Economics, U.S. Economy

The facts on the National Association of Realtors (NAR)

Image Credit: Shutterstock

Image Credit: Shutterstock

The National Association of Realtors (NAR) exists to preserve the free enterprise system and protect home ownership in America for today and tomorrow. Is this fact or fable? For 90 years the NAR (and its predecessor organization) has supported expanding the government’s role in housing finance. Today, the government guarantees upwards of 90 percent of all new mortgages.

It is easy to reconcile the NAR’s interest in home ownership and its support for the expansion of the government’s role in housing finance. It is as basic as Economics 101. The marginal buyer is the one who is just willing to pay the price in the marginal transaction undertaken with the marginal seller. Sales in a housing market occur at this marginal or equilibrium price. It is in NAR’s and its members’ interest to lobby the government for loose and highly leveraged lending policies in order to “qualify” more marginal home buyers in an effort to increase marginal prices. Since the primary goal is to create more buying power today, little or no concern is paid to the fact that these new highly leveraged buyers are exposed to abusive levels of delinquency and foreclosure risk in the future.

For decades, the FHA and HUD promoted ever increasing levels of leverage in the US housing market. Increasing leverage serves to expand the pool of marginal buyers.  From 1954 to 2006 FHA’s compound leverage (the combined effect of lower down payment, a longer loan tern and higher debt-to-income ratios) increased 16-fold while its incidence of foreclosure also exploded, increasing 13-fold. But the leadership at FHA/HUD would not be content until the entire housing market had followed suit and levered up.  Enter the National Homeownership Strategy (1995), with the lynchpin being the elimination of down payments. By 2004 HUD was able to boast: “Over the past ten years, there has been a ‘revolution in affordable lending’ that has extended homeownership opportunities to historically underserved households.”

In my research I have not come across a single instance where the NAR has stated that lending standards should be tightened. To the contrary the NAR has almost always called for loosened lending standards and continued or increased government involvement, no matter the market conditions. Rather than protecting free enterprise and homeowners, the result was the creation of a dangerously synchronized market consisting of an unprecedented numbers of overleveraged loans made to an unprecedented number of overleveraged borrowers–a housing finance market ill-equipped to absorb the potential shock of declining prices.

Given its business model, the NAR finds it immensely profitable to lobby for the addition of higher risk marginal buyers to the market. First, real estate commissions are paid in a lump sum at closing, leaving the real estate agent with no skin in the game—if the loan defaults that is someone else’s problem. Second, commissions are generally paid as a percentage of a home’s sales price, so as prices increase, so do commissions. Third, marginal buyers generally enter the market by moving from rental to home ownership. This sets off a chain reaction of sales. The renter buys an existing home at say $140,000, allowing the seller to move to another home, one that is generally more expensive. The chain of sales continues perhaps for a total of 4 or 5 times, until the last seller either rents or buys a new or vacant home. While the real estate commission at 5 percent of the first sale is $7000, the 4 subsequent sales in the chain might generate another $35,000 in commissions, for a total of $42,000 generated from adding just one higher risk marginal buyer.

The reason for the NAR’s fervor for the FHA and other government financing agencies now becomes clear. It is also the reason the NAR is not deterred by the FHA’s more than 3 million foreclosures over the last 3 decades.

Based on these incentives, the NAR’s self-described interest in preserving the free enterprise system and protecting home ownership in America for today and tomorrow is a fable.

5 thoughts on “The facts on the National Association of Realtors (NAR)

  1. There is one additional point that was left out.
    Once the house is foreclosed on, or put in a short-sale, the house goes back on the market. The agents then get another commission when it is then sold again.
    Agents have an incentive to have over leveraged people buy houses. They can make a commission on the house far sooner than they would have. The same house gets turned over far more frequently tan if a stable buyer had purchased it.

  2. The NAR is funded by real estate agents! They are the 4th largest lobbying group. They lobbied were banks must use real estate agents on all foreclosures.
    However the days of the realtor are rapidly coming to an end. 30% less in just 5 years. Not even stockbrokers or travel agents died this fast.

    According to the National Association of Realtors own survey (you have to pay $150 and be a member to get a copy!), only 22% of all homes are sold using the “traditional brokerage model” (aka: the full commission service). That is down from 24% in 2011. Why? Because home values dropped and homeowners had to find an alternative. They learned they could either do it with a discount firm or on their own.

    We now have websites like Zillow, which is ranked the #1 most searched real estate website. The MLS has become out-of-date. Purchase contracts are available at your local Office Max or online. There is a Kinkos/Fed Ex on every corner. And a custom sign is just a few clicks away.
    The real estate industry forgot that the cost of a real estate commission was now usually more than the homeowners have in equity. In this market, the commission structure deserved a good examination under a microscope and it is being challenged. It is no longer “just part of the deal.” Agents were the only ones walking away from the closing with a check. In the last five years, I’ve watched the real estate industry stuck in its antiquated anti-consumer methods, while companies like Zillow, Simple and Sold, and Redfin are changing the real estate industry at lightning speed.

    The real estate revolution is upon us. Never before have the barriers to being able to buy and sell your home been so small. With the cost of homes in the current market, never before has the opportunity been so substantial.

  3. Following up on Thermo’s post and Ed’s point about chain-reaction sales, not only does the NAR want to suck as many marginal buyers into the marketplace as possible, but they want to encourage those marginal buyers to flip their houses as often as possible. If serious down payments are required, then borrowers need to keep coming up with more cash as they flip their way up — not easy for those with weak credit. If near-100% financing is available for weak-credit borrowers, they can keep flipping their way up and generating more commissions. As the Angel Clarence told the original subprime lender, George Bailey, “With every government-financed housing sting, the NAR’s cash register rings.” Or something like that.

  4. “For 90 years the NAR (and its predecessor organization) has supported expanding the government’s role in housing finance”

    As long as that role didn’t involve financing homes for minorities in the suburbs or financing homes in minority neighborhoods…

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