Read it here first: Incentives Distorting Home Prices

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. 

Today’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, 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, Florida: $479,000
Actual price = $450,000-459,000

Home buyers received Vouchers to purchase Mustangs, or a $20,000

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

Originally listed in February 2005 for $635,000; Wells Fargo 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.


UPDATE: DECEMBER 23, 2007 3:06PM

This is now available in the (free) Real Estate Journal


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

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What's been said:

Discussions found on the web:
  1. CaptiousNut commented on Dec 19

    This may be an issue for lenders – sale price transparency and whatnot. But I don’t see it a concern for others.

    I particularly don’t like it as a call for more regulation.

  2. Deborah commented on Dec 19

    To me the article showed how stupid the buyers are to jack up their own transfer and property taxes by including rapidly depreciating items such as autos in the purchase.

  3. biglugmonkey commented on Dec 19

    Barry, good on you for recognizing the need for some reasonable oversight.

    CaptiousNut, this didn’t strike me “as a call for more regulation,” but more of a recognition that current law should have been, and should be, followed.

  4. Marcus Aurelius commented on Dec 19

    The entire political/economic situation of the US (trust me – there will be epic political repercussions due to economic factors within the coming decade), can be laid directly at the feet of the “Conservative” penchant for “deregulation.” These two words are bracketed by quotes because they have come to represent ideas and ideologies far removed from – almost to the point of being directly opposed to – their original meanings.

    In a normal political climate, there can be no more liberal activity than the deregulation of industry (argue this statement to its logical end, and you’ll see what I mean). Our current political regime has fostered much more than simple deregulation of industry, having set the precedent and lowered the bar to the point that rank criminality routinely goes unpunished.

    We have witnessed this lawlessness at every level of government and industry over the past 7 years. From blatant and unchecked violations of the Constitution and statute laws, to cronyism, to crimes committed under color of law, to the enterprise-wide unwillingness of the appropriate authorities to enforce the law of the land, as is their duty.

    The evidence of such criminality is overwhelming.

    At the heart of this problem is the propagandists device known as “The Big Lie”, the gist of which is that people will believe a big lie much more readily than they will a small one. For eight years, we have been lied to right, left, and regular. We have not only accepted the lies we have been told as relative truths, we have internalized and justified them to the point that we have learned to lie to ourselves.

    The bottom line (and the Big Picture is always about the Bottom Line) is that we are being robbed on a grand scale, yet we can’t bring ourselves to believe that we would be so grossly victimized by our own government and business leaders (as well as by our own acceptance of the role of willing victim – we are complicit in our own victimization in that we continue to allow it).

    People tend to forget that laws and regulations do not spring from the head of Zeus – fully formed and relative to nothing else under the sun. Laws and regulations exist because, at sometime in the past, someone got screwed, but good. (Probably it was your grandparents – they paid for the last crime wave.)

    The headline on this post reads, in part: “Incentives Distorting Home Prices.”

    The corrected version should read: “Crime Wave Continues, Latest Fraudulent Financial Scheme By Mortgage Lending Industry Uncovered.

    This is not distortion, it is crime.

  5. Ross commented on Dec 19

    I still say that it is time we use racketering statutes to solve the problem.
    Is it not obvious to most that we have an interstate con game aided and abbetted by lenders, bankers, GSE’s, mortgage brokers, and politicos from local to federal?

    RICO the bums. ‘But who knew?’

  6. Winston Munn commented on Dec 19

    Robert Kuttner testimony to House Financial Services Committee:

    Quote: “Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s — lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s.” End Quote.

    It is unwise to believe that unsupervised children will play well together – sometimes adult supervision is required.

  7. anon commented on Dec 19

    It doesn’t help that “the refs” are big players and beneficiaries in the game too…talk about steroid addled?!

  8. dad29 commented on Dec 19

    the various county agencies that track home prices — despite the legal requirements


    Counties, munis, and school districts’ REVENUES are based on valuations. The higher, the better, for them.

    It’s a convenient ‘wink-wink’ scam for all the players.

  9. The Financial Philosopher commented on Dec 19

    Since I am no expert in macro-economics, I am curious about something:

    Those same “incentives” that falsely inflate the real value of a home also “create” more money that goes into the economy.

    Other than inflating the greed-induced financial bubble, which would cause the larger problem — the “false value” of the home – OR – ending the practice of incentives, thereby shutting off the money tap?

  10. michael schumacher commented on Dec 19

    Sounds exactly like Morgan Stanley this morning.

    If that is what we can expect from the financials (countering a loss with “found money”) I gather by this time next year we will be in a share-cropper financially-based economy.

    John Macke has got to be the biggest prick for saying that his loss was an “isolated incident”

    I bet…seems that there were billions of dollars of these “isolated incidents” all over the effing world.


  11. Marcus Aurelius commented on Dec 19

    Other than inflating the greed-induced financial bubble, which would cause the larger problem — the “false value” of the home – OR – ending the practice of incentives, thereby shutting off the money tap?

    Posted by: The Financial Philosopher | Dec 19, 2007 9:44:09 AM


    Using your money tap analogy, the “false value” would be the equivalent of denying how little water is left in the reservoir as you continue to over-water your Arizona lawn with falsely priced water. The incentives are the equivalent of local authorities expanding the loss-leading water system to promote population and economic growth (despite the under-priced and rapidly decreasing supply of water).

    The money tap must be closed because the status quo cannot be sustained in realistic physical or economic terms.

    You might be damned if you do, but you’re even more damned if you don’t.

  12. JKB commented on Dec 19

    “This may be an issue for lenders – sale price transparency and whatnot. But I don’t see it a concern for others.”

    The concern for non-lenders is that, with hidden incentives, the market value of houses is being overstated by 10-20% since the value of the incentives is an inducement to buy and not part of the real market value of the property. As such an instant negative equity situation is created and neighboring homes that are valued by comparable appraisal are also overstated. In essence, as soon as the incentivized transaction occurs the real value of the house declines 10-20% from the sale price, i.e., a price decline.

  13. Stuart commented on Dec 19

    BR, good comments. It extends across pretty much most industries. Take a look at the banks trying to bail out ACA. Talk about left pocket buying from the right pocket and recording as a sale. Blatant financial end run accounting, yet they get away with it,…again. This is as bad as the M-LEC scheme to inject a price into a market where no price existed. Self-funding your own insurance provider so they can continue to provide insurance. On so many levels, that’s blatantly just plain wrong…yet who’s to say anything. Goldman’s L3 earnings.. clearly skeletons there given what we know of the environment for those assets, yet they still remain, so who’s to say anything. Clearly absurd housing figures as you post, but who’s to say anything. Alternative media rants and raves and as a forum posts excellent analytical works to separate fact from fiction, yet the MSM, nary a word, so who’s to say anything. 95% of Joe public, not a clue. Same ole same ole keeps going around and around. Yes, call me skeptical that anything will ever change.

  14. New Yorker commented on Dec 19

    I love it: “…rank criminality routinely goes unpunished” I’m afraid though that this has been a SOP of the business for sometime now.

  15. Stacey Kringle commented on Dec 19

    Isn’t this way of business part of todays MBA curriculum? Moral Relativism and Financial engineering make for a top notch banker.

  16. palm coast, fl realtor commented on Dec 19

    What’s going on really is wrong. As the seller they are trying to keep appraisal values up which in turn keeps the taxes for the homeowner up. These nationwide builders are making creating “false values” for homes as michael schumacher put it, then the banks were lending close to 100% of this false value…now look where it got us. Foreclosure City! They may have a new car, but they still can’t afford their house, and now it’s not worth what they borrowed for it.
    The builder made his money and walked away scot free and the bank is stuck with the problem. Furthermore, it made it impossible to compete for the smaller, honest, hard working companies!

  17. larry commented on Dec 19

    Not to put to fine a point on your comments, but isn’t the lack of oversight, the MS one-time whoops, the govt sponsored non bailout bailout, etc. going to cause problems for the dollar and our financial industry? We’re beginning to look like a banana republic where the rules are anything goes.

  18. wunsacon commented on Dec 19

    Marcus, you are my Hero of the Day. That first post is a keeper.

  19. TDL commented on Dec 19

    I’m just curious, has there never been a corrupt referee? I also find interesting that there has been not one mention of the Fed in the comments. At any point the Fed could have clamped down on these “abusive” lending practices, but did not. So what we need is more or referees? The reality is, the financial industry is the most regulated industry. With heavy regulation comes less competition as the largest players “help” the legislatures write the new regulations. It is the lack of competition due to heavy regulation and that central planning committee known as the Fed that is the cause of these problems we are seeing today.


  20. michael schumacher commented on Dec 19

    The Fed endorsed it…how on earth were they supposed to “clamp down” on it when it was a free-for-all actively endorsed by the Fed?????

    second your post wunascon….


  21. TDL commented on Dec 19

    Mr. Schumacher,
    That is exactly my point. The regulators are supposed to be the “adults” and yet turn a blind eye to activities that are supposedly harmful. To imply that the regulators either need more power or merely need to do their job completely discounts human nature. The regulators will merely protect vested interests and periodically play the role of the “adult” to appease the voters.

    I also want to make another point about the notion of regulators/politicians = adult and the rest of us = children is profoundly distasteful. The notion that once an individual enters public office they become superhuman or is able to overcome human bias and base motivations is very silly.


  22. Francois Theberge commented on Dec 19

    “regulators/politicians = adult and the rest of us = children is profoundly distasteful”

    Distasteful, it may be, but it is nonetheless true. Someone MUST play the role of the supervising adult in this game. (heck! in any game for that matter)

    That does NOT mean they are more adults than the rest of us. Only they are assigned the role of adults. Problem is, our regulators and politicians have decided to go on strike when money and power became the only things that matter.

    That is how Empires start their decline. The US is no different. That does not mean the decline is a done deal. Just that if things are allowed to go the way they are now, the probability of decline is much greater.

    That would be really bad for everyone.


  23. wunsacon commented on Dec 19

    >> The regulators will merely protect vested interests and periodically play the role of the “adult” to appease the voters.

    The “periodically” would be “more often” if it weren’t for the Big Lie that “regulation = bad”. Nearly the WHOLE F****** COUNTRY has accepted this Big Lie.

    Democracy depends on an informed electorate. This electorate — generally — has been “informed” to hate all things government. The bar has been lowered. “Incompetence” is acceptable because “government shouldn’t be involved anyway”.

    And that’s when they’re not angered and distracted by thought of two loving homosexuals gaining respect as first-class citizens.

  24. Tom B commented on Dec 19

    “That is the risk that excessive deregulation and/or inadequate prosecution brings:”

    Deregulation is like anything else; there’s an optimal AMOUNT. And it’s more than we have. Look at lead in Chinese toys; the Sago mine disaster; various attempts by the EPA to “look the other way”; compromised air safety (recent NASA report); E. Coli in spinach. I could go on.

    Other problems relevant to real estate (they are occurring in my county: 1) Builders who give million dollar homes to aldermen to get approval to build ugly subdivisions. 2) State universities who get help from state legislators to side-step local zoning ordinances.

    The whole system, sadly, is corrupt though and through.

  25. Francois commented on Dec 19

    @ Captious wrote: “I particularly don’t like it as a call for more regulation.”
    Come again?

    When the kids push the envelope in my house, they get a warning. If they disregard it, guess what happens?

    The rules are enforced. And if the rules do not work, new rules are established AND enforced, swiftly and decisively. No arguments allowed.

    Otherwise, its chaos that ends up affecting the whole family.

    Exactly what happened in the housing market. The “ME-MYSELF-AND-I” credo led to unbridled bad behavior generating chaos that ended up affecting the whole economy.

    Quite frankly, I’m having a heck of a hard time understanding why people that most certainly would not tolerate bad behavior in their own house are so freaking willing to look the other way when it comes to the economic house.


  26. Below The Crowd commented on Dec 19

    Brief Notes

    Lots going on this week: Adding to my comments on retail a couple of days ago, I stopped by Best Buy (NYSE:BBY) yesterday to pick up a couple of essentials. It seemed quite slow for a pre-Christmas week evening. Their…

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