Dr. Lawrence Yun, Call Your Office

A mere six days ago, NAR’s Chief Economist (and my doppelganger) Lawrence Yun released this cheery video forecast on housing for the remainder of the year:

Lawrence is predicting a slight pickup for 2011 over 2010; he thinks the second half of this year will be better than the second half of last year. New home sales will still be hurting, he thinks, but existing home sales should improve.

He based this forecast on the idea that the employment picture was slowly improving, as seen in this video:

Lawrence says he thinks we’ll see 1.5 million new jobs in 2011, maybe a little less. But “at least we’re not losing jobs, and losing potential for housing demand”. He thinks we’re on the right track, albeit slowly.

So he’s thinking 1.5M new jobs this year, 2M next year.

Well, the latest job report is dismal, even grim.  The official government report was that only 18,000 jobs were created in June, way, way below the expectations of economists of around 150,000. Furthermore, the news is even worse than it seems.

Ah, but there is a glimmer of hope, it seems… read on for more.

Recovery? What Recovery?

First, however, we must take a cold, steely look at the reality of the situation. The July jobs report is nothing short of catastrophic. But as noted above, it’s even worse than the topline numbers:

Now for the really bad news: that 18,000 gain announced by the government yesterday isn’t real.

For one thing, the number of jobs increased in June only because the Labor Department simultaneously revised downward the number of jobs that existed in this country during May. It’s like moving the fences at Citi Field so the Mets players can hit more home runs. It might make Jose Reyes feel better, but it doesn’t actually make him more powerful.

Without the fence-moving operation in the May employment report, the June number — yesterday’s number — would have shown a decline of 26,000 jobs.

Then there’s another problem with June’s employment report. Included in the 18,000 headline number is a guesstimate that 131,000 jobs were created by newly formed — and, therefore, invisible — companies.

If you want to send your resume to one of these companies, don’t bother. They probably don’t exist, and neither do the jobs the government thinks they are creating. These figments of the imagination of the Labor Department’s computers will probably disappear when the numbers are checked early next year.

Look even deeper in the June report and you’ll see something else you really don’t want to know. The more broadly defined U-6 unemployment rate, which includes people who are underemployed, went from 15.8 percent in May to 16.2 percent in June.

These are workers who want full-time jobs but can’t find them. And the U-6 figure doesn’t even include people who’ve given up looking for work because they believe it’s hopeless.

Read the whole thing. Yes, it’ll depress you, but you probably ought to know what you’re facing.

What is particularly odd is that real estate brokers and agents — and NAR itself — would not have guessed that the government job numbers are likely inflated. Why?

Because every single REALTOR is a small business owner; even if you “work” for a brokerage, you don’t get paid a salary. You’re responsible for most of your own expenses, and even if not, your split with the brokerage pays for those expenses. How many real estate agents are hiring these days?

As a matter of fact, Lawrence Yun said in the first video that because of “shrinkage” in the number of REALTOR members, most real estate agents should see greater income in 2011 over 2010. We’ll get to that more in a minute, but… shouldn’t someone be asking, “Hey, so… uh… shrinkage eh? If the market is recovering, albeit slowly, why are the numbers shrinking?”

Truth is, the economy sucks, the housing market sucks (and yes, yes, every market is local, and your market happens to be booming — congratulations), and it sure looks to me like we’re into the New Normal already.

Dr. Yun, please call your office. Revisions to the forecasts need to be made, pronto.

On Shrinkage

The glimmer of hope, it seems to me, is in shrinkage. This is the inevitable consequence of the Age of Less. As Lawrence suggested, those who stay in business throughout this shrinkage will likely improve their income, simply through shrinkage: other agents just leaving the business.

And as I mentioned here and here, there are quite a few people who would love to see fewer real estate agents. But then again, there are quite a few who would not.

Foremost among them has to be NAR itself. Recall that the big push in 2011 so far was the REALTOR Party Political Survival Initiative (RPPSI). Remember all the sturm und drang surrounding that? It goes without saying that the extra $40 per member is not going to raise the expected amount if you have fewer members. But even more dangerous for NAR, its political power was always premised upon having a huge number of members throughout the United States to put grassroots pressure on the critters in Congress from their districts. It was never about outspending the banks and the unions; it was always about the number at the local level.

Shrinkage directly imperils that base of political power. And without sufficient political power, NAR can hardly hope to influence things like QRM, MID, and other goodies that our Lords and Ladies in Washington DC have in store for us.

Hey, suddenly, we have a feedback loop forming: shrinkage leads to loss of political power, which leads to rules and regulations that make housing even less attainable, which leads to loss of buyer demands, which leads to… more shrinkage!

The Centre Cannot Hold

This is not to say that people will simply stop buying and selling houses. Of course they will. But it does mean that the real estate industry will look very different from today within a fairly short period of time: I’d say three to five years at the maximum.

For one thing, the New Normal will feature the economic law of “He that hath, gets”. The top producers, those already in the top 5% or so, will see their businesses improve steadily. As the economy and the markets get worse, consumers will start to look for “The Best” more and more. Look, when the market was hotter than a Houston summer, most consumers figure that just about any old realtor can get the job done; after all, they don’t really think it takes that much to sell a house. As the market gets worse, those consumers will be disabused of such notions, and realize that if they want to have a chance at selling their house, they’d better find whoever it is in their market who is The Best.

Given the difficulty in finding out who The Best is for consumers, they’ll substitute things like production, volume, years in business, and of course, word of mouth reputation, to find people they think can get the job done.

This mechanism benefits the top producers. If you’re already number one in your market, expect to get a lot more phone calls. If you’re just starting out in the business… well, good luck to you.

At the other end of the spectrum, the bottom tier will feel little impact. They’re already not doing much business — perhaps one or two transactions a year. But they’re part-timers anyhow, doing real estate for a little extra spending money, while their spouses support the family with their fulltime jobs. Why would those people leave? If nothing else, they can refer some friend to a Top Producer and get a referral fee, for basically no work.

Those agents in the middle of the pack? The “average” REALTOR who does 7 transactions a year, thinks of herself as a professional, who goes to conferences, takes training courses, invests in websites, mobile apps, and such? They’re screwed. For them, it’s either Up or Out. Either join the ranks of the Elite somehow, or get your lunch eaten by them in the New Normal. You’ve got a $19.99/month website, and a Facebook page; the Elite have a $15,000 state-of-the-art website, a Marketing Coordinator, SEO consultants on speed-dial, and a team of buyer agents. How you gonna compete?

Say hello to shrinkage, ladies and gentlemen.

There are far, far more consequences to the industry as a result of this shrinkage, particularly in the vast middle of the pack. A real estate industry comprised of 5% Elites who do 95% of the deals looks very different from one where 20% do 80% of the deals. I’ll have some future thoughts on what that looks like, because The Age of Less is here to stay.

But what say you? Think I’m overreacting? What consequences do you see for your business, should the New Normal look like the national economy that eviscerates the middle?

And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?


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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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12 thoughts on “Dr. Lawrence Yun, Call Your Office”

  1. I guess when you comment in the FB plugin it only goes to FB.
    Great stuff as usual Rob. Some analysis we’ve done shows that almost half of active agents haven’t had a sale in the last 12 months and that the top 10% of agents account for the vast majority of total volume.Another factor encouraging shrinkage is that traditional non-distressed sales are still trending down in most markets. A bigger share of sales is going to distressed inventory that’s being sold to investors (i.e. future landlords). On the listing side, a relatively small number of agents represent the banks in those deals, and often at a reduced commission. In other words, they’re not big generators of life-sustaining income for the average agent. The KINDS of sales going on will have a big effect moving forward.

    • I think investors are a big part of the market now, even in non-distressed. That’s who bought my house, for example.

      What’s troubling is that very few realtors are equipped to be dealing with investors, who don’t care that much about the grand foyer, or the type of marble, but far more about cashflow analysis, rental rates, vacancies, and the like…

      • And they’re likely working with a small set of trusted agents as their buyer reps. So it’s safe to say that the the inequality of the agent population is growing. We need a gini coefficient for real estate.

  2. Dark pools, secondary markets, local networks – that’s what we will see in 3 to 5 years.  NAR won’t matter, neither will the top producer.  Connection services with low cost and ease of execution will prevail for the real estate transaction in most metro and suburban markets.

  3. The grim reality. I agree investors are the buyers right now, and will continue to be. I’m in the middle rung of agents, so I will have to learn and adapt if I want to stay in the game.

  4. Rob, I’d like to see #’s that represent what you are referring to here when talking about the decline of the middle of the road agents.  I actually think that the real reason for diminishing numbers of mid-range producers is that these agents do rely on the real estate income.  With a declining number of sales in the marketplace, and the decline in prices, there is likely evidence of a reduction in middle of the road agents. I’m just not sure it’s because the consumer is looking to the top producers for their real estate needs.

    I still think that a good number of these agents are competent, educated professionals that continue to inspire the confidence of their clients.  I think many consumers still make decisions based on who they like.  If poor market conditions compelled the consumer to select ‘the best’ based on volume and production, I think we’d see much stronger evidence of that already given that we’ve been living in a crippled real estate environment since 2007.

  5. Wow Rob, I actually agree with you! 🙂 I do see the rift getting bigger and bigger when I look at our MLS stats. The top 3 agents are way ahead of everyone else, and this has been a growing trend. 

     With the declining number of sales today, the top agents in the industry are GAINING market share and are also able to recruit better and better talent for their teams.  Linsey,  I do believe that consumers make decisions based on who they like unless that middle of the road agent is competing for the listing against one of the top agents who also has a reputation of doing a great job for his/her clients. When a seller has a “friend” in the business, the top agent only needs to ask the question” So in something as important as managing the sale of your largest asset, do you think you should be making a business decision or a personal decision?” And then once that agents shows sales stats pulled  directly from the MLS, and a very comprehensive marketing plan, it;’s very difficult for a 7 houses a year agent to compete with an agent who dominates that same market.

    I know when I am looking to refer someone to an agent across the country I am looking for the best agent. I wouldn’t refer to someone who only sells 7 houses a year even if I liked that person. To me, it just seems that this person wouldnt have his/her pulse on the market the way a more active agent would. I could be totally off base with that but I know when Rob asked me for a referral in Texas, I looked long and hard to find the right person for him… someone who I was sure had his pulse on the market.

  6. I agree with Linsey’s comment regarding the decline of the “middle of the road” agent. As a consumer, I would never base my decision on what agent I choose based on the number of homes they sell in a year. The “best” agent is not defined simply by volume of sales. I know a lot of really, really competent agents, agents who bleed and sweat for their clients, agents who work selflessly and in their client’s best interests, who are not top producers. I also know several top producers who see their clients as dollar signs, not as people. If I were able to discern one from the other in the listing process, I would choose the former over the latter every time. 

    • Jeff – it isn’t that I disagree with you or Linsey, but that I would wonder how a consumer is supposed to know who the “best” agent not defined by objective measures is. Yes, you, me, Linsey, and others happen to be in the industry and have enough of a network to know who’s good and who isn’t. And we rely a lot on word of mouth, general sense of competence, and so on.

      How is my doctor friend who doesn’t even have enough time to hang out with his family every weekend supposed to discover the same?

      In such cases, you know and I know that consumers substitute branding and advertising as markers of quality. If for no other reason than to think, “Well, if they got money to waste on these ads, they must be doing something right”.

      I think the rules of competition are about to change on all of us, and in the not too distant future.

      • Rob,

        Measuring competency by sales volume is always a risky bet. Sure they may sell a lot, but at what cost to the seller? Did they sell the home near the original asking price – or promise the seller the moon and stars only to make several subsequent price reductions?

        Was the agent well versed in in various contracts? And how do you know the sales volumes are even accurate? There is a well-known agent in our market who claims eye-popping sales volumes every year. In 2009 he claimed $35 million, yet he only really did just over $2 million. His “team” did the rest but he gets credit for all of their production. This year? He’s only sold four lower-priced homes. Yet people unknowingly line up to give this listings that he doesn’t sell.

        I am a big supporter of the local MLS’ making agents track records available to the public. Post their volumes, their days on market compared to the market average for the price range, the original list price to final sales price and more. It would cut out a lot of the BS that permeates our industry.

  7. I realize I left an important point out of my comment. Of course that top agent needs to have a great reputation as being an advocate for his/her client and certainly be a trustworthy advisor.  I didnt mean to imply that its just about the numbers. Reputation, dedication, and competency absolutely come  first, and then the numbers just follow.
    There is a top agent I know who takes any listing at any price and they all just sit on the market. Her reputation is really bad amongst the realtors and the buyers who get frustrated when they like one of her overpriced listings..

    Rob had come up with a great idea  a while ago. Ask the agents in your own market place who  they would list their own houses with. The agents all know who is good in their own market place.  But the question is, how does the consumer know? I think it’s really a combination of reputation – of word of mouth, marketing – is your website professional, do you brand yourself as the area expert? Do you show market stats? video? and then if you dedicate yourself to doing all of this well, then as I said earlier, the numbers just follow.

    And saying all of this, I realize that the reason the agent in the middle is having a harder time is because without a staff to assist with video, sales stats, uploading to websites, brochures, mailings, transaction management, etc… something has to give because one person cant do it all. It’s just impossible… and that is the part I think is harder for the middle agent to compete with today. It doesnt mean that agent is incompetent or lesser of an agent, but consumers are making an opinion based on each piece of the puzzle.

  8. Rob,

    Maybe this is the wrong space for this comment – but it all seems related.  It appears the price range for Zillow’s upcoming IPO has increased.  You know that means a larger demand for the stock than previously anticipated. Can all these investors be wrong?

    Won’t they (Zillow) and similar companies like Trulia just turn on a brokerage arm and make all this commentary irrelevant – no NAR, no top producer – everyone works for the broker?  Total disruption? Like to here your thoughts.

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