Continuing the tradition that started when the earth was young (or last year… depending on your definition of “time”), I’d like to present this year’s version of “Predictions Guaranteed to be Wrong, Or Your Money Back”! As we saw in the report card post, last year, I went 4.5 for 7 in predictions. I hope to bat lower for this year’s predictions. Of course, I can guarantee 0 for 7 by making ridiculous predictions, like “The Jets will win the SuperBowl”.
Without further ado, the predictions for 2012…
1. The Decline Continues
There may be people who believe that it’s just a matter of time before the real estate market comes back strong, and that 2012 is the year. All that pent-up demand! All those Gen-Y kids getting married and needing starter homes! Sadly, I’m not one of those people, although I sure would like to be.
There’s too much chaos in macroeconomic trends to predict what could happen. The best case scenario has some sort of black swan event that dramatically improves employment, willingness of banks to lend, and so on. The worst case scenario — far more likely, so let’s call it a “grey swan” event — leads to global financial collapse… and I rather doubt we’ll be worried that much about industry issues if that happens. We’ll all be worrying more about finding food and fending off bandits.
So the middle-of-the-road boring prediction is that we will see neither dramatic collapse nor dramatic improvement in 2012. Instead, we’ll continue the slow and steady decline that has been the story over the past couple of years. This is particularly likely because 2012 is not only a presidential election year, but one that has been billed as “the most important election ever” by most of the commentariat. Once the GOP primary is over, I expect both candidates to propose nothing dramatic and do nothing shocking that could upset the markets. Sure, we’ll get minor policy statements from both the GOP candidate and from Obama, but it seems rather unlikely that we would see Fannie/Freddie shut down, or really significant QRM regulation promulgated, or the mortgage interest deduction eliminated. Not in 2012, not with the political situation the way it is.
Last year, I worried about possible systemic risk from foreclosuregate. That risk hasn’t disappeared entirely, but it went dormant throughout 2011 as more and more institutions reached settlements to avoid upsetting the entire apple cart, and the small lawsuits are making their way through the legal system. In 2011, the Supreme Court denied cert on a CA case involving MERS; a decision there could have been dramatic, but we soldier on without clear legal guidance for now.
But the “middle-of-the-road” doesn’t look as trouble-free as 2011 did, in retrospect. Europe is really, really, and I mean, really heating up. In case you’ve been living under a rock, or resolutely refusing to hear any news, there is a financial crisis in Europe that threatens the global economy. It isn’t just the poor cousins like Greece, Portugal, and Spain that are facing crises anymore; now we’re talking about Italy, Belgium, and France.
The reason why we should care, of course, is that most large banks — including nominally American banks like JP Morgan Chase, Bank of America, Citibank, etc. — have exposure to European debt crises in various ways. First, they might own some Italian sovereign bonds, which might default. More likely, however, they are sure to have counterparties, investors, depositors, borrowers, etc. who are European financial institutions. If they go belly-up, then American banks will not remain unscathed. If you really want to scare yourself, spend some time on the Zero Hedge blog enjoying some “doom-porn” as they call themselves.
The impact on real estate is obvious: the private mortgage market cannot recover if Europe gets any worse. Without available financing, fewer people will buy homes. Even the foreclosures and short sales can’t be moved if there are no funding sources. Furthermore, banks will turn off credit to companies because they themselves have to preserve capital to survive; that in turn means layoffs, rising unemployment and so on down the awful cascade road.
The hope today is that the smart guys in NY, DC, Brussels, and elsewhere could somehow manage the decline, reassure the markets, and keep things lurching along for a while. We’ll see if that effort is successful in 2012. My guess is that it will be moderately successful, preventing all-out panic and bank runs, but that we’ll continue to see banks being very skittish, economic growth being sluggish, unemployment not improving at all, and general malaise throughout 2012.
One possible bright spot for real estate in 2012 is that investor activity could be very high, since the global economic crisis is financial in nature: meaning, keeping money in the bank is a dangerous thing if you’re really, truly, stupendously rich. Sure, you can stock up on gold and silver as a hedge, but at some point, you’re going to want to look at putting some money into income-producing real estate. If I were a German millionaire, I know I’d want to look at some apartment complexes in high-growth places in the United States… like Houston.
Relatedly, I think we’ll see an all-time high in rental activity in 2012. The real estate company that figures out how to do rentals profitably stands to reap the whirlwind in 2012.
2. The Start of the End for IDX
Note that I am not predicting that IDX itself will go away in 2012. I am predicting that 2012 is the year when the conversation turns to whether IDX is necessary at all.
Most industry data people know that the issue of 2012 will be listing syndication. Edina Realty’s move to pull listings out of syndication was just the first; most people expect to see a wave of brokerages pulling listings from syndication, to replace it with something they can control far more effectively. I suspect that the major franchises have to be laying the groundwork to do the same. It makes little sense for Coldwell Banker or REMAX to continue to spend tens of millions of dollars on their corporate websites to then have all of its franchisees help the portals beat the pants off of them. If the name of the game is consumer attention, then everybody is in competition with everybody else. The third party portals are the first up on the data-based competition.
I don’t believe that is where things will end. Most people think I’m nuts, so I’m more than happy to be wrong on this prediction. But logic has its own force that might take some time to develop, but develop it will. I think the timeframe is towards the second half of the year.
The essential struggle is not “who should control the data” and so on. Those are actually surface symptoms of the underlying question, which goes to the heart of American real estate: “Why should I make my data available to you?”
I keep going back to this testimony by Geoffrey Lewis of REMAX during the 2006 Congressional hearings, but I think it’s 100% the issue in real estate today:
The concept is simple: you earn a customer, you get to use the MLS with the customer. The concept is not: you get free access to the MLS and then you use it to advertise the properties of your competitors in order to attract customers.
Lewis was testifying about the MLS, but you can easily replace the word “MLS” with “listing data” and you have pretty much the hot and heavy issue of today. More and more brokers are uncomfortable with syndication, because it allows other agents and brokers to use listing data to attract customers. The whole raison d’etre of a third party portal — all of them describe themselves as media companies — is to generate traffic and leads. And abuses and mistakes and bad policies in the syndication world led to what we see today.
However, the logic of “you earn a customer, you get to use my listing data with the customer” applies with exact same force to IDX, a policy that has been the source of so much drama over the past few years. I know I’ve begun hearing some opinions from strong listing brokerages that just like the portals bring a fork to a potluck, so do the buyer brokerages who do nothing but use IDX to rank high in Google and bring precious few listings to the table.
I expect that by November, at next year’s NAR Annual, we’ll start to see a small movement away from IDX at least in some markets where certain brokers have market power.
3. Mobile Finally Arrives, At Last
I know mobile has been one of the hot topics in real estate for a few years now. And I’ve always been a bit of a skeptic, despite the fact that mobile makes all sorts of sense for real estate, because of the issue of battery life. Two years ago, I wrote that 2010 will not be the year of the mobile based primarily on issue of battery life. I still don’t believe that mobile phones will be the dominant technology for real estate consumers.
So why is 2012 the year when mobile arrives? Because of tablets. The iPad’s success can hardly be doubted, and with the larger device, battery life is no longer a major concern. Furthermore, because a tablet is not a mobile phone, there isn’t the same incentive to preserve battery life. Nonetheless, the iPad and its competitors remain high-end luxury goods for people with money. Even the base non-3G iPad ends up costing north of $700 when it’s all said and done. The 3G models can easily reach $1000 with accessories and such. The competition, like Samsung Galaxy, Motorola Xoom, the Blackberry Playbook, was not exactly setting the world on fire.
Then Amazon releases the Kindle Fire. It is priced to be affordable for most consumers, and only Amazon has the content ecosystem to compete with Apple’s iTunes universe. Both Amazon and Apple are big players in Cloud infrastructure that is a natural add-on to mobile computing platforms. I do know from some friends that Amazon has big plans for mobile, and I suspect further that Apple won’t just lie down and take it; they will come out with new products and services to compete. This is not to mention all the other companies and software developers who will be getting into the game.
All that competition implies that consumers will have a wide variety of platforms at different price points to get into mobile computing. And battery life will not be as big an issue, as most tablet devices boast 8+ hours of battery life, and that big battery is meant to be used for mobile computing, not for taking and making phone calls.
Oh yeah, and 4G rollout continued throughout 2011, and will continue in 2012. Wifi-class bandwidth over the airwaves is transformative, and more and more consumers will have tablets connected to 4G networks. Just a matter of time.
Furthermore, at the HearItDirect Charleston event (video footage coming soon, I promise, as we’re still editing more than 8 hours of video), I asked the consumer panelists about mobile, and heard some amazing things. One of them was the fact that unlike web search, consumers looked at every single real estate app in the AppStore. In a couple of cases, they downloaded them, tried them out for a while, then deleted them if the app didn’t meet their needs. I asked them specifically, “So if a brokerage or an agent had an app, you’d have found it and used it?” and the answer was unanimously, “Yes.”
That’s amazing. Considering the difficulty and the SEO gamesmanship that goes on for a website to be found in Google, mobile apps will be the Blue Ocean strategy for 2012. Yes, eventually, the space will get so crowded that the impact will be less. But at least in 2012, I see major gains for companies that develop and launch mobile apps.
4. Broker-centric Models go Mainstream
I believe that 2012 is the year when we see broker-centric models start to go mainstream. A combination of factors is making the current agent-centric model, born of the RE/MAX revolution of the late 70’s, less and less viable. Most of those factors are items regular readers of Notorious ROB have already seen here:
- Terrible real estate market leads to the growing gap between the Haves and the Have-Nots in real estate — the middle is disappearing, and that’s where conventional brokerages make their money.
- Technology continues to become more and more important, yet the cost to compete in technology continues to rise (for example, consider #3 above about mobile: app development is likely beyond the reach of most small brokers and individual agents).
- Agent teams are growing in popularity and importance, but those are nothing more than proto-brokerages without the legal liability; crucially, however, an agent team is the broker-centric model of real estate.
The battle over data syndication (and the soon to be coming battle over IDX) is at its surface about data. At the core, it’s about who should be at the center of the real estate industry: the broker, or someone else. For decades, the answer was, “someone else” — the agent, the portals, the franchises, the MLS, the vendors… anybody but the broker, who focused on recruiting.
For the past couple of years, we’ve seen the counter-movement to that agent-centric model. The poster child for the movement is Krisstina Wise of the GoodLife Team, who is very active in writing about and speaking about the broker-centric model of her company. But for whatever reason, GoodLife Team remains very much a small boutique — it is, as a matter of fact, an agent team that became a brokerage, thereby proving my point about teams = proto-brokerage.
I believe that 2012 will see the first mainstreaming of the broker-centric model. I think it is quite likely that one of the companies active in the syndication/IDX debates — a HomeServices of America company perhaps, or someone like Shorewest, or a Leading RE company — will be the first to really implement a broker-centric strategy. Such a company is likely to have dominant market share to try it, but upon trying it, they will find that they do not lose market share, do not lose agents to competitors, but increase their profitability and ultimately gain market share by leveraging superior capabilities in technology and by managing consumer relationships centrally with a strong brand.
That is when broker-centric models go mainstream. And I believe it happens in 2012. It is unlikely to be reported widely when it does happen, since it will be implemented incrementally, step by step. But happen it will.
5. Keller Williams Overtakes Coldwell Banker for Top Spot
It seems contrary to prediction #3 above, but I think there’s a decent chance that Keller Williams will overtake Coldwell Banker for the top spot as the largest real estate company (i.e., franchise) in the United States.
In 2011, we saw Keller Williams overtake Century 21 to become the second largest company. Only two years earlier, in 2009, Keller Williams surpassed RE/MAX to become the third largest. On that timeline, 2013 is probably the more likely year for the KW dominance, but I think there’s a decent chance of it happening in 2012.
Big part of the reason is that Coldwell Banker continues to shrink. In 2007, Old Blue boasted 120,000 affiliated agents; in 2011, Coldwell Banker talks about having “more than 86,000 sales associates and brokers“. (Note that in 2007, Century 21 had 144,000 agents, while KW had 74,000.) KW isn’t growing explosively: in 2009, when it took over third place, it had 73,000 agents, which is fewer than it had in 2007. In 2011, it has some 77,000 agents (almost 80K counting Canada, which Coldwell Banker surely does). But it is growing, while the others are shrinking.
Big part of the success of KW, I believe, is related to the success and popularity of agent teams. Of all of the companies in real estate today, KW understands and supports agent teams the most. Its operations, its technology platforms, its training courses, quite a lot of its activities in fact, are built around agent teams. In a sense, KW is a franchise of franchises — each of its brokerages (or “market centers” in KW lingo) is effectively a franchisor with a bunch of proto-brokerages underneath it.
As the bad market continues, the highly profitable and successful agent teams continue to accelerate their growth… at the expense of somebody. And market share and success beget market share and success, and so the snowball keeps rolling downhill.
It is a bit of an out-on-a-limb prediction, but it seems to me that if the trend continues, KW should gain a bit, while Coldwell Banker will lose a bit. Supposing KW gains 4% and CB loses 4%, at the end of 2012, we should have KW with about 83,000 agents and CB with about 82,500. There’s a decent chance that KW ends the year as the largest real estate company.
6. Watson Makes an Entrance
I wrote about Watson in 2011; I think this might be one of the most significant technologies in years. And I believe that we will see Watson implemented, in some way, in real estate by the end of 2012.
The issue is money. Watson technology is brand new, and it took IBM years and years of work, and tens if not hundreds of millions of dollars to develop. IBM isn’t likely to be giving it away for chump change. Then there’s the matter of programming Watson so it works, which means feeding it terabytes upon terabytes of data. Deploying Watson, then, is likely to be a bet-your-company strategic decision costing in the tens of millions of dollars, and thousands of engineering/programming manhours. So who in the real estate industry has that kind of cash laying around, technical talent, and access to terabytes upon terabytes of data?
My bet is on Zillow, flush with its IPO cash, and a business model that doesn’t really rely upon political approval from REALTOR organizations. But I wouldn’t count out other big organizations with money: Move, Inc., Trulia, and possibly one of the major companies (Realogy? KW?) and/or NAR via the RPR subsidiary. A possibility is a MLS like MRIS or HAR that has the mandate to compete head-to-head with the portals for consumer traffic. And an outside possibility is a company like Redfin.
And a major question will be whether the Real Estate Watson will be consumer-facing or professional-facing: will it be deployed more as a “customer service” type of machine that answers consumer questions directly, or an expert system designed to provide quick answers to professionals (i.e., affiliates of major franchises, subscribers to a MLS, etc.)? If we are fortunate, we might see both varieties, to see which one will ultimately win out in the next few years.
7. The MLS Transforms
All of the above should work towards the beginning of a transformation in the MLS: the backbone of the residential real estate industry. I believe we start to see it take root in 2012.
The broker-centric models that are the future of the industry require substantially more in technology investment than we have seen in the past decade or so. One of the things that the Internet era brought to businesses everywhere was lowering the cost of communication, particularly mass communication. Indeed, if we think back to the birth of the RE.net, one of the promises that the third party portals brought to the industry was to save on advertising costs over the then-dominant model of newspaper advertising. As the Web advanced, and brought with it things like blogs, social media, and Twitter, the cost of advertising and lead generation technology continued to drop. Back in the beginning, even the simplest website might have cost tens of thousands of dollars; today, you can buy one for $9.99 a month from any variety of website vendors.
The next wave of technology does not appear to be heading in that direction. If anything, the cost of entry is getting higher and higher, rather than lower and lower, because market power is becoming more and more concentrated. Making a website on the open World Wide Web was and is a simple matter. Making an iPad app in the closed Apple ecosystem is a different proposition, and dealing with the complexity of competing platforms (Apple, Android, and who-knows-what-else) is different still. And the cost of entry into the AI/expert systems space will make all of those costs pale in comparison.
Once, the MLS was created because computers were expensive. A single brokerage couldn’t really justify the cost involved in setting up a server room. As the cost of technology dropped, and performance rose, the need to have a MLS as a way to pool resources for technology decreased. I believe all that is about to change. We are going back into a tech cycle where doing things on the cheap won’t cut it anymore, at least not if a company wants to become a broker-centric operation.
The Web will not be the primary space for competition for consumer traffic and customer loyalty; mobile will be. And competing with Zillow for local SEO is one thing; competing with Zillow on the AppStore is a different proposition. There will be a few brokers who can afford to do so; everyone else will need to look elsewhere. And I think they’ll look increasingly at the MLS. It is the logical vehicle.
The issue that stands in the way, of course, and the debate and discussion that will begin in earnest in 2012, is MLS governance. Who will make the rules? Who will make policy, set priorities, and investment decisions? Who will, in short, control the MLS? Today, most MLS are Association-owned, and follow the rules of NAR. The Franchise IDX issue raised the possibility that at least some brokers don’t care for the status quo; the upcoming syndication fight will tell us all much about who will make policy in the end.
However it all shakes out, the role of the MLS will begin to transform once again. In the past ten years, we have seen the MLS go from an exchange for members, into a data repository for pass-thru to the Internet in various ways. What’s next for the MLS? And how many can make that transition before it’s too late?
Happy New Year!
If you’ve reached this point, it means you actually read through some 3700 words. Hey, I got nothing but love for you, the few readers who actually read this blog, instead of just the headlines. 🙂 You are the few, the bored, the Notorines.
Remember, all predictions guaranteed wrong, or your money back! We’ll revisit this post at the end of the year for the grading session.
Happy 2012 everybody. May it be your most prosperous year ever, filled with hope, faith, and love.
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