Website traffic as proxy for real-estate correction

Amidst the sub-prime lending mess, it is difficult to gauge the true state of the real-estate market. Several blogs track the inevitable correction, and academic Casandras such as Robert Shiller– who correctly called the end of the 2000 technology-fueled stock bubble– have been predicting doom and gloom for some time. Meanwhile the National Association of Realtors would like to assure you that all is well, pay no attention to the man behind the curtain please. (In fact, one full-page ad published in the New York Times in late 2006 hoping to stem the rising tide of panic stated: “It’s a great time to buy or sell a house.” Simple economics would dictate that it can’t be a both buyer’s market and a seller’s market but hey, irrational exuberance is all about freedom from the dictates of logic. BigPicture blog compared the advice to an investment banker suggesting that it’s a great time to buy or sell the same stock.)

It does not help that the market indicators themselves have been completely skewed, in spite of the full disclosure tradition. Keeping with Justice Brandeis’s principle that sunlight is the best disinfectant, few other markets have so much regulation intended to keep the level of transparency. From the seller’s obligation to disclose known defects to the public database of all transactions, residential real estate makes the post Sarbannes-Oxley corporation look like the Iran Curtain. But compelling disclosure does nothing to ensure the accuracy or relevance of the data published. Since perception is everything in market-setting, it is very much in the interest of sellers to project the existence of high demand and a robust market firing on all cylinders. Nothing ruins that picture as evidence of price declines.

Because the entire history of the transaction including original asking price is conveniently available on MLS, it would obvious when the seller did not succeed. That sets a bad precedent, especially when identical units have to be moved. If the average cookie-cutter suburban development has 100 units and the first few go below market, the next customers in line will demand deeper discounts. Soon the builder is in trouble. Much better to inflate the selling price by throwing all types of incentives. Paying the buyer under the table by the way, is illegal, so builders need more subtlety, in the same way car dealerships charge exorbitant premiums under the “fresh-air-and-sunshine” package. Paying closing costs, throwing in extras and upgrades, in one case offering a car along with the house, are all examples of incentives that are not reflected in the recorded sale price in MLS and not visible to prospective buyers looking for comparison basis. (Here is another article from the San Diego Union Tribune on incentives skewing the data and how that impacts lenders.)

So one must turn to more indirect signs to measure the correction. Fore-closures are one gauge that can’t be faked or sugar-coated, but they reflect the worst-case scenario. Money/CNN now reports on another: the traffic on a website that helps home owners quickly sell their property. According to Florida foreclosure future shock, the House Buyer Network website guarantees a sale by pricing it below market (one would hope, based on an honest appraisal this time, instead of the equally inflated appraisals used to secure financing) and having a real-estate agent commit to purchasing at even lower price if no buyers are found after a specified time. Company president claims to have correctly called the correction in Phoenix, Palm Beach FL and two California counties ahead of time. Their next reading: Central Florida is in trouble, even though Gainesville, FL home of the University of Florida Gators still posted the fourth highest year-over-year gain of all US cities.


On Chinese gold-farming operations

Not everything originating from China is toxic or dangerous to your health but the economic dependency is under scrutiny more than ever. (In retrospect, James Fallows seems to have picked a particularly bad time for his July/August article in the Atlantic Monthly titled Why China’s Rise Is Good For Us.) On the virtual side of the trade, New York Times Sunday magazine published an article about gold-farming operations. These are the contemporary equivalent of sweat-shops where employees are paid to play online games. Specifically massively multi-player online role-playing games, or MMORPGs such as World of Warcraft. These games all share one key trait: users get to build “characters” over time, sometimes years. Characters gain experience and skill based on their exploits, and the newly acqui pred power open the door to more interesting aspects of the game.

Intended to approximate the competitive nature of real life, where hard work and persistence over time leads to results, or so the children are counseled endlessly, this naturally leads to a black market in developed game characters. While the idea of trading virtual characters did not originate in China (and eBay provided the early marketplace) the gold-farmers have industrialized the practice, churning out fully developed avatars in 80-hour work weeks around the clock.

This issue is full of interesting risk and business trade offs. First the buyer needs to trust the seller– and this is why established online websites with a history of delivering the goods has a competitive advantage over the one-off eBay auction. A virtual world meeting and perhaps a mock battle can prove that the character in question has the right magic spell but there is no element of escrow. After payment exchanges hands, the seller must release the credentials to the online account and this is where he/she can defect. Buyer has no recourse other than hoping to recover the payment by filing a dispute. In principle a trusted 3rd party can solve this system by temporarily holding on to the character until payment clears, in the same way exchange of valuable physical goods are facilitated by escrow agents.

Sellers face a different problem, namely that gaming companies have started cracking down on gold-farming operations. Large number of different characters played by same IP address in China is likely a dead giveaway of something sketchy. But farmers have come up with responses: instead of creating and developing characters from scratch, they agree to take over existing characters. Gaming enterprises have no problem targeting the farmed avatars but shutting down legitimate US customers’ characters is bad for business. (The author compares this to the drug problem: going after producers/suppliers/traffickers is far more politically wise than going after users.) Then there is the problem that some experiences can not be traded; the author cites WoW where groups of elite players get to raid dungeons in groups to recover loot which can’t be given away. But the farms responded by creating bands of mercenaries, 40 people playing at once, for hire by a novice seeking to storm the virtual castle, no battle experience required. Spoils go to the payer.

It turns out that gaming companies are not the only ones with missile lock on gold-farmers. Vigilante players have also banded together to opportunistically kill farmed characters. (Virtual death however is not particularly fatal to the economic well being of a farming operation, because the character can be resurrected with most if not all powers intact in a matter of minutes. But when you are punching the clock and getting paid in virtual-coins, that’s a dent in revenue.)

At the end of the day, gold-farming brings up the question of fairness. Games are not about skill alone; luck and circumstances often factor into it. But it offends people’s sense of equity when other players can get ahead by simply paying more. This is where games are supposed to be distinct from real life, where $$$ can be converted into advantage in almost any other arena. Influence of money in sports is undeniable: and the manufacturer of that expensive titanium driver would like to emphasize that. But the competitive spirit remains alive to the extent that correlation between budget and success remains low. Nothing delights the sports fan more than seeing the scrappy Oakland Athletics edging out the Yankees, or the dedicated rider on his ancient bike dropping a youngster pedaling away on a cutting edge carbon fiber frame during an intimidating climb. Even Barry Bonds owes his steroid inflated home-run total to the ufair advantage of better chemistry, not the unfair advantage of better venture capitalism. From that point of view, gold farming represents an unashamed attempt at buying one’s way into success. Not surprisingly some players are offendedp, others jump at the opportunity, meanwhile entrepreneurs in China find another way to increase US the trading deficit.

Why do the gaming companies care? They are conflicted. Farming operations do pay the online gaming fee after all. But lower customer satisfaction (from perceived inbalance) is one reason to act, and probably correct PR response. In reality they are probably more offended that there is money left on the table. After all the number of virtual coins and healing power of spells is nothing more than a bunch of numbers stored in a database that Blizzard Entertainment, the parent company, runs. If anybody should be getting paid to fudge those numbers, it is Blizzard.