I originally wrote this post in 2006. We've hit the major correction I mentioned in the article, but I think many of these issues are still relevant, given a market that is defined by high costs and low liquidity.
When we first moved to the Bay Area, we searched for a new home for several years. The real estate market had a single, unwritten rule:
Rule #1: Screw the Buyer
I've seen what must be hundreds of houses and I've talked with dozens of real estate agents. I finally found one broker who was willing to work with us as an agent's buyer for a flat fee, on the premise that my wife and I would do all the legwork. He'd only be involved in writing offer letters and any final contract negotiation. This was perhaps one of the smartest moves we could have made.
Here's how buyers get screwed in this market.
1) Your agent doesn't really represent your best interests. Buyers' agents are paid a percentage of the gross. They have a strong incentive to get the deal done as quickly as possible, not to get you the lowest possible price on a house. We've had agents pressure us to make offers way above asking "to be sure we got in while we could". In one case we backed off from a deal where the agent tried to strong-arm us into increasing a good offer by another $50,000. Angry, we walked away. The house eventually sold for $50,000 less than what we'd originally offered.
2) Agents on both sides can withhold and distort price information. A free market is based on the free exchange of information, or at least I thought so. If real estate is a free market, then as a potential buyer shouldn't I be allowed to know what other bids have been placed on a house, and the amount of those bids? Apparently not. In fact, I was told by one seller's agent that it's unethical to provide this information. Less profitable perhaps, but unethical?
3) The press pumps up buyer's frenzy. Reading the papers here (before 2008), you'd think every house you walk into is going to be a multiple bid death-match, with the biggest wallet winning. Horror stories of twenty offers and final prices 30% above asking abound. Yet on the ground, this doesn't happen all that often, and there are certain segments of the market that are soft.
4) The construction cost here runs $100 to $200 per square foot. This is greater than the retail cost per-square-foot of many other regions. Labor costs may be a bit higher, as well as insurance and permits, but that much more expensive?
4) The state and communities of California use zoning laws and restrictive ordinances to help keep prices high. Land is relatively scarce, but zoning forces houses to be single occupancy. So if a decent-sized lot costs $600K, the builder has an incentive to put up the largest single family home that zoning will allow, and sell it for $1.3 million to maximize his profit. Changing the zoning laws would reduce sprawl and increase available housing, but that would negatively impact real estate values. Can't have that.
Here, the tax rate on a home is based on the last purchase price. The higher the price, the higher the tax revenues. In fact, unless I get very lucky when I finally do buy a home, I'll be paying more in property taxes than I will be paying in state income taxes.
