The Joys Of Homeownership: Transaction Costs

There is nothing like a house closing to reinforce the point that transaction costs are real, and large. I am astounded at the layers and complexities of the transaction costs in real estate transactions. Even our lawyer, who has a lovely and well-honed sardonic sense of humor, looked at some of the papers we had to sign and claimed that he didn’t see any reason why these documents were material any more, but that we had to sign them anyway.

By law we have to get your consent for this; by law we have to inform you of that. And even though a lot of what has to be done could be done in advance, and electronically, we are still locked in to this ritual of getting 6-8 very busy people together in a room at a title company, with the mortgage underwriters doing their last minute nannying that could have been done further in advance, twiddling their thumbs and watching the unfolding of transaction costs in front of their glazed eyes.

I think it’s a testimony to how badly people want to own property that we are all willing to put up with the perpetuation of the layers of bureaucracy, inefficiency, and rent seeking. Or perhaps it’s an Olsonian concentration of benefits and diffusion of costs story — we buyers and sellers do this so infrequently that our costs are diffuse, while the other required parties in the transaction milk it.

2 thoughts on “The Joys Of Homeownership: Transaction Costs

  1. Transaction costs for buying a house vary considerably between the states. Some states require a costly and dumb title history search while others such as California just require title insurance and search for current liens. Also, I find it curious you used a lawyer. In California I have rarely encountered situations where deals I knew about (and I had a realtor girlfriend who kept me more abreast of her deals than I ever wanted to be) required a lawyer to close.

    Someone ought to do a comparative study of transaction costs by state for various types of transactions.

  2. Transaction costs aren’t that low in California; real-estate commissions are still mostly betewen 5% and 6%, plus loan commissions/points and inspections, etc. And some cities charge up to 1%+ RE transfer tax. A simple $400,000 house purchase could easily cost $30,000 to complete.

    But I haven’t ever heard of lawyers being involved in a house sale.

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