Louisiana Attorneys- Baton Rouge Law Firm

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Gouging or the free market at work?
Lawyers and some in real estate are troubled by price spikes in Katrina's aftermath.
By Mukul Verma
Business Report Staff
December 14, 2005

Some conservatives find themselves siding, perhaps uncomfortably, with trial lawyers. In recent weeks, the divided sides have come out separately against what they perceive as gouging in the post-Katrina Baton Rouge housing market.

Says appraiser Tom Cook, "I'm a right wing, Republican capitalist. I believe in the market but what is going on in a lot of cases is just wrong. You are taking advantage of someone's misery."

Says trial laywer E. Eric Guirard. "We don't find any difference between people on Canal Street taking radios and what sellers are doing in the housing market. We call it suburban looting."

Charges of price gouging are not new. They stretch back for centuries. In times of scarcity, sellers jack up their rates, causing people to cry unfair. But many economists and Libertarians say, "sorry, that's just the market at work."

In the wake of the doubling of gasoline prices this year, The Cato Institute last week issued a defense of soaring prices. The group says all businesses attempt to set their daily prices at the highest possible level the market will bear. Alleged gouging, says Cato, signals to the market a product is scarce, which remedies the shortages.

LSU economist Loren Scott says there is no such thing as price gouging. "That's just the market working."

Forty centuries of data indicate correcting government's attempts to control prices scrambles the market. Price controls, he says, cause a drop in supply.

No gasoline manufacturer will sell products at prices below the cost of production, for instance. Price controls on gasoline have failed under Republican Richard Nixon and Democrat Jimmy Carter, says Scott. "Price controls always have perverse results. You always have shortages."

Plus, economically, how do you define gouging, he says.

Reports of sellers raising their prices after the houses were already on the market are rampant--and true. Real estate agents confirm the reports. Guirard has experienced what he believes is the sting of suddenly higher prices.

His New Orleans office evacuated to Baton Rouge after the storm. Guirard wanted to buy a house in Plaquemine to temporarily shelter nine New Orleans attorneys, but the seller wanted to raise the price after the injury lawyer had signed the deal. That prompted Guirard to sue the prospective seller and the real estate firm for gouging.

"We are hoping to make a point," he says of the lawsuit, "and damages will be whatever the judge and jury find appropriate."

Guirard's firm also placed an ad to locate potential clients who thought they had been gouged. More than 40 people responded and the law firm is sifting through the information before signing clients.

There is a gouging statute in Louisiana law. Essentially, it's against state law to raise prevailing prices on goods and services during a declared emergency, such as the emergency declaration Gov. Blanco issued in response to Katrina. Violators of the law can be prosecuted by the attorney general, district attorney or parish attorney. People convicted of gouging can be imprisoned for six months, fined $500, or both.

But the law does not specifically say real estate is covered. When the law is murky, attorneys battle. Guirard says under the law, he sees the house defined as a "good" and the real estate transaction as a "service."

He acknowledges there is no case law in Louisiana that addresses price gouging in the real estate market. He also acknowledges homeowners who already had their homes on the market before the hurricane and raised their prices after the storm are likely to be liable under the law, but not the ones who put their homes on the market after the storm hit.

Attorney Stephen Babcock takes the opposing side. "In response to several inquiries from realtors and brokers, we have studied the statute and believe the Legislature never intended real estate transactions to fall within the definition of goods and services," Babcock says.

He says goods are items consumed or bought for personal, family or household purposes. That includes food and clothing. Services, meanwhile, are professional services from doctors, lawyers and the like.

Real estate transactions don't fit into either category, Babcock says. "First, real estate--a house and land--is not considered a consumable or a good. Second, in most cases the service provided by the real estate broker is on behalf of the seller, not the purchaser. Furthermore, the broker's commission is usually paid by the seller, not the buyer."

Attorney Randy Roussel of Baton Rouge last week was working on a possible statute to cover real estate price gouging. He might push it locally or statewide.

It's likely, Scott believes, market forces will sort out the mess, just as it has corrected gouging claims in the past with regard to alleged gasoline price gouging. It appeared that was happening last week, as prospective buyers were beginning to realize they were going to pay above market price for properties and started balking on deals.

And appraisers were delivering appraisals for homes below the offered prices, a situation that will make it difficult to close deals on homes that are considerably above market price, bringing a heady market to a higher--but more reasonable--level.