Read It Here First: Incentives Distorting Home Prices

by: Barry Ritholtz

Since the Housing market peaked in August 2005, we have argued that reported home sale prices dramatically understate the actual price drop of sales. This has been especially true of New Home Sales, thanks to the many builder incentives we have seen.

Wednesday's WSJ has an article detailing just how pervasive the practice has been nationwide -- and how much of these incentives are not disclosed to the various county agencies that track home prices -- despite the legal requirements they do so. From Department of Duh: How Hidden Incentives Distort Home Prices.


"As the housing market slump deepens, disguised discounts are making it harder to tell exactly how much people are paying for homes.

Buyers, sellers and other market participants typically monitor fluctuating home values through sale records that legally have to be listed with county clerks. But incentives offered to buyers -- ranging from free cars or furniture to cash rebates -- are making those prices less reliable as a sign of what buyers actually paid, netting out the giveaways. And that may be misleading lenders and people shopping for homes, some real-estate lawyers and appraisers warn."

Some examples where the incentive is not public:

• KB Home (NYSE:KBH), Colorado: $196,000, according to deed.
Actual price = $168,400

Buyer disclosure form: KB paid $27,600 to 3rd firm, which made a cash payment to the buyer.

Lennar (NYSE:LEN), Florida: $479,000
Actual price = $450,000-459,000

Home buyers received vouchers to purchase Mustangs, or a $20,000 Harley-Davidson.

Bennett Homes, Maryland: $600,000
Actual price = $469,000

Originally listed in February 2005 for $635,000; Wells Fargo (NYSE:WFC) held two mortgages: first for $479,800, second for up to $120,000. Buyer's agent said the transaction included a $120,000 "payment by the builder to an organization that collected fees for finding buyers."

(I always thought those folks were called Real Estate Agents).

Fraud, false reporting to government agencies, misleading documentation. For those of us who believe in disclosure and the rule of law, the current circumstances are a vast absurdity, and scream out for legal enforcement.


Why are there referees in professional sports? Because the competition between athletes leads to the rules of the game eventually getting tested (i.e., cheating). You need refs to prevent the game from spiraling into something that no longer is recognizable to fans of the sport.

In business, the profit incentive leads to behavior from a small but influential swath of participants that pushes the envelope, tap dances close to that line -- and then blows past it, deep into what is clearly criminal territory.

That is Human Nature -- we are competitive creatures, and we need some legitimate boundaries. If you haven't noticed, when left to our own devices, too many of us eventually cut corners, eventually leading to the many scandals we have seen over the past decade: Corrupted analysts, accounting scandals, predatory lending, conflicts of interests, option backdating, etc.

That is the risk that excessive deregulation and/or inadequate prosecution brings: With no refs on the field of business, too many of the players eventually become steroid-addled, drug-addicted, quasi-criminals.

How Hidden Incentives Distort Home Prices
WSJ, December 19, 2007

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