Why homeownership is important and how Houwzer is making it more cost-effective
In a January 12, 2016 Inman News article, California Association of Realtors CEO, Joel Singer, expressed concern about the declining rates of homeownership in America. Mr. Singer’s concerns are well placed: Post World War II homeownership is the backbone of American Middle-Class wealth. In fact, homeownership created the middle class in America. The evidence for this proposition is irrefutable. What is refutable, however, are the reasons Singer gives for the declining homeownership rates. He estimates homeownership rates dropped a full 10% since 2006 to its lowest rate since the 1960’s.
Singer lays out the same old tired generalizations as causes for the declining numbers. Each factor he sights may hold a kernel of truth but are too general and simplistic to get at the root:
- Income inequality
- Racial discrimination
- The new economy
What really clouds Mr. Singer’s perspective on this issue and should disqualify him from approaching the topic at all is his mission of protecting the current real estate broker/agent model, in his words a “thirty-year history of challenging the industry to face its threats while working on practical solutions for keeping the agent at the center of the transaction.”
Why does keeping the agent at the “center of the transaction” even matter? How does this priority further the aims of increasing homeownership rates? Maintaining the status quo for Singer and the National Association of Realtors (“NAR”) with the agency model is tantamount. It is their raison d’etre! The effin’ irony here is the current agency model is what’s decimating homeownership rates. Did you ask how? Let me explain.
The days of men like my father working for the Caterpillar Corporation for 25 years are over. It’s both spouses out there now working harder than ever for the man. The average career span for a millennial is 3-6 years which can easily translate into moving every 3-6 years.
What’s this have to do with homeownership?
Everything! Let’s use Philadelphia for my example. Let’s say I purchased a townhome in 2009 for $500,000 after saving for 4 years post college (we must also assume I’m not crushed by student loan debt!). In 2015, I sell this same townhouse for $600,000 and get ready to move to Austin, TX for career #2. On paper, I made $100,000 in equity over 6 years, right? Wrong! While the original purchase price may have been $500,000, my settlement sheet (HUD1 back then) showed total funds due $523,500. How’d that happen? Let’s see. I paid:
- $5000 loan origination fee to my lender
- $10,000 to the City Of Philadelphia for transfer tax (2% from buyer & 2% from seller = 4% total transfer tax ticket!)
- $3000 title insurance fee (It’s illegal in most states to discount title… That’s right, ILLEGAL to cut consumers a break! Title insurance underwriters have the lowest risk portfolios of any insurer. In fact, title insurance premiums are so wrought with FAT that 85% of the premium goes to the servicer who found the buyer)
- As much as $995 went to Berkshire Hathaway/Keller Williams/Coldwell Banker/Remax for a “Broker Admin Fee”
- $500 home inspection
Then there’s a host of miscellaneous charges such as recording fees, notary fees, wire fees, overnight mailing fees, fees for the title closing agent to show up, etc… Okay, so really I made only $66,500 since my basis after settlement cost were $523,500 when I purchased. Guess Again! At the closing for the sale of my townhouse in 2015, there’s a whole set of other expenses:
- 6% realtor commission = $36,000
- 2% transfer tax = $12,000
- 1% seller assist = $6000
- Conveyance fees = $300
Get the picture? Throw in maintenance fees, taxes & insurances (none of which a renter pays) and you’re lucky to break even. When you consider the lost opportunity cost of being able to pick-up and leave whenever your lease expires, which is pretty attractive to a large segment of millennials, the reason for declining homeownership rates are crystal clear. The truth is, everyone from the state & municipal governments, insurance companies, title companies and worst of all, real estate brokers (with the backing of NAR: The largest industry for lobbyist expenditures nationally) have conspired to strip middle class America of their home equity at the closing table on the way in, and the way out! Those are real numbers in that example… They’re taking it all! These transaction costs are also a tremendous drag on the asset class as a whole by making liquidity events so expensive to the point of being prohibitive for the first 3-6 years of ownership.
So what’s the answer?
Don’t buy real estate? That cannot be it! Equity built through home appreciation and principal pay-down has created the very wealth that makes our middle class. The equity built up in homes has enabled legacies to be passed on to siblings & heirs for college tuitions, down payments on their own homes, or retirement funds for the buyer. Home equity is fundamental for preserving the middle class. So what can be done? Houwzer is starting with the biggest drain: real estate commissions.
In March of 2015, Houwzer launched the first full service residential real estate brokerage that charges sellers no listing commission or flat fee. Houwzer sells homes for free! That’s right. Houwzer has tested the underlying premises behind real estate marketing and proved with 30M+ in sales volume in just 6 months that it doesn’t cost 6% to sell a home. It cost about $500 in pictures, virtual tour, signage and some other incidentals which Houwzer recoups only if your house is sold at the closing table.
This brokerage model survives and “thrives” on buyer commissions alone. If Houwzer brings the buyer, it collects the buyer agency commission. If another brokerage brings the buyer, they collect the commission. This model saves the seller 3% which is the cost of the standard listing commission. It may not sound like a lot, but in our example with the $600,000 townhome sale in 2015, the seller would have put an additional $18,000 in his/her pocket!
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