This week we saw the Detroit Big Three with their hats out looking for taxpayer money from Congress to "keep afloat" for another few months. (Photo, left, from Wall Street Journal). No serious discussion about how we got here: Everything's blamed on the "financial crisis" and it's all "Wall Street's fault" that these companies just can't make money. No mention about steadily eroding market share for decades; no mention of how consumers simply PREFER to purchase Japanese and German cars; no discussion about quality; repair records. And absolutely no mention of the United Auto Workers Union other than "they've already made so many concessions".
So, hands-out, the Big Three Old-School Failed-Business-Model AutoMakers asked for $25 BILLION in taxpayer dollars to keep afloat. Their arguments started with "we're too big to fail" because we employ so many VOTERS, er, we mean, citizens. And they kept on with the "all of the companies who work with us - the suppliers, partners, even the OIL companies will be in trouble" if nobody is buying a Ford, Chrysler or GM product. In other words, the universe will come to an end if nobody can buy a Cadillac, Taurus or Caravan ever again.
Even tow-truck companies will feel the pinch, since there won't be many Hondas and Toyotas needing their services.
Now, maybe this story sounds familiar? No, I don't mean AIG or Lehman or Washington Mutual - because the Feds let two of those three actually FAIL. Rather, I mean that the Detroit Wail sounds awfully simliar to the real estate industry's request for policies that offer a $7500 tax credit for first time buyers purchasing a home - with no payment required. Is the money really to help "consumers" - or is it another bailout for an industry that can't sell its services much better than a Ford?
I know - REALTORS HATE to be compared to CAR SALESMAN. But let's do it anyway - just for fun... Is the NAR Stimulous plan any different than the auto maker bailout loans?
Let's do some math: Say 5 million real estate deals occur annually in real estate - based upon historical trends of the last two decades NOT accounting for the boomlet years. About 40% of buyers are first-time buyers, according to NAR"s survey data, so we're talking about 2 million purchases with a $7500 tax break on them. Taking out the trusty calculator, we multiply 2 million deals by 7500 dollars and.... click... clickkk.. clakk... clakkk... whirr...
That's right: FIFTEEN BILLION DOLLARS.
That's the subsidy that the trade association representing the real estate brokerage industry in America is looking for from taxpayers. Of course, it's not a "direct loan" like the auto manufacturers are seeking. Nor is it a "revolving" credit line - even though the NAR policy doesn't ask for the buyers to ever pay it back - say, when they sell the home years later and reap an increase in appreciated value.
FIFTEEN BILLION DOLLARS in taxpayer money to "revive" the housing industry. Just where will that money come from and where will it go?
For starters, it will come from the neighbors of every home sold. Selling 1 Main Street will require 2 Main Street's owners to pay more taxes from their capital gains, small business profits or personal wages. Every sale REALTORS make under this policy could be harming their past clients in favor of their current clients. Not a strong policy for creating long term business, would you say?
Couldn't Uncle Sam just "print" more money to pay for it? It sure could - and we'd have inflation on par with that of Venezuela - so now we're talking about everyone paying for those first-time buyers' purchase. Not just homeowners, but everyone paying for bread, milk, gasoline, electricity and any purchase that is affected by inflation. Simultaneously, since homes are bought and sold in dollars, an increased money supply will further devalue the dollar - and therefore deflate purchasing power. Home prices will go up again, but buying power will go down. It's called stagflation.
But, wouldn't the tax credit "stabilize" the housing industry? Not likely. If American's can't figure out by now the basic laws of economics - and that EVERY GOVERNMENT INTERFERENCE HAS UNINTENDED CONSEQUENCES - then why ask only for $7500. Why not $10,000 or $100,000? If first time buyers "deserve" so much help, why not just give them homes? Oh, sorry, that's called communism - and nobody like to live in public housing anyway, do they?
Giving $25 billion to auto makers won't make auto makers more profitable; it won't increase the quality of their cars or the desire on the part of buyers to purchase them. It won't create efficiency. It won't create innovation. It won't create fundamental changes that recessions are designed to cause in the marketplace.
The same is true for REALTORS and the $7500 tax credit. It won't make overpriced homes more attractive to cautious buyers who fear they will lose their jobs because the higher taxes, inflation and devalued money (needed to give them the tax rebate) will cause their employers to go out of business. Will the $7500 make brokerage services - used by 8 out of 10 buyers - more affordable or attractive? Not likely. In fact, the $7500 should be provided to the SELLERS, not the buyers, so they will lower the price asked for the home, which lowers the broker's commission. Only by lowering the commission will you cause a broker recession - which is necessary to get them to be more effective, efficient, cost-effective. Giving the money to the buyers only "papers over" the inefficiencies of the brokerage process because it reduces the pain caused to the seller - and therefore to the broker - that only innovation and efficiency can create.
Oh, please. Spare me the "we use technology!" cries. The real estate industry is the ultimate example of Newton's Third Law: For every reaction, there is an equal and opposite reaction. So, for every technology implemented by real estate brokers, there is an equal and opposite lack of usage, effectiveness or cost savings created. Have brokerages dropped costly newspaper ads once they discovered cost-effective internet marketing. Not one bit. Have brokers put all the paper work online and eliminated the costs of documentation - like the dreaded banking industry? Just go to a closing and see the buyers get writers cramp from all of the forms to be signed.
Look at this chart from the Keller Center's latest study of FIFTY THOUSAND REALTORS - and you'll see that they are still pouring money into Direct mail and print advertising. A later chart in the same report shows those to sources of marketing leading to the LEAST SOURCES OF NEW LEADS. Once again - no evidence that anyone is doing anything other than making "Model T Fords" in this business.
Just like Detroit has put navigation, anti-lock brakes and satellite radio into their cars, but failed to lower the cost or increase the quality of their commodity, the real estate industry suffers from the same basic institutional failings.
I'm not even asking for REALTORS to lower their commission - because my Acura costs way more than any comparable Ford. At the same time, let's not assume that every REALTOR with a digital camera is actually producing a better product or service - because one glance at the marketing they do with that camera and we're back onto the Used Car Lot.
And that's why the real estate industry needs - is begging for - it's FIFTEEN BILLION DOLLAR TAX CREDIT. Because it's just a loan of a different kind. A "please don't make us change" subsidy. A "stave off the market forces" protectionism. A "keep hope alive" pact with their political masters in exchange for something - votes, home affordability, something - but certainly not profitability, efficiency or even jobs. Sixty percent of all REALTORS who start today will quit within twelve months - and it has been like that FOR TWO DECADES. So the real estate industry can't even claim it's $15 billion will save jobs.
Of course, like the automobile industry, not every company is on Capital Hill looking for a handout. Honda isn't there - and neither are some real estate brokers who ARE making money, despite declining markets. Neither Toyota nor some brokers are asking for taxpayer protection from change - from innovation, painful but necessary evolution. Some are even embracing it.
What's more, some consumers are helping them do it. For example, yesterday I leased a new Acura RL (with no problem getting a lease - wonder where that credit crisis is??). Why didn't I choose a Ford or Chrysler or GM product? Aren't they just as good? No. Don't they deserve my support? No. Because their taxpayer loan is going to come from me whether I like it or not.
But ultimately, I bought another Acura - my third in a decade - because as a consumer, I reward innovation, reliability, creativity. And I prefer to deal with companies that make a profit - because the fact that they are making a profit means they are trading value for value. Their products deserve my money. I endorse their business models by purchasing from them. And I reward them for meeting my needs on my terms.
Most importantly, I buy from them because they respect that my money is mine - and that they have to earn it. Too bad the Detroit Three - and some REALTORS - have forgotten that.
PS: Want to be AMAZED? Check out this little phrase in the NAR stimulous proposal:
That FIFTEEN BILLION TAX SUBSIDY JUST DOUBLED or even TRIPLED!