Most Brokerages Have Zero Counter-Cyclical Hedge

This will be a quick one.

Just had lunch with a friend and client who has been a broker for decades. We got to talking about what we both think is headed our way in the next several quarters. Basically, doom for real estate in a variety of ways as the Fed tries its best to kill the economy — particularly buying homes. We got to talking about comparisons of what we expect to see in 2023 vs. what we both saw in 2008.

One thing struck me about our conversation: we all recognize that real estate is a cyclical business. Things go up, then things go down. Markets get hot, then markets turn cold. It’s part of the industry and as old as the industry itself. Brokers and agents spend a few years making a fortune, then spend a few years losing it all.

What occurred to both of us is how most real estate people and certainly real estate companies are un-hedged. What do I mean?


I’ll illustrate with a story from 2010 or so. Obviously, I can’t use actual names, but I assure you this is a real story. Frankly many of you know people who were in exactly this position back in the bad old days of the Collapse.

A friend of mine was a very successful real estate broker married to a very successful mortgage broker. This kind of couple is extraordinarily common, because the nature of real estate tends to lead to meeting and hanging out with and ultimately getting together with other people in real estate. I’m a perfect example, since I met my wife Sunny (who is a recovering real estate broker, and still works in the industry) at a real estate conference.

From 2001 to 2006, this couple made an absolute fortune. The market was crazy hot, and both mortgages and home sales were going stratospheric. They basically doubled their income every year from 2001 to 2006. With the enormous amount of money they were making, they made significant investments into rental properties. Again, this is extremely common since real estate agents know the value of real estate as an investment asset.

The point is that during Good Times, things were amazingly great. Both the real estate business and the mortgage business made more money with each month, while their investments went up in value month over month, and they had strong rental demand. But when the Crash came, the entire family was wiped out.

Sales plummeted. Mortgage was frozen. Both spouses saw their income drop by nearly 90%. At the same time, their investment properties kept falling in value and renters started to miss payments. They ended up having to fire sale their investment properties, sell their vacation home, and suffered enormously for years. Rags to riches to rags, in about ten years.

This is an incredibly common story. Some brokers and agents working today remember those bad old days; many do not because they were not in the business in 2007-2011.

Zero Hedge

What my friend and I ended up discussing is that while we think many agents in 2022 are in the same position as those agents we knew in 2007, we are pretty confident that almost all brokerages are in that same position out of necessity.

That is, most brokerages over the past 20 years or so have seen their profits from brokerage get eroded to pennies… if not zero. For the past decade, every brokerage-focused session at every conference I’ve attended has been preaching “ancillary revenues” as the business model of choice. The basic idea is that you can operate the brokerage more or less as a loss leader business in order to feed leads and business to the actual profit centers: mortgage, title, escrow, insurance.

And over the past few years, brokerages have done very well with this ancillary-revenue based model. Sales were going up, prices were (and are) going up, volume is up, so all of the ancillary businesses have been doing very well indeed. These ancillary services became the profit center, with the brokerage staggering along at break-even (or at a loss), as long as the brokerage generated leads to mortgage, title, escrow, insurance, etc.

Trouble is, much like my agent friend’s family from back in the day, ancillary businesses are all connected to the housing market. If transactions are way down, then mortgages will be way down. Escrow will be way down. Title will be way down. It’s hard to sell homeowner’s insurance if there are fewer people becoming homeowners.

I think a phenomenon few of us discuss is the fact that most brokerages and even agent teams today have all of their eggs in one basket: real estate. That’s a fine basket during up-cycles, but it’s a bad basket during down-cycles. And it’s a horrible basket if the market collapses.

Counter-Cyclical Hedge

Back when I was still thinking about pursuing law as a career, my interest was in bankruptcy law. I find the area intellectually fascinating for a variety of reasons. For some reason I thought international cross-border bankruptcy law was super fun.

Thing is, there was one partner at the law firm I summered at who said something that stuck with me forever. At the time I was a summer associate in the mid-90s, the economy was booming. Bankruptcy department wasn’t doing much, and they weren’t billing a lot of hours. So I asked this partner, “What do you do when the economy is good?”

His answer: “Watch my investments grow.”

It was an eye-opening insight to a young twentysomething lawyer larva. When the economy is bad, bankruptcy lawyers are making money hand over fist as debtors and lenders both need bankruptcy lawyers. When the economy is good, those lawyers have investments that do very well. Either way, they were doing great. Not so much those lawyers in the high-flying M&A departments or Corporate Finance.

Bankruptcy Law is a near-perfect counter-cyclical hedge.

Most industries do not have such perfect counter-cyclical hedges. But it would be wise to think about counter-cyclical hedges.

Real Estate Counter-Cyclical Hedge

In my mind, there is a perfect counter-cyclical hedge in housing. It’s something I’ve been talking about for a while now, especially in live presentations.

Property management.

If home sales are up, then the sales side of the business does very well, along with all of the ancillary businesses that benefit from higher transactions and higher sales volumes. You can carry property management along during a hot housing market.

If home sales are down… then rentals and property management does well as fewer buyers = more renters. Homelessness is not an option for housing. Purchase and rent are the primary options. If you have property management, then that division should get far busier to offset the losses in the sales side of things. If you don’t… well… all eggs, one basket, no?

It’s bizarre to me that so few brokerages have property management divisions or practices (some even have rules prohibiting agents from the practice). It’s odd to me that so many agents look at property management as they might shoveling manure: as something far beneath their dignity as professionals.

As the housing market reverses faster than most had imagined possible, and we are seeing double digit declines in sales transactions, most brokerages are going to get put under enormous pressure extremely quickly. If they had property management, they would have at least one counter-cyclical business that goes up as everything else comes down. If they do not… then everything simply comes down.

So… a few questions as I am curious.

Does your brokerage have property management? If so, how’s that doing now that the market has turned?

If your brokerage does not have property management… why not? What has kept that brokerage from building out the counter-cyclical hedge?

Am I missing something in thinking that rentals and property management are the ideal counter-cyclical hedge?

Let me know what you think in the comments.


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Rob Hahn

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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5 thoughts on “Most Brokerages Have Zero Counter-Cyclical Hedge”

  1. I’m not a broker. But, like you, am shocked more brokerages don’t have property management divisions. Seems like a no-brainer.

    What am I missing?

  2. Hey ROB,

    …which brings us back to some of our previous discussions on the iBuyer model. Just a couple of Wall Street quants on staff and they would have figured out a decent ratio spread using treasuries. Selling calls or futures against their long position would have softened or eliminated the losses from the only-long position. In hindsight, as Drew says above – it’s a no-brainer.

    What strategy did we undertake as a hedge? Our hedge is the fact that houses get older everyday – good market or bad. Established markets remain established. New things are being developed everyday in housing technology, materials and processes and buyers (with money) will want it.

    I don’t know anything about property management but if new revenue opportunities are too big of a pill to swallow, IMO the easiest “hedge” for the traditional brokerage is to reduce expenses. Close those offices…..

    Great topic! We’ll see 🙂


  3. Rob,
    I don’t believe that property management is a great hedge for most brokers or agents. The amount of time spent could be used in closing sales especially if they’re not in property management now and have to gear up. The amount of properties you have to manage has to be significant to earn enough to offset a sale.
    Rentals are also the highest E & O claims.
    Life events will continue to move the market not rates.
    The education of agents and mortgage reps is needed to teach them to use adjustable or buy down products, seller assists and credits to help their clients purchase a home.
    I’ll go back to 15% mortgage rates in the early 80’s and folks still bought homes. The crash of 2008 was tough but so was 1980 & 1981.
    Your point of income going down is probable for most people in our industry.
    Our business is hard work and during tough times it gets harder.
    My advice to brokers and agents is to get educated and understand mortgage financing, anticipate the shifts in your market and don’t expect homes to sell quickly.
    We’ll get through it.
    Thanks Rob, for your thought provoking subject as people in our industry are looking for solutions.

  4. Great topic….

    There are many people in the real estate business, there are few people who HAVE a real estate business. The difference, which may seem subtle to some, is the essence of creating various avenues of opportunity in differing markets. Creating income streams, unrelated to any individual transaction should be the goal. If you or your brokerage has not stressed that in the good times it is going to be a challenging pivot in the times ahead.

    Why isn’t it a bigger focus? Too many people come in this business to “make money.” Fewer people come in this business to create wealth. It’s the mindset…

  5. Hi Rob, We’ve done some property management to go with brokerage, I’ve served on the board of directors of a multi-state property management company, and in my prior life in technology I worked with some brokerages that had property management divisions that did well. Here was my take aways on why this may be a difficult hedge….
    The margins on property management require scale. Ideally you need your own maintenance folks and equipment and, if doing short-term rental, your own housekeepers and laundry facilities (if you operate on very large scale).
    Essentially it is a totally different business, with very different systems, people, and financials. Other than needing a real estate broker to run this, you may as well find any counter cycle business, perhaps one with better margins at smaller scale.

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