Freakonomics in the Times Magazine: Payback Time

In their June 10, 2007, column for the New York Times Magazine, Dubner and Levitt present some interesting new research on real estate sales. No, it’s not what you’re thinking: more Realtor bashing! Although it is true that they have written before about the imperfect nature of the Realtor’s commission model, this column takes a somewhat different tack. It’s about a little-known trick known as a cash-back transaction, in which a buyer receives a “rebate” to finance his own down-payment – a rebate that the lending bank never finds out about. Click here to read the column and here to comment. This blog post supplies additional research materials.

1. Itzhak Ben-David, a Ph.D. candidate in finance at the University of Chicago’s Graduate School of Business, has written a paper called “Manipulation of Collateral Values by Borrowers and Intermediaries.” This paper is the basis of the Freakonomics column. Through analysis of nearly 300,000 real-estate transactions in the Chicago area, Ben-David was able to identify sales where a cash-back transaction likely occurred and identify the noteworthy traits they shared. He found that a small group of real estate agents are repeat offenders.
2. Besides the section on real estate agents in Freakonomics itself and an earlier N.Y. Times column, Dubner and Levitt have blogged regularly about real estate here, including this virtual real estate roller coaster and the question of whether street names affect property values.
3. In their paper “Income and Wealth Effects of Italian Households,” Charles Grant and Tuomas Peltonen show how much harder it is to buy a home in Italy than in the U.S.
4. In a briefing paper called “Home Insecurity” from the Demos think tank, David Callahan argues that appraisers, lenders, brokers, and real estate agents are highly incentivized to overvalue homes, and may therefore be responsible for artificially creating a housing bubble.
5. In a Wisconsin Real Estate Magazine article titled “Appraisal Fraud,” Debbi Conrad writes that most appraisers admit they have the power to end appraisal fraud, but that collusion with real estate agents is so widespread that it’s unlikely to happen.
6. According to David Jackson at the Chicago Tribune, mortgage fraud is “the new street hustle” among urban gangs like Chicago’s Black Disciples, who don’t make as much money selling crack cocaine as they used to.