The New Economy Real Estate Model – A Soft Sell Concept

As far back as the 1970’s Sears envisioned a kiosk in their stores where a customer could buy stock and even real estate. It was a bold look at the future from one of the world’s largest retailers. All they had to do was to get the consumer to come to their stores to do business. This was quite a challenge thrown down to both Wall Street and Main Street USA. Most of us probably never heard or remember this strategy, and it never got off the ground. People just did not equate Sears with stock or real estate; they were a department store.

In fairness to Sears, the technologies and conveniences did not exist to enable the plan. Sears may have also thought themselves too big to fail. That theme does seem to be a constant.

Hmm, it appears that history does indeed repeat itself, and perhaps at shorter and shorter intervals. It may be ironic that by speeding up processes and the rate at which things can change, the lessons of history are lost at a quicker rate. Did that make sense? If it did, you may be thinking a bit like me – you’ve been cautioned.

In the 1980’s the successful real estate agent became more independent and needed fewer and fewer services from the brokerage firm. As they claimed a higher and higher portion of the brokerage fee, margins for the real estate brokerage began to shrink. Some phenomenally high interest rates had a similar impact on the mortgage banking industry. Unless buyers had no choice, they did not take on these inflated mortgages. The mortgage industry literally shrunk along with their profit margins. We all know that real estate cycles; it goes up and it goes down. The curve is rarely smooth, and is punctuated by sharp turns in one direction or another. Most features of the real estate industry react quickly to the conditions in the market that affect it. Now we have the background for the next attempt to create a commodities market from the real estate process.

In 1974, the Real Estate Settlement and Procedures Act (RESPA), as amended, were passed. It opened the door for consolidations within the industry. To foster competition, companies were regulated to prevent abuses in the industry and to keep prices to the consumer lower. It was almost ironic that the very act that was passed to prevent abuses, in a way opened the door. I don’t know that it has empirically been demonstrated that RESPA actually lowered costs or prevented abuses. With HUD as a watchdog, there was little real enforcement, and although fines were levied, industry practices ultimately were left to the states to manage. It took decades to sort it out, and Wall Street only a few months to make it yesterday’s issue.

The point for mentioning RESPA was that it allowed what was called “controlled business entities,” a term later changed to “affiliated business entities.” The home builder and the real estate brokerage could now have a captive mortgage and title business. The theory was that this would somehow create efficiencies and economies lowering the cost and improve service to the consumer. It didn’t. With all of this vertical integration, each one of the independently managed businesses was caught in the same financial wringer.