Archive for December 2012

How to buy a house in an artificially tight market

December 28, 2012

Here’s how you buy a house during a mini-bubble, while the odds are stacked against you in ways you’d never imagine when you first set out to find four walls and a roof, in a suitable neighborhood, with a few features that might make it a comfy place to call home. When you’ve had enough time-wasting false starts and shattered hope using conventional channels, you’re ready for the do-it-yourself method.

At one level, it’s as straightforward as it ever has been. You find a seller whose timetable matches yours. You arrive at a price, nail down a few administrative details, and you exchange money for keys.

It’s also absurdly difficult.

You must be willing to lose entire weekends, driving, searching, and coming up empty.  You have to thumb your nose at convention, forget about etiquette, trespass, and knock on doors. You have to eavesdrop, and ask nosy questions of people who, for instance, have allowed a marital squabble to spill into the driveway as they set up their yard sale.

When you find willing sellers, you will have to blur the boundaries.  You’ll have to allow yourself to be pulled deeply into the personal affairs of the other party. Using normal, prudent procedures, two real estate agents would keep you and the other party at arm’s length.  But you have abandoned normal.

This should probably go without saying — when you find sellers who want to ditch their formal listing and forego an unduly rich price in a seller’s market, who agree instead to a fast-and-dirty transaction with a pair of world-weary shoppers brazen enough to corner them in their garage, well, let’s just say there are reasons for that, and you’ll probably discover them the hard way.

When you get your teeth into the deal, you have to sink them deep. You can’t let go, no matter what comes your way. Faulty plumbing, gaping holes in the drywall, scattered piles of pet waste. Hints of legal problems. An angry ex-spouse, who, because of a glitch in the county records, is still on the deed, and now believes she has a stake in the transaction. Logistical challenges. The sellers want the money quickly, and they’ve agreed to a closing date that’s a full week sooner than they can clear out their personal property.  They want to leave everything in the garage while they iron out the next wrinkle in their lives.

After everything else, will you allow it to be a deal breaker?  No, you won’t.  You make a fundamentally unwise decision, at considerable inconvenience to yourself.  Inviting some vaguely frightening brand of liability that can’t be named, but keeps you awake at night, you further blur the boundaries, and allow the short-term storage. Only when it’s too late will you grasp the extent to which, without intermediaries representing the parties, this is mistake.

Before this odyssey, with this party, there was another misadventure. There was the caregiver (holding a garage sale), who promised the dying wife she would sell the house and use the money for the care of the elderly husband, who’d been institutionalized with dementia.  As it happened, the next door neighbor, a renter, desperately wanted the house. The caregiver, now the seller, was not at all sure the neighbor would qualify for a loan. She nonetheless promised that nobody else would get a chance until the neighbor exhausted every conceivable lending source. An eight-week roller-coaster ride that ground to a halt when the neighbor found a lender.

Before the roller coaster ride, there was the short sale offer that was accepted, and then the contract sat and sat in limbo.  Three days before the closing date, nobody could say what would happen next, or when.

Residential purchases are complicated and emotional. Real estate agents will tell you that part of their job is keep the parties from boiling over in their own stew pots when the stove gets hot. The professionals are valuable in a way you can’t appreciate until you think you can do it on your own.

But this is the moral of the story:  Nobody cares about your interests the way you do, and when the odds are stacked against you, nobody will fight your fight to the bloody end like you will.  See you at Home Depot.

Contemplation: Why People Don’t Trust Markets

December 14, 2012

You hear it all the time — the market doesn’t work.  We can’t count on the market.

The market is supposed to pick up signals and the prices are supposed to reflect those signals. That’s how it’s supposed to work. When it fails, it fails spectacularly, in the largest, most important markets – housing and health care, for instance — not the trivial ones.  One might conclude they are not  inherent market failures, but failures because congress (or some force with equivalent power) is scrambling the signal they were supposed to hear.

Take the case of the lost eyeglasses, for instance.  After frantically retracing the day’s activities, the Reasonable Reporter accepts the loss, and heads for the one-hour frame store where the prescription is on file, and the whole transaction can be put to bed quickly, if expensively.

For years, this store has offered fashion frames and excellent service at truly exorbitant prices, when one considers that the product is nothing but molded plastic. For years, the self-insured Reasonable Reporter paid for the frames, the lenses, and the eye exams. They call it fee-for-service, which, loosely translated, means “nobody is helping me pay for this.”

For a dozen years, the Reasonable Reporter had a medical savings account.  The accounts were conceived as part of a scheme that was supposed to tame the cost of health care and put power in the hands of patients by making them responsible for their own health spending decisions.  The law allows a tax-free deposit annually into a medical savings account that can be used for any health-related purpose, combined with a high-deductible insurance policy for hospitalization and catastrophic illnesses. The benefit for a healthy person is an account that grows over the years and can be applied at any point to medical need of any kind.  Patient choice, patient responsibility, lots of privacy.

It was supposed to become a movement. Doctors were supposed to embrace it because collecting from the patient is cheaper than collecting from the insurance company.  They would pass the savings along, the theory said, and some did. The patient would be restrained by financial reality from overusing the health care system, and she was.  Employers would help employees by contributing to the accounts, but be relieved of the expectation that total health care coverage should be part of the compensation package.  A whole fee-for-service subculture was supposed to grow up and there would be a break from the over-priced status quo.  It didn’t, and there wasn’t.

It was a great idea that never truly caught on, and if you want proof that it never caught on, go to a medical appointment and try to persuade the receptionist that since you are going to pay on the spot for the day’s visit, she doesn’t need to photocopy your driver’s license, which is a standard procedure to prevent insurance fraud of the variety where an uninsured person seeks treatment using someone else’s coverage.  Fee-for-service makes the whole routine moot, but the staff aren’t trained to deal with your money, they are trained to fight with insurance companies. For the self-insured, a struggle ensues.

The struggle ensues every single time, at every new health care provider.  It’s exhausting, and this is a tiny illustration of a market that’s failed to pick up a signal.

On the day of the lost eyeglasses, a new job had resulted in new insurance, and there was a radical change in the transaction.  The eyeglass store had the prescription in its data system, and it had something else.  Correct insurance policy data, even though the policy had not yet been used anywhere, for anything.

The Reasonable Reporter paid a bit more than a hundred dollars instead of five hundred, and walked away whistling.

A few weeks later a coverage recap arrived in the mail, showing the part the patient paid, the part the insurance company paid, and – what’s this?  The part that was discounted to the insurance company.  Big Insurance paid less for the eyeglasses than the self-insured patient had been paying for years and years. This, perhaps, should not have been a surprise. It makes sense, until  you think the very next thought.

The reward for being a responsible patient —  for taking charge of your own health care costs and choices – is that you get to subsidize coverage for the employees at the company where they have Big Insurance. You get to pay more, out of your little individual pocket, than the Big Insurance company pays for the same service.

Which is another way of saying, “you got screwed for all those years.”

This is one tiny example in an avalanche of reasons people don’t trust markets. Congress had its thumb on the the medical savings account scale. It put a cap on the number of accounts that could be created, which meant of course, that the insurance providers did not promote the idea. Why would they, if there’s not going to be a large market for it?  If you were seduced by the notion of sending a signal to the market, you were going to be in a tiny minority.

The biggest market of all, of course, is the political market, and voters are the consumers, and politicians are the salespeople.  They know nobody wants to pay more when they can pay less.

The voice of the actual product purveyor  is mute. They have abdicated control of the product. It’s the politician’s product to protect now, so the companies stand back, except in the committee hearings where they show up to bargain, always with the recognition that they can be placed at great commercial and financial disadvantage if they rock the boat.

For an alternative and particularly deep explanation of why people don’t trust markets, watch the Book TV segment about the history of Fannie Mae. (“The Fateful History of Fannie Mae” by Wall Street Journal reporter James Hagerty.  The discussion also involves others.)  Very near the end of this segment, there is question from the audience and a brief contemplation of why congress is afraid to let the housing market work. Paraphrasing:  It’s been 70 years (since the creation of Fannie Mae), and nobody knows whether it will.