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July 20, 2007

soldsign.gif   Yesterday afternoon, we completed the final chapter in the liquidation of my wife’s house – the closing.   Last time  I mentioned this, we tried just tacking up our own sign to see what would happen.  We received some calls and were able to show the house ourselves, but in the end, decided to list the house with an agency.   Within a week we had a viable offer, and then a second offer negotiated in the event the first fell through.  With the end objective to sell, it is difficult to argue with those results.

Depending on your perspective, it is difficult to see the agencies walk way with 6% of the gross, which can be a large percentage of the seller’s net.  What do you really get for that money?  For starters,  you gain entry to the system, which seems more to do with the agency networks replete with secret winks, nods, and smooze ladden stories.  It’s more than just the MLS listing.  Depending on your agent, you also gain access to a lot of marketing insight on how to stage the rooms, pictures taken with very wide angle lenses to enhance the perception of size, and of course the savvy to know what will fly and what won’t in the final deal.  It’s also apparant to me that the agents work both sides of the deal, despite their pledge to support solely your interest.  Their mutual objective is to close a deal – a profitable deal.   As a result, your agent may try to persuade you to pay more as a buyer, or take a little less as the seller in the interest of getting it done.   When it gets down to the last several thousand,  the difference to their bottom line is probably in the range of a good dinner out.

Sitting in the lawyer’s office yesterday, with both agents, the buyer’s mortgage broker, and listening as the lawyer did his best to inject levity and personality into going through the HUD1 form, a realization about much of our economy struck me.

The lawyer, the bank, and the real estate agent’s income, and hence their ability to return to the economy through their subsequent spending, was all based upon the flow of the newly borrowed money provided by the buyers.   This transaction, and the opportunity brought to all parties, exists solely because the valuation of property is going up.   It’s much like the stock market in that regard.

The real estate industry, and all the related legal and professions that enable it, can operate solely because there is a desire to change, to move, and there is equity that may be tapped to pay the way.  This equity comes from two principle sources.  Appreciation of value over time and inequalities in valuation between diverse geographic areas.   Our deal was made possible by the first scenario, our house is worth more now than it was five years ago.   The second scenario is evidenced by the relocation of people from the Northeast and the West coast, to our area here.   During a recent dinner conversation, our guests shared that they were going to sell their townhome in Maryland for about $400K and move to a similar size and style townhome just outside Atlanta for about $225K.    It’s that value inequality that allows movement in one direction.   As people move, values appreciate in the destination region.

Areas ‘Boom’ as people move in, and ‘Bust’ as they leave.  As they leave, valuations in their area shrinks.  Those that don’t recognize this and sell early in the movement, may be trapped, owing more than their property is worth, depending upon their equity stake, and the level of devaluation.   It’s not a zero sum game because the population is growing and our consumption levels are on the rise.

While real estate could be likened to ‘muscial chairs’, I do expect the music to continue to play for quite some time, and that is good news to our growth economy.

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