Editor’s note: This Q&A is a part of the Inman News Roadmap to Recovery editorial project, which focuses on the future of the real estate industry. Click here for details on how to participate.
The following is an Inman News Q&A with Victor Lund, a partner with WAV Group, a real estate consulting company:
Q: How will the real estate industry be different when we recover from the current downturn?
A: Brokerage and agents will need to get better at communicating with consumers online. When online tools were introduced into the real estate transaction, agents and brokers adapted but did not learn the new behavior necessary to communicate effectively to their customers. The industry adopted "auto-responders," which is not the personalization consumers seek. They want to be afforded the same personalized service that they get from a Realtor in real life.
In 2006 I sat next to a leading broker at the Inman Connect (real estate conference) in San Francisco. He is a friend and he had a strong number of his agents attend the conference with him. Noticeably, his top agents were not there. When I asked him why, he replied, "They were invited and encouraged to come. They are my past — the people who are here are my future."
Professional, strategic-thinking brokers pursue business with purpose and conviction. Those brokers are doing fine today — outpacing their competitors in every market, good or bad. This approach to any business generates success and market leaders.
Q: How will the business model or business practices of the title, brokerage or lending industries change in the future?
A: The lending industry is taking the hit for its clever efforts to put unqualified people into homes they could not afford. Now, the federal government is overreacting in their efforts to provide oversight and regulation of lending practices.
Participate in an audio town hall meeting related to the Roadmap to Recovery project: click here for details.
We saw the same intervention by government into the financial markets when they overregulated financial reporting after the Internet bubble. Historically, government intervention and regulation leads to stifling growth and development. In the end, fewer people will be afforded the opportunity to own property as lenders comply with laws that regulate the levels of risk they can take on loans.
Let’s turn now to real estate brokers: Brokers get an average of 25 percent of an agent’s commission on a transaction.
Out of that 25 percent brokers need to pay:
- Franchise fees of 6 percent;
- National advertising of 2 percent;
- E&O insurance;
- Referral fees (if applicable);
- Transaction fees;
- Technology costs;
- Building costs;
- Staff costs.
Brokers weren’t making money at these commission splits, which led visionary brokers to supplement company dollars with additional transaction services in title or mortgage. When transaction volumes were high, this was an effective strategy. To staff these initiatives, you need lots of deal flow or you cannot support payroll. That is the situation today as brokers are cutting staff to these profit centers. In the future, brokerages will need to be larger to support these profit centers with a predictable flow of closings.
The title industry will continue to see the loss of its local salespeople. They do not add any value to the transaction. We have seen banks select title companies for all of their REO (bank-owned real estate) business, destroying the efforts by local title officers to attract deal-flow through personal relationships. When asked, agents have not complained about using "virtual title" services aside from the time lag (it can take longer to get docs and checks). Unless they can demonstrate that local services make a real difference, clearinghouses will emerge that will use better technology (such as electronic documents) to solve the speed problem, and the local office will disappear.
Q: What technology trends will change the industry in the future?
A: The largest change facing real estate today will be adapting to the National Association of Realtors-U.S. Department of Justice settlement. This will redefine the relationship between brokers and multiple listing service data by requiring MLSs to extend the full compendium of information to the broker. Brokers will also be able to extend that level of information to consumers who are "registered" to their Web sites.
It will also serve to differentiate information available from organized real estate from third-party Web sites. Current listings, tax data, plat maps, sold listings, and all other cloistered information will now be made available for display on broker Web sites. This is huge!
Q: What skills will the real estate agent of the future require?
A: Real estate agents have the skills today that they will need tomorrow.
Q: How will real estate advertising dollars be spent in the future? How will real estate marketing be different?
A: This market downturn has tied the hands of Realtors and real estate brokers. All advertising has dropped down to a bare minimum and many have pulled out of newspaper and magazine advertising. What precious dollars can be spent are being applied to online marketing, where return on investment is more easily traceable. WAV Group is working on studies with Zillow and with Yahoo to understand how the shift of dollars from print to online affects response rates.
As we pull out of this recession, and transactions begin to flow again, advertising budgets will return. If agents and brokers go back to print, it will be at reduced levels. Now that necessity has forced them to break the habit of open-house ads in the newspaper, it will be hard to convince them to return.
Q: What will drive the expansion or contraction?
A: The real estate market has never driven the U.S. economy into a recession before. Economists do not have reliable information about how long the recession will last or what can be done to reignite consumer confidence.
Clearly we are on the brink of global job loss and higher unemployment than our nation can absorb. The government will need to support people on unemployment and welfare, or provide bailout money to the nation’s largest employers. It is a lose-lose situation.
Home values still have a long way to drop if they are going to trail the stock market. The Dow has receded back to 1996-97 levels, but real estate values have only given back a small piece of the double-digit year over year gains of the last seven years.
Nevertheless, new leadership in Washington could turn things around quickly if they run a positive administration, support business growth, free up financing for expansion, and win the war.
Q: Will local home prices decrease, increase or remain stable in 2009? In 2010? Will national home prices fall, rise or remain flat in 2009? In 2010?
A: Local home prices in the Central Coast of California will remain stable in 2009. Housing here is still trading at a discount to Los Angles and the San Francisco Bay Area, and the lifestyle is more desirable. We are the exception rather than the rule, according to Leslie Appleton-Young, chief economist for the California Association of Realtors.
Nationally, I would expect another year of double-digit losses in home value in 2009. Foreclosures and short sales will increase as a result of greater unemployment.
2010 is too far afield to guess at. If the federal government continues to provide financing to troubled companies, economic expansion as a result of population expansion may allow those businesses to catch up and rebuild. This strategy can be a double-edged sword. Federal support will also serve to bail out companies that might ordinarily fail. So the bailout is only suspending the inevitable, at great taxpayer cost.
If big business is allowed to fail and unemployment grows, other countries with lower labor costs are likely to take market share from U.S. businesses.
Expect the worse, and hope for the best! Work hard and be financially conservative.
Victor Lund is a partner with WAV Group, a real estate consulting company.
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