There’s not much that excites the hoi polloi of the real estate industry more than the suggestion of disintermediation: that one day, buyers and sellers would transact business without having to call their local REALTOR and pay the commission. If it’s not one lion over the hill, then it’s another. If it’s not a lion, then it’s an angry pig over the hill. Even after countless denials, brokers and agents insist that Zillow, for example, intends to get rid of agents altogether.
A recent post on Inman, and the comments under it got me thinking how deeply the fear runs. It’s a no-big-deal, typical “cool technology to look at” post by Bernice Ross about the CMA. In relevant part, she talked about algorithms that could compute repair costs of a home with an older roof. The comment section responded by wondering if Ross had ever sold real estate, talking about how inaccurate those algorithms are, etc. Lots of fear 🙂
Thing is, there is a real way that an agent-free future could get here, and faster than you might imagine. Most of the industry is not paying attention, of course, but the threat isn’t from Silicon Valley startups with bearded dudes in shorts. It’s from Wall Street and Washington DC with men and women in power suits. Allow me to connect the dots.
Do You Remember…
I wrote a post last year talking about something that had the appraiser community up in arms for a few weeks: Fannie Mae’s Collateral Underwriter. Let me do an extended excerpt:
We might as well go straight to the horse for a brief overview of what CU is. Read this from Fannie Mae.
For those that don’t like to read (in which case, I wonder why you’re here… but anyhow), CU is a free tool provided to lenders by Fannie Mae that scores an appraisal and elements in an appraisal on a 1 to 5 scale, with 1 being “low risk” and 5 being “high risk”.
It’s important to understand that “risk” here means something like “variance from the model” rather than “the loan is risky”. It measures how an appraisal differs from what the system expects based on past appraisals, valuation models, etc. etc. (Fannie hasn’t said, and no one really knows, what elements, in what weights, go into the expected results.) So a “high-risk” appraisal simply means that it differs from what Fannie’s automated system expected to see; the loan and the property itself may be extremely low-risk indeed.
CU is built on top of Fannie Mae’s Uniform Appraisal Dataset (UAD), a massive database of virtually every property and every comparable in the U.S. built from a mix of public records, purchased private data, and some 12 million appraisals and 20 million transactions to date submitted to Fannie Mae by lenders. In Rick and Bill’s judgment, the UAD is the finest sold-data database in the country, if not the world.
By the way, Fannie Mae is the lead on the project, but it is a join project with Freddie Mac, and I believe they’re looking at expanding CU to other GSEs and federal departments like VA, FHA, etc.
At the time, appraisers were concerned about all the unknowns, all the extra costs, etc. But a year later, it doesn’t appear to have destroyed the market as some had feared.
But at the time, I wondered about whether the pricing that a listing agent does on a property still mattered:
Since only lenders have access to Collateral Underwriter, I’m not even sure if that sort of thing is possible pre-listing. But it does suggest that one of the most important services of an experienced REALTOR, her knowledge of the market, and her ability to price a home correctly so that it generates maximum interest, maximum offers, and highest price is… devalued.
After all, whatever the listing agent thinks the value of the home is, if the house won’t appraise, it won’t appraise. And her opinion doesn’t mean a whole lot then, does it?
I need to research this further, but my understanding is that Fannie Mae’s UAD (Uniform Appraisal Dataset) is a database containing all the appraisals that have been submitted to Fannie/Freddie. Matt Cohen of Clareity thinks UAD is just a data standard — fine, whatever the name, Fannie/Freddie has to have a database somewhere of appraisals in order for Collateral Underwriter to do what it does: score an appraisal and kick it back.
The Real Power
Fact is, the real power in real estate is in the mortgage banks. We’ve seen this firsthand when the housing market all but collapsed for a few years. We still see it when NAR, Realogy, big companies everywhere are constantly grousing about unavailability of capital to borrowers. Sure, a few rich people buy in all cash. Most investors do as well. But for the vast majority of buyers, if they can’t get a loan, they’re not buying a house.
All of the gyrations of the real estate industry in data analysis, all the talk of real estate Big Data, etc. don’t matter much if the bank says Nyet.
So Imagine This…
So let’s assume that Fannie/Freddie/Whoever does in fact have this massive dataset of all appraisals that have been done for the past several years. They use it today to score appraisals, so they can tell the bank that they will or will not buy the mortgage in question. According to one experienced appraiser I interviewed last year, “Fannie has the best sold database in the country, period.”
Fannie and Freddie are private companies operating under a federal charter; they make money, and like making money. Their shareholders do too. So they decide to open up UAD to the public via a partnership.
A buyer can go to some website somewhere, find a house, and submit that to some sort of “Fair Pricing Engine” (“FPE” hereafter) powered by Fannie/Freddie. FPE kicks back a price — it’s an AVM! We all know how much the industry hates AVMs, like the Zestimate, right? FPE also includes various TCO (Total Cost of Ownership) figures for the property, drawn from the appraisal data that the UAD has, combined with some algorithm (Bernice Ross above).
At the end of it, FPE literally says, “We will finance 82% of this home” and gives you the maximum mortgage a bank will write on that home.
Buyer clicks “Purchase Home”, and the machinery of contract, closing, etc. go into action. And please let’s not pretend that the actual process of going from contract to close is something that requires the average REALTOR. If there’s been significant automation in real estate technology in the past several years, it’s in making the paperwork more efficient. Digital signatures, online forms, offshore transaction coordinators, title and escrow companies, etc. etc. are all kind of a machine that can run itself.
But what about negotiation? That’s precisely the thing. If the bank tells you what mortgage it will write on a property, how much “negotiation” is there really to be had? Is that something a buyer and seller cannot do themselves?
What sets the Fannie UAD apart from any other “technology” is that it guides the lending decisions of virtually every mortgage bank in the country. I mean, unless we’re talking about some exotic jumbo mortgage, no private bank wants to hold the mortgage on their books. If Fannie says nyet, the bank is going to say nyet. So it really doesn’t matter much how much a REALTOR thinks the price is crazy wrong; unless you can find a cash buyer or a private lender who doesn’t care about Fannie Mae, if Fannie’s AVM says the price is X, the price is X.
FSBO With Fannie Mae
In that world, why would a seller hire a real estate agent and pay 6% of the sale price to market a home? The maximum price he would get is fixed by Fannie Mae’s AVM, unless you think your buyer is going to come out of pocket with more downpayment, or is going to pay cash above the Fannie price.
Sure, the marketing and the showing buyers around… I imagine companies would pop up to do that for a fixed fee. I mean, we already have a lot of “$495 for MLS entry” companies no?
The contract? Hire a lawyer for like $750 to do that part for you.
As a seller, you go to the Fair Price Engine, put in your address, and now you know what you can get for your house. So you just put it up for sale on some website or another, hire some MLS-marketing-showing service, and a lawyer.
All of the local knowledge, the special insight, the expertise, all of that which an experienced Counselor-REALTOR (as opposed to the ho-hum run of the mill Facilitator-REALTOR) brings to the table doesn’t much matter does it?
Won’t Happen, Can’t Happen
I imagine Wall Street would love something like this, because it brings more certainty to the loans they’re packaging into RMBS. Their consumer divisions, like BofA, Chase, Wells Fargo, etc. could just throw up websites showing all of the properties in the country and how much they are willing to finance on each house. Let the buyer start on Chase.com, look for a property, find one, and click Buy.
Sellers would love not to pay the 6%. Buyers would love having far more certainty — how exactly would bidding wars work when every single person knows how much mortgage he could get on the house he wants to buy?
But… that won’t happen, right? Can’t happen. No algorithm can replace the human expertise on the street. Right? Right?
Today’s dose of paranoia brought to you by the 2016 Presidential