On the unlikely date of Feb. 14, Cendant Corp.‘s CEO said the company plans to slash costs at real estate brokerage NRT by about $50 million by closing offices – followed just days later by an announcement from Washington Mutual that the third-largest U.S. mortgage lender is eliminating 2,500 jobs.
As real estate industry layoffs continue and the toll mounts, some industry experts predict a toll of as much as 40 percent of existing jobs lost by the end of the year, while others insist that the WaMu layoffs are just an anomaly.
“Reductions in the mortgage banking industry are somewhat due to the end of the refinancing boom,” said Brian Carey, an economist with Economy.com, “but it’s probably even more due to the slowdown in the housing market over the last couple months in terms of home sales and purchase mortgage applications.”
The economist said that because of the drop off in applications to purchase loans, there is less work to be done on the back end, less need for appraisals and other work performed by the real estate finance industry. Hence, the WaMu layoffs and Cendant’s office closures.
According to the Mortgage Bankers Association, there are 500,000 people employed in the real estate finance industry. “We’re looking probably at a 5 to 10 percent decline in home sales this year compared to 2005,” Carey said. “That would suggest to me a similar decline in employment. You’re probably talking 25,000 to 50,000 jobs lost in the real estate finance industry in 2006.”
Because real estate brokerages are operated differently, that part of the real estate industry will be affected differently, Carey predicted.
“You’re not going to find layoff announcements in that field because it’s more of a commission-based profession and people work relative to what business values are. Instead of doing 10 sales a year, they may do five sales a year. I would look for a drop-off in their income,” Carey said of real estate agents and brokers.
“Their incomes will go down and a lot of them will turn to another line of work,” Carey said.
Another industry expert agreed with Carey that many real estate agents would be pursuing different lines of work as the slowdown continues in 2006.
“The real estate occupations tend to be more flexible and move with the economy because everyone knows they are cyclical,” said Dr. Delores Conway, director of the Casden Real Estate Economics Forecasting Project at the University of Southern California Lusk Center for Real Estate.
“A friend of mine’s husband is a Realtor and he is going into auto sales,” said Conway.
According to the National Association of Realtors, there are 1.2 million Realtors in the United States.
“Let’s say there’s only room for half the Realtors. It could be 500,000, it could be 700,000,” Conway said. “In the margin you would have people moving out of the industry. I would be surprised if it was more than 30 or 40 percent.”
The director said that for real estate agents, “it’s not so much losing their jobs as changing their jobs. Realtors are entrepreneurs. When the market cools down they do less of it and tend to move into other jobs.”
As for the real estate finance industry, Conway said of the WaMu layoffs and Cendant closures, “It makes sense. Refinance activity is slowing down. Interest rates are up and people are not refinancing any more. WaMu did a lot of refinancing.”
According to Conway, both companies ramped up during the refinancing boom and now don’t need the excess capacity, so it makes sense to cut back.
Economy.com’s Carey agreed with Conway that the WaMu layoff spurt was prudent and that there is currently an overcapacity in the mortgage industry.
“The refinancing boom peaked in June of 2005, with the Mortgage Bankers Index reaching 2,937,” Carey said. “Since June of 2005 refinancings have dropped almost by half,” to 1,517, the most recent MBA Index figure.
However, Carey said, “I don’t think it’s (the layoffs and closures) solely refi. It’s probably even more due to the housing market slowdown. The refinancings started declining six months ago. That would be too much of a delayed reaction. This recent layoff is related to the drop-offs in applications to purchase loans.”
It might seem that one way to chart a drop-off in the real estate profession would be to tally the number of real estate licenses being granted. But, according to Vince Malta, the president of the California Association of Realtors, historically there is a two-year lag between a change in the housing market and any change in membership.
“Let’s say someone obtained their license last year. Their license will be good for two more years,” Malta said. “It’s a four-year license. They may not renew if they sense the market is tougher,” but this decision won’t become apparent immediately, he said.
The California Association of Realtors has 180,000 members at present and Malta predicts there will be 210,000 members by the end of 2006. California’s Department of Real Estate currently has 475,000 current real estate licensees. Malta said the Real Estate Commissioner predicts there will be 500,000 licensees by June. “Generally there is a lag,” Malta said.
“I think the slowdown of WaMu is directly correlated to interest rates going up. The refi market has slowed significantly,” Malta said. “Generally, 30-year fixed interest rates are now around 6-1/2 percent. I refinanced at 4 percent and I am not going to be refinancing (again). I love my loan more than I love my home,” he joked.
As far as the state of California’s real estate market, Malta said, “We are still projecting the state to have about 620,000 single-family (sale) transactions this year. The record is 625,000 last year and 624,000 in 2004, so we’re going to still have a good year in terms of transactions. We are going to have a more balanced market.”
As to whether real estate agents might be moving to different lines of work, Malta said, “I think they are entrepreneurs. They go where they are going to make a living.”
Speaking for himself, Malta said, “I sell real estate, and I have changed my marketing plan. I look my sellers in the eye and say, ‘Guess what. The “real” is back in real estate.’ I see prices leveling off and I would say some markets are more vulnerable than others, but still for the whole state, we’re anticipating a good year.”
John Marcell, president of the California Association of Mortgage Brokers, said he feels the real estate business is “always a cyclical situation, it has its ups and downs.
“We have been experiencing an abnormal situation because of the lower interest rates the last five or six years. Because interest rates were so low, a lot of people were refinancing, and big companies like WaMu or the Bank of America will immediately hire people to take care of that part of the business with very little thought of what is going to happen when there is a downturn,” Marcell said.
According to Marcell, “It’s unfortunate that a company the size of WaMu has to lay off people they have hired to take care of the abnormal influx of business. Most of the mortgage companies have not done that. They have stayed pretty much close to the vest and not gone ahead and hired a bunch of people with full knowledge this is not going to last forever.”
Marcell said that as the year goes on, there would be an adjustment.
“We are seeing a slowing of home sales. A lot of homes are on the market and buyers are saying, ‘Lower this price by $5K or $10K and I might make a deal,’ but we are not seeing a huge reduction in the price of loans.
“It’s an adjustment, but nothing catastrophic,” Marcell said. “It’s not a reasonable situation to have 10 people wanting to buy one house.”
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