This is the first of a zillion-part thread on how the heck we got into this financial mess in the first place. With reader feedback and a lot more reading I’m sure I’ll get close to the real reason, but you have to start somewhere, why not here?
My young and lovely wife, showing what might be overoptimism or maybe artful timing given the economy but more likely just general disappointment with me, has decided to embark on a career in real estate sales. She has taken classes and passed tests, joined one of the very best local firms, and hurled herself into the business of selling historic Charleston homes while they still have some value and the termites haven’t finished their work. And along the way, while mastering the Multiple Listing Service, she learned an important fact that was news to us both: people no longer find houses for sale by looking in the local newspaper. They use the Internet, instead.
The irony here is that — at least in these parts — the local paper seems chock-full of real estate ads. But according to her teachers down at the MLS university, those listings are simply vestigial, like little toes we all have but probably don’t need for balance or, indeed, for anything at all. Real estate brokers put ads in local newspapers because their customers expect them to do so, not because they actually help sell houses.
I’m sure there are exceptions to this rule, but if 80 percent of all houses for sale in the U.S. are eventually sold NOT because of any newspaper listing, tradition or professional pride aside, at some point we can expect real estate newspaper advertising to eventually disappear. Chock up more bad karma for the newspaper industry, where this fact has to have been long known, and which is apparently in even worse trouble than we thought.
But this post isn’t about the newspaper industry or even about the real estate industry. It is about the lack of friction in our commercial lives brought about by the Internet and an emerging thought in my mind that maybe it is time we as a people took action to change some things.
Let me explain.
It’s not that newspaper ads work so poorly for selling real estate, it’s that Internet advertising works so well. You can put more words on a web ad than you could ever put in the newspaper for the same money. You can put more and bigger pictures, virtual tours, Google maps. You can put Zillow virtual appraisals and links to lenders, home inspectors, and the local Chamber of Commerce. Internet house listings can be searched in a zillion ways that newspaper listings cannot. In the time it takes to find a house — any house, maybe even the wrong house — in the newspaper and then go see it, well in that amount of time using the Internet you can find the house, order an inspection, get a loan, and make an offer on the darned thing. It’s like crossing house-hunting with air hockey.
But is it all good?
Don’t tell George W. Bush, but we are in a recession, which is making me look more critically at the Internet as a marketplace. There’s a lot of good about the Internet market, of course. Auction sites like eBay help us get rid of our junk and then help us replace it with new junk. The web has made comparison-shopping for houses and cars and disposable diapers almost a contact sport. And we’re sure as heck better equipped than we were before to claim all that money that’s been waiting for us with some bank manager in Nigeria.
Just as an aside, I know a guy from Japan who actually went to Nigeria once to pick up some of that unclaimed money. It didn’t exist and he felt lucky to get home at all.
The theme of disintermediation — of eliminating middlemen — has been a driving force in the Internet for as long as commerce has been allowed on the web. But what happens when the middleman you just eliminated had as one of his or her jobs the task of keeping us from being ripped off?
Tasks that are harder to accomplish are also less likely to be foolishly accomplished, which is why so few of us make trips to Nigeria.
That’s not the way we are supposed to view things, of course. Ideally the Internet as a research tool is supposed to give us all the information we need in order to resist any allure the Internet has as a tool of fraud or misadventure. But this attitude ignores many of the fundamental forces at work in most sales situations where the simple fact is that we want to buy, the seller wants to sell, and so any countervailing forces are purely voluntary, which is to say often nonexistent.
Take our current national economic mess, the so-called sub-prime mortgage crisis. I like to think that I’m not a subprime kind of guy, but pretending to work as I do (my kids think I TYPE for a living) the world may not always see me the way I would like to be seen. So last year, in what we didn’t know were the waning and idyllic pre-subprime days, I tried to get a new mortgage. Of course I used the Internet to get the loan because, as we all know, when banks compete I win. And within a few days, without having to actually meet with or even speak to another human, I found myself offered a $336,000 mortgage.
It was SO easy. Fill out a few online forms, make some choices, and there I was, about to close that loan. But then I did an odd thing. I carefully read the papers I was about to sign (I’m one of THOSE people). And in that residential loan application, right on line something or other, was a number that didn’t make any sense to me at all. It was labeled “total household income” and was almost twice the pitiful amount I actually earn.
From where did that number come? It certainly never came from me. Since my signature would be at the bottom of this application I wanted to make sure everything was correct, so I called the mortgage broker. For the first time we spoke. She was a very nice lady, too, and explained that number was the variable required for all the ratios to be correct so I could qualify for the loan.
“But it isn’t true,” I said.
“Do you want the loan or not?” she asked.
Not.
I wasn’t so principled as cowardly, but maybe that doesn’t matter: I did what I knew was the right thing for me, which was to walk away from the loan. But evidently a lot of other people took the other course and today are having trouble paying for their houses, which is a big part of the reason why we are in this current economic mess.
This little drama of mine explains the credit crunch better than Federal Reserve chairman Ben Bernanke ever would. Securitization of mortgages works just fine unless the mortgages are based on lies. Lenders turned a blind eye to bad loans and bad loan candidates because another company assumed the risk by bundling these loans and reselling them on a global market.
What has caused the credit problems to extend beyond subprime borrowers to just about everyone is the simple fact that lenders can’t act so sloppily now, but having turned that blind eye for so many years they have no idea who is telling the truth anymore. So they don’t trust anyone.
And that brings me back to transparency and disintermediation and why the heck the Internet, which was very involved in enabling a lot of this bad behavior, didn’t do even the smallest thing to help save us from ourselves?
I suppose it was because there is no money in virtue, no easily measurable value in NOT having those banks compete so I could win only to eventually lose.
Do these loan referral outfits like LendingTree and LowerMyBills and the many, many others EVER say, “Wait a minute, pardner, there’s no way you can qualify for any loan, much less that no-doc super-jumbo you have your eye on?”
No.
In their defense, these companies are never actually faced with that question, which is ultimately asked not of them but of their customers, the lenders, and we know how much self-restraint those people have: almost none.
Here’s why I bring this up. It is clear to me that government (ANY government, not just the U.S. federal government) and Wall Street have no idea whatsoever how to handle the current crisis. They are just trying to look busy while protecting their own interests and allowing those affected to muddle our way through this mess to some kind of solution. It’s not that they don’t want to be helpful (if the cost of being helpful is low enough) but that they simply don’t know HOW to be helpful. They can’t be educated and they can’t be changed. Certainly they wouldn’t consider any course that would curtail government authority or commercial opportunity.
So I figure we’re on our own. And if we are really, truly on our own, we shouldn’t pretend that we’re not, that some agency that doesn’t know its IP address from a hole in the ground will take care of us and make this all better. If we’re on our own we should solve our own problems using the tools at our disposal. Which brings me back to the Internet, where it ought to be possible for a change to use all that transparency and economic friction reduction to actually do something FOR us, rather than something TO us.
Posted by cringely / Semi-coherent Rambling
