study, so we’re not going to see it addressed in the pages of the personal finance magazine you write for. Instead, what we're going to get from you is the economist's favorite textbook bogeyman, the supposedly uncompetitive industry. Why am I so sure? Because one of the academics you quote, Yavas, quotes another academic's study that finds that “the socially optimal commission rate is only 2.8%”, and I’m willing to believe that this is the latest and best academic thinking on the subject. That’s why academia “knows” that commissions are artificially high, set not by consumer demand but by collusion among brokerages. Never mind fixed costs, and never mind that an industry has to offer a certain rate of return to be taken seriously by capital and by potential entrants.
A moment ago I said that the costs of entry into real estate brokerage were relatively low. That’s for a mom-and-pop operation. And even at 2.8 percent, there would probably be a few moms and pops willing to enter the business just so their chests swelled with pride to see their names on an office no bigger than a two-car garage. But consumers increasingly want something flossier than that, something with the name-brand recognition and implied credibility that national franchises offer. Something like Coldwell Banker, with its large regional headquarters offices, fully-staffed corporate legal, IT and training departments, extensive computer networks, advanced and expensive agent technology tools, the relatively consistent performance that comes from standardized training and procedures—and deep pockets, in case something goes terribly wrong even after all that.
That kind of infrastructure takes lots of capital, and today that means publicly-traded companies, and that means a certain rate of return or investors will get into oil production or pharmaceuticals instead. Think a 2.8 percent commission structure would encourage capital to flow into real estate brokerage? Only if those brokerages could find agents willing to work for virtually nothing. And only if those brokerages were just gutted shells with familiar names.
Now let’s bring it down to the consumer’s level: think every agent is a low-grade moron? Of course you do. (You don't want to know my opinion of so-called "financial writers".) That’s at 6 percent. Picture the industry at 2.8 percent. After taxes that’s about 1.5 percent of the sales price, split between two agents—except it wouldn’t be split, because the only agents left would be listing agents who double-ended every deal so they could put food on the table. Even then, we're still talking Wal-Mart commissions. I wonder who’d be willing to take the wear-and-tear and liability exposure of real estate sales for Wal-Mart wages. Wal-Mart service, anyone?
And this is “socially optimal”? Only to the naive.
<< The same "experts" did a study that shows that agents sell their own homes for "4.5% more" than "comparable homes", somehow proving some kind of realtor conspiracy. Are we to believe that buyers are clueless enough to pay 4.5 percent more for an agent's house, just because it's an agent's house, than for the same house down the street? No one who knows buyers could seriously suggest this. Has anyone checked their study's methodology, or would that have just gotten in the way of a good hit piece?">> “Yavas and his co-authors studied 300,000 listings in Texas, 10,000 of which were realtors own homes. The sample size is quite large, in other words, and the study was peer-reviewed by other PhD economists and is about to appear in an academic journal (I believe it's "The Journal of Real Estate Economics," but I can double-check the name if you're interested.)”
My response: I’ll rephrase the question: just how dumb do you think buyers are? When soreheads priced out of the market think that buyers are easily-manipulated lemmings, you can put it down to unsophisticated envy. When an academic or a big-magazine writer thinks the same thing, you can only ascribe it naiveté and arrogance. Here, I’ll take the question out of its practical context and put it in one that’s more familiar to you, the classroom: in economic theory, who sets the price of a good? Right, the consumers of that good but, oh yeah, I forgot: agents use their supernatural powers to make buyers pay more for agents’ houses, pay too much for everyone’s houses in general and in fact make them stampede through the marketplace like panicked elephants. I’ve never understood why we agents don’t use those same supernatural powers to keep prices from going down. Wouldn’t be sporting, I guess.
I asked about methodology not because I was concerned about sample size, which, as you apparently don't realize, doesn't guarantee good methodology. My concern was whether the right parameters for the data were established. “Garbage in” is still “garbage in”, whether there’s a lot or a little. Here’s what the study’s authors did: they compared the 10,000 agent-owned homes with the universe of homes sold. But for the study to be meaningful, those 300,000 homes had to all be comparables to those 10,000 agent-owned homes. In other words, apples had to be compared to apples, not oranges. “Realtors own homes” should have been compared with virtually identical homes owned by non-Realtors. And there’s no way all those 300,000 listings can be comparables. Variations in house and lot size, condition, neighborhood, location within the neighborhood, school district—all these factors influence the value of a house, often by 10 percent or more and sometimes much more. So instead of looking at comparables, the study compared a small percentage of houses with the total universe. Which suggests that what the study’s authors proved is only that, on average, "realtors" own homes 4.5 percent more expensive than the universe of homes. Which is interesting, but not exactly a smoking gun.
[And in fact, shortly after I initially wrote this as therapy in 2003 I went to the Census Web site and discovered that in Texas the average agent's annual income is almost 4.5 percent higher than average. Think there might be a correlation between slightly higher income and slightly higher home price? Not if you're an academic or journalist determined to find conspiracy. And now that I think of it, isn't the "fact" that agents' homes sell for more proof that agents add value to the transaction? After all, who's more likely to listen to his agent than an agent who's selling his own home?]
Senior Editor: “The fact is that no academic study has ever found evidence that full-commission realtors get higher prices for their clients than do discounters. Even with FSBOs, the research done by academics contradicts the NAR's dubious claim (not peer-reviewed, by the way) that realtors get 10% higher prices than FSBO sellers. Below are citations for studies which found that the actual price premium for agent-sold homes ranges from 0% to 4%—even at the high end that's less than the 6% commission. In fact, three University of Alabama academics found an inverse relationship between commissions and sale prices. In other words, if high commissions influence prices at all, they lead to lower sale prices. Anyway, here's the research should you feel inspired to do some homework (he gives me citations for research articles)”.
My response: Hey, thanks for the tip, because I was “inspired to do some homework”—on you. I discovered that, while I was entering my third year in real estate, you were a freshly minted reporter covering, no, not real estate, but a pumpkin festival for a small-town newspaper, and doing a dreary job of it. In fact, you were just out of school, but it was the right school, of course, where you majored, no, not in real estate are you kidding? and no, not in business are you kidding? and no, not even in journalism are you kidding? but in history. A few years later you moved to the big city and started covering, no, not real estate, but the securities industry. By the time you wrote the article we’re discussing, apparently the first you’d written on real estate or at least the first under your own byline, I’d been in real estate for fifteen years. But according to you, I’m the one who needs to do his homework on real estate. What’s worse, I think you really believe it.
When I think about it, maybe this happens all the time. As a new college graduate, you leave school with a degree but no field of expertise. If you’re a well-taught journalism graduate, you have the writing skills to communicate clearly and concisely, and the research skills to be able to appear to write credibly on a subject you knew nothing about twenty-four hours before. (If you're a history major, on the other hand, well, you'd better hope that graduating from an Ivy League school still opens a few doors, and apparently it does.) As a wet-behind-the-ears reporter you cover a variety of topics, and you’re always working against deadlines. But you borrow credibility from the credibility of your medium. Every day, on every topic, you’re an “expert” because your work appears in print or on TV.
You pay your dues, work your way up the ladder and you’re assigned your first beat. Here again, it’s something you probably know little or nothing about, but you put your research skills to work, pick up a little knowledge here and there, keep riding the credibility of your medium, and now you’re a recognized “expert”. Stay on that beat for five, ten or twenty years and you’ll deserve to be called a recognized expert without the quotation marks.
But that’s not for you. No, you’ve got people to do and things to see. So you land a job as associate editor with a larger, more prestigious publication. There’s no byline, but you’re getting credit for contributing to articles and, most important, you have your foot in the door. You work hard, show promise and finally a plum falls out of the tree. If it’s in the same field, you can build on the knowledge you’ve slowly pieced together.
But maybe the plum assignment is in a different field. Not to worry. Managing Editor gives you your brief. Then you do what the other Senior Editors around you do. You go to the academics whose ideas and research fit your brief. They’re eager to help because your magazine gives them credibility outside the cloistered halls of academe (“the next Robert Shiller!”); even if it doesn’t vault them onto the New York Times best-seller list, it’s a valuable addition to their curriculum vitae. You’ve got contributing editors to do the legwork. You’re still riding the credibility of your medium, and by the time you get this high up journalism's ladder, the credibility is tremendous. Your job is simply to turn all this momentum into something that sells magazines. Voila! Instant expert. That’s NPR calling for an interview; your voice will ring with authority. Journalists further down the food chain write pieces based on your article. It’s cited favorably in blogs. You’re on your way.
But what’s odd about this vault into the big time is that neither you nor your academic partners have ever had any experience in the industry you cover. Think about it. You’ve never rubbed shoulders with the industry’s consumers, never gotten to know what they think and how they act. You’ve never rubbed shoulders with the industry’s practitioners, never known what they think and how they act. You're simply recycling the work of others who, in turn, recycled the work of others who, in turn...and the crap you recycle has been around so long that by now it's hallowed crap. You’ve never been in the belly of the industry and seen how its business model runs. You’ve never picked up on the subtle nuances that distinguish any industry, but especially one that resembles a village marketplace more than General Electric.
If this sounds like the way movie and music stars are packaged, then why not? It’s all big-money, big-media entertainment, built on cheap interchangeable parts.
I also took your advice and did a little homework on the academics that cover real estate. As you no doubt know, you don’t just run out and pick up a copy of “Kamath, R. and K. Yantek (1982), ‘The Influence of Brokerage Commissions on Prices of Single-family Homes’, The Appraisal Journal, 63-70”. And when you do find this stuff, much of it is available only by subscription. But I did look at a few of the obtainable studies on real estate, and I discovered something remarkable: the academics aren’t unanimous about anything.
I’ll quote from one of Yavas’ own papers, “A Comparison of Real Estate Marketing Systems: Theory and Evidence”: “Doiron et al. (1985), and Frew and Judd (1987) found that one-third to one-half of the broker’s commission is passed on to the buyer through the higher price paid for housing, while Tirtiroglu (1996) reports that the increase in price can be even higher than the commission amount. On the other hand, Jud (1983) reports that homes sold through brokers do not (Yavas’ italics) sell for significantly more than houses sold by owners. The results of Kamath and Yantek (1982) and Zumpano, Elder and Baryla (1995) suggest that if brokerage commission influence the price at all, they lead to lower prices.”
Thank you, Mr. Science. Rigorous analysis proves conclusively that a) agents do add value, b) agents might add some value and, c) agents don’t add value. You heard it here first, folks. Question: which study would you build your magazine article on? Answer: which study fits the axe you’ve been given to grind?
By the way, the Yavas study I just quoted “obtains the surprising result that the decision to use a multiple listing service decreases the sale price of a property”. Yes, sellers, now Mr. Science is telling you that exposing your home to more buyers through the MLS actually decreases what you’ll get for it. It turns out that the “pocket listings” of the bad old days were really as lucrative for sellers as they were for the listing agents who pocketed them. “Surprising” is hardly the word. Maybe “counter-intuitive” is. “Ludicrous” is another.
And that’s not all. In the introduction to “Bigger is Not Better: Brokerage and Time on Market”, Yavas cites two previous studies that show that “an increase in the size of the brokerage firm reduces TOM [time on market]”, yet his own study agrees with another that proves the opposite.
Of course, maybe “proves” is too strong a word here because, in fact, what we've inadvertently exposed is the social sciences quandary: when you’re studying human behavior, you can’t conclusively prove or disprove anything. You can’t split the atom, discover a new element, develop a miracle drug or, failing that, accidentally blow up your laboratory. No, all you can do is push data around until it comes together into something that looks like it can be published.
And you can tell that the academics are struggling mightily with the data. Their heroic attempts to screen and neutralize it will remind you of the security buffer around the Green Zone, or perhaps an Army Corps of Engineers project to channel the Mississippi River through Greenland. Unfortunately, “surprising” and sometimes goofy results require surprising and sometimes goofy explanations. You’d think the researchers would know enough to just keep their mouths shut and pretend it never happened, but in the academic world of “publish or perish” this stuff gets sent out to be carefully peer-reviewed and enter the literature. I suspect that’s usually as far as it gets, but once in a blue moon the Senior Editors come calling.
But that’s not the half of it: I’ll let them in on a little secret. I often fool around with MLS data, and I can tell you that sales price is one of the few things in which I have virtually absolute faith. Take the rest of it with a grain of salt, especially anything the person entering the data had to look up—lot size, building size, marketing district—anything that isn’t auto-populated. Sometimes it’s wrong and sometimes it’s missing. A recent change in my MLS’s database program left at least one quirk in the data that still hasn’t been cleared up and probably never will, because no one cares except me and the handful of other agents (and any researchers) who play with yesterday’s numbers. Even the subscription databases taken from county assessors’ records can be wrong, either because the county’s sources were wrong or because a data entry clerk’s mind wandered.
What this means is that real estate researchers work with data that’s not exactly clinically pure. Add that complication to the already formidable challenge of making any numbers make sense, especially with no background in the environment that produced those numbers, and you have a science reduced to dueling statistical techniques: “my Weibull distribution beats your linear regression”. So it looks like the mighty science of economics has taken us in a dizzy circle, from the error-prone subjectivity of pre-scientific times all the way back to today's “what would you like to believe”. Somehow that hardly seems scientific, but it’s mighty convenient, because it leaves the door wide open for anyone to slip their agenda through.
Which brings us full circle. I don’t know about you, but when I see someone railing against the infamies of an industry, I expect that person to have the proper credentials. I guess what’s open to debate here is the proper definition of “proper credentials”. To me, that suggests in-depth experience in the industry. You know, up close and personal, interacting with other players and consumers, and not just academics poking it with a stick in the la-bor-a-tory. I guess what I expect is something more than a promising journalist career covering a different industry, or a speedy and lavishly published scramble up the academic ladder. It’s the old “theory versus practice” debate, or what some might call “navel gazing” versus “real life”. I’d rather see “theory and practice” or, better yet, “theory that someone cares about and can put into practice”.
But that’s just me, and maybe I’m showing my Babbitt here, because some people seem to think that industry experience taints you. No, I take that back. Mainstream industry experience taints you; operating on the margins keeps you virginal and unthreatening. Today quarantining the mainstream industry and watching it from the safety of the sidelines makes you an indisputable academic authority, and riding on the back of that indisputable authority makes you a credible reporter.
And maybe it’s just me, but I find my exchange with Senior Editor unnerving. Here’s someone who’s taking off the public guise of impartiality and staking his position clearly: full-commission brokerages are rip-offs. He’s saying that the mainstream of the industry he writes on has no value and never will, and he’s going to cover his ears and yell until you stop saying it does because he knows some very educated people with fancy degrees and stuff who know far better than the industry troglodytes who don’t have fancy degrees and didn’t graduate from the right schools old boy—elitism in the "service" of Main Street, or perhaps elitists pandering to the basest in Main Street. It’s like being at a party and overhearing a writer who covers the securities industry for a mainstream consumer publication confide that he thinks full-commission stock brokerages are useless and maybe worse than useless. Or like a writer who covers the medical profession saying in private conversation that all doctors are quacks and that he only goes to chiropractors.
Everyone’s entitled to their own opinion and there’s an appropriate outlet for every opinion, but that outlet should be unambiguously labeled. I don’t expect the media to be a cheerleader for the mainstream real estate industry. There’s nothing more unproductive than an industry spokesperson trying to get a writer taken off a beat because he or she insists on presenting a balanced picture, not just the industry line.
But when a writer for a mass-circulation, apparently middle-of-the-road publication that isn’t called Popular Academic Review or Conspiracy Theory Monthly turns his back on an industry—not publicly, of course, or he'd lose his guise of impartiality, but only privately—I think it's obvious that his readers aren't going to get the full story. It’s like running an editorial on the front page of a newspaper, not as an editorial but as reporting. Like Roger Maris’ old home run record, it should come with an asterisk. But it didn’t. What’s worrisome is that apparently no one—not Senior Editor, not Managing Editor, not Publisher—saw anything wrong in this. Even more worrisome is my sneaking suspicion that they knew full well what they were doing and still didn't see anything wrong with it, as long as titillated more readers than it alienated. And it wasn’t the last hit piece written by Senior Editor to appear as unalloyed truth in that unnamed magazine.
If you need any more evidence that this major but unnamed personal finance magazine wasn’t ready for its real estate close-up, I offer the following:
1. The same issue also had an article warning about the pitfalls of car rebates. A great point—rebates are discounts that sell second-rate goods (and services)—that for some reason didn’t make it into the article on real estate discounters.
2. In Senior Editor’s response to my e-mail he uses “realtor” instead of “agent” or “licensee”, a small but telling mistake acceptable from the public but not from someone who presumes to expertise on the industry. That’s Realtor®, and I'm pretty sure that not every real estate agent who scorched his inbox was one.
3. He also implies that the commission for high-end properties is 6 percent, when in fact it’s usually a point or more less, at least in my area.
4. In the same issue, another editor turns himself into a pretzel designing an investment portfolio that supposedly minimizes my risk if my house loses value. Somehow his heart doesn’t seem in it. Besides, the house you and I own and live in is an asset, not an investment. Pinning your portfolio to your home misses the mark.
5. The magazine advances the theory that home prices must bear a relationship to rents, and that current price/rent ratios show sale prices are out whack. But as the magazine points out in its financial reporting, even the proven valuation methods should be taken with a grain of salt. Here’s a proven fact, not a theory: low interest rates benefit the sales market and hurt the rental market. Why not let it rest there, unless the idea is to make up for missing the dot-com bubble and predict nine of the next five bubbles?
6. Senior Editor’s contention that there is no proof that agents add value, and that in fact the evidence suggests that agents detract from value, denies the usefulness of an industry that at the time the article was written was booming solely because it provides an economic benefit. To rely on a handful of academic conspiracy theories, rather than on the overwhelming evidence of the marketplace, can fairly be called naïve and elitist. Or maybe the magazine has taken to opening its staff meetings with a rousing rendition of The Internationale.
7. Does anyone besides me see irony in the fact that the online version of the article this magazine did on a Department of Justice test case “for ending the stranglehold 6% commissions have over the real estate brokerage industry” has four links to discount brokerages offering sub-6% commissions? That’s a mighty loose stranglehold.
8. A recent article in this magazine on the perils of real estate investing informs me that the property taxes each Yorba Linda, California homeowner pays rose by some ruinous amount between 2000 and 2004. That’s news to me, because California's Prop 13 limits property tax increases to a maximum of 2 percent per year. What really happened is that total property taxes rose stratospherically, not just in Yorba Linda but elsewhere in California, because sales prices rose stratospherically, and in California properties are re-assessed at the sales price each time they sell. But this well-know personal finance magazine didn't know that.
I’ll conclude now the way I concluded my email to Managing Editor. Senior Editor didn’t quote this part in this response, but I have a feeling it’s why the magazine kept bugging me for permission to use my email in “Letters”, perhaps as a sitting duck for Senior Editor’s snappy rebuttal (but mama didn’t raise no fool):
“So let's see what we've got: cardboard characters you love to hate; one-sided reporting with bumper-sticker truths; a fawning "this changes everything" storyline; ivory tower 'experts' pounding the square peg of theory into the round hole of the marketplace; a know-nothing rant disguised as consumer reporting. Yes, all the ingredients of a journalistic train wreck.
"My advice: don't rip the lid off an industry you don't know. And if you're going to sub it out to freelancers [Senior Editor had appeared out of nowhere, so I didn’t know he was on payroll], use better quality control. After (this article) I'll need to question every piece of supposed consumer reporting you do.”
I guess the jury is still out on what mama did or didn’t raise, but that is a good rejoinder, or at least a snappy one and, as a certain unnamed personal finance magazine proved, sometimes snappy is good enough.