The loss looks ugly, but Realogy is getting healthy, y'all...

Last year, I wrote that Realogy’s numbers looked pretty good to me, despite the fact that Realogy had lost $237m in Q1 of 2011. I figured I might as well dip back into that water since I’m interested in my old corporate home (I started my real estate career at Coldwell Banker Commercial), and well… I guess I’m kinda strange in enjoying looking at financial statements.

So Realogy lost $192m in Q1 of 2012. Sounds bad, right? Well, I know a lot of folks like to point to the big loss number and claim that Realogy is screwed, but… after these results, saying such a thing just exposes you as someone who doesn’t actually read financial reports.

Let’s take a look at a few signs of health that I find very interesting. I did read through the 10-Q, but I think this presentation for the investor call contains enough detail.

Revenues Up, Earnings Up

Very interesting chart here:

First, realize that Realogy posted a 5% increase Y-O-Y in topline revenues from $831m in Q1 of 2011 to $875m in Q1 of 2012. That increase was primarily due to increased revenues from the real estate brokerage operations, rather than from relocation or title. You can see the the Franchise Group pulled 9% more than year before, and the NRT division pulled 5% more.

Second, even though Realogy’s bottomline loss was $237m, recognize that EBITDA (Earnings before interest, taxes, depreciation and amortization) before restructuring charges and some other stuff was up a robust 44% Y-O-Y. The presentation says $36m in EBITDA, although the 10-Q says $30m (maybe a typo?). I also find interesting that the EBITDA for the NRT division was significantly improved, going from a $37m loss in 2011 to a $17m loss in 2012. For a 3 month period, that’s not a bad deal at all.

Okay, yeah, sure, this first quarter’s been red hot for a whole lot of real estate brokers and agents, and maybe everyone else was seeing 25% increase in revenues and 200% increase in EBITDA Y-O-Y, but I don’t have any of that information. But there’s no way that 5% increase in revenues and 44% increase in core operating earnings are bad things, is there?

The Y-O-Y loss number is certainly down from $237m to $192m. And 170m of the 192m loss is because of debt service. Without that, the “loss” is a paltry $22m, and Realogy is booking $45m in depreciation (i.e., that cash never left the building). It’s all looking pretty rosy.

Speaking of debt, Realogy says they’re well within the loan covenant ratio of 4.75:1 at 4.01:1. Recall that in Q3 of 2009, Realogy came very very close to violating that ratio (it was 4.94 debt-to-income when the covenant was 5 to 1). I also noted that Realogy spent $6m in Q1 of 2012 retiring debt. That doesn’t sound all that bad to me.

A Little More Detail

This isn’t gonna be long, since the results seem pretty straightforward to me. But there were a couple more interesting points made during the conference call.

As we have previously discussed, NRT management’s focus on organic growth through sales associate recruiting has been very effective and the trend continued in the first quarter. During the last 12 months, NRT has recruited new sales associates who collectively generated approximately $53 million in annualized gross commission income. More traditional mergers and acquisitions over the same period added about $26 million of GCI. Thus between organic and non-organic growth, NRT added approximately $79 million of GCI to its revenue base during the last 12 months.

The retention of top-performing sales associates is a priority, and NRT management has been highly effective in that regard. In the past two-plus years, NRT has consistently retained over 93% of the production from its first- and second-quartile sales associates, the top-producing segments of its sales force.

At a minimum, that suggests to me that the meme in certain parts of the industry that Realogy brokerages — and in particular the NRT/Coldwell Banker — are embattled, losing top agents, and so on might be overblown a tad. $53 million in GCI from recruiting doesn’t sound like a company fighting for its survival. And again, retaining 93% of the top producers also isn’t bad.

Finally, at least for Realogy, all this wonderful financial news is leavened by the fact that while transaction sides are up, prices are down:

As we saw in the fourth quarter of 2011, an influx in homebuyers at lower price levels continued to be seen in the first quarter’s closed transactions. NRT’s Midwestern operations, which in the fourth quarter of last year saw a 13% increase in homesale sides offset by an average sale price decrease of 8%, had a 21% increase in homesale sides that was offset by an average yearover-year sale price decrease of 7% this past quarter. NRT’s Southern California operations continued to be relatively weak and reported a 1% increase in homesale sides along with a 5% decrease in average sale price compared to Q1 of 2011. Northern California enjoyed a 12% increase in sides and only a 2% decrease in average sale price. The Northeast experienced sides increases of 9% offset by average sale price declines of 4%. The comparisons for the Northeast were somewhat impacted by improved weather, but we believe that pent-up demand at lower price points was the more prominent reason for the increase, which is supported by the decline in average price in the region. As we’ve remarked before, Florida is starting to see overall market inventories return to more normal levels — and at lower price levels, below-normal inventories. That region experienced a 4% decline in units more than offset by a 7% increase in average sale price.

Now, this doesn’t necessarily jive with the idea that the housing market has bottomed, since prices kept falling throughout Q1 (again, at least for Realogy). We’ll see where Q2 comes in at, but the overall financial results for Realogy suggests to me that NAR and Realogy and everyone else in the brokerage business should be eager to see prices keep falling, as the increase in transaction sides will more than offset the decline in price for the actual GCI revenues for brokerages. I mean, crikey, look at the Midwest: 7% decline in price meant 21% increase in sides? Who wouldn’t take that deal?

Fun Fact Nuggets

Let’s end with a couple of fun facts from the report.

• Remember Century21′s SuperBowl ad? Well, we now know what that cost approximately: $8m. Maybe not all of the $8m was the SuperBowl ad, but management mentioned that specifically, so I’m guessing most of it was.
• What C21 got for that spend was 85% bump in site traffic in February, and a 35% increase in traffic for March, as I imagine the Q1 report cuts off in March. Was it worth it? Who knows — only the CMO of Century21 can say for sure. But it does suggest that old-fashioned advertising isn’t as worthless as some might think for some things.
• Realogy also booked $11m in “retention plan expense” for the quarter. I’m not entirely sure what that is, but it sure does sound a whole lot like bonus plans for Realogy executives to keep them around. Given the financial performance as indicated so far, seems like the senior management and the equity holders (Apollo) are feeling more comfortable about how their people are performing. So if you get a job offer from Realogy Corporate… consider taking it. They might have turned that ship around.
• Realogy’s cash-on-hand increased by $5m from Q4/2011 to Q1/2012, from $143m to $148m. For a company that is heavily indebted, but making all of its debt service payments, perhaps that little fact says more about relative health than any other measure.

I’m sure there’s more in the earnings report that professional analysts can tease out. But I’m just a wee little blogger with a bit of an interest in Realogy. And I say, good job, boys and girls at One Campus! Looking very solid indeed.

-rsh

No related posts.

Not the answer to all our problems, sadly...

Jeff Corbett, my good friend and former partner at 7DS Associates, recently penned a fantastic call to arms at the RETSO blog in which he got into some depth about the concept of an Open Source MLS:

As a self described ‘Agent of Change’ around the real estate and mortgage space, I’ve sat in the shadows lurking, observing the discussions regarding ‘Raising The Bar’, IDX listing exchange equity, why it’s a bad idea to send listings to the aggregators and the such. All conversations that, IMHO, root back to the 900 some odd MLSs across the nation.

So, what I would like to talk about is the concept of an Open Source Multiple Listing Service.

He goes on to lay out a fairly convincing set of arguments for an Open Source MLS (“OSMLS” hereafter).

As it happens, I personally worked on precisely this concept of the Open Source MLS last year for quite some time. It was a serious effort, that went as far as setting up a company, looking for people, and was on the verge of raising money to fund it. So I do think I have some insights to be shared here. I don’t know that I believe in the OSMLS anymore, but in case someone else wants to take up Jeff’s battle standard, I would advise them to consider some things.

Part of this will be a debate with Jeff, since some of the problems he seeks to solve cannot be and will not be solved with an Open Source MLS. But the larger part of this will be looking at a couple of issues that I found I could not solve with an Open Source MLS

What Is It We Want To Solve?

VisionaryX

As the quote above suggests, Jeff believes that the root of all of the plagues of real estate stem from the MLS. He has a number of complaints about them:

The current MLS landscape is full of inefficiencies.  They are fragmented databases with little to no continuity between them.  Most MLSs do not allow the commingling of data between each other.  There is a severe lack of innovation.  Accessibility to insightful data is tightly regulated and heavily guarded.  MLSs engage in monopolistic practices.

…

MLSs are typically comprised of boards that are typically comprised of brokers and some other figure heads. In other words, the inmates run the asylum and are paid handsomely to keep this order in place.

And most importantly, an MLS’s primary paying customer is a licensed Realtor, since you must also be a member of the National Association of Realtors (as well as local Associations) to gain access to their walled gardens.

It costs money to belong to MLSs (and multiple Associations), ergo, MLSs make a lot money. Therefore, it behooves the NAR and the local associations to keep barriers to entry to becoming a Realtor low– very low. More members equals more revenue. Further, this overarching business model perpetuates, even necessitates, the baseline Realtor ~6% commission model… I know it’s not supposed to exist, but it does.

I don’t think it can be argued that the current MLS landscape is inefficient. There are a lot of people, many of whom I speak to on a regular basis, who are working on making the MLS more efficient. But it cannot be denied that the system we have of 900-plus MLS is not exactly the model of Six Sigma efficiency.

They are local monopolies for the most part, but it is important to note that they are organic monopolies, like Ebay, rather than regulatory/legislative monopolies, like utility companies, which derive their monopoly from the government. This will be important below.

The linkage between MLS membership = MLS revenues = NAR and local Associations keeping the bar low is tenuous at best, and actually one that isn’t what Jeff thinks it is. And I say this as someone who is now on record as advocating for a smaller Association on all levels.

The basic issue with this line of reasoning is that there is nothing inherent in the Open Source MLS that would solve any of the above problems that Jeff lays out. That’s what I learned during my months of actually working on an Open Source MLS. The problem with the MLS is political, not technological.

Open Source: What It Is, What It Is Not

To understand why OSMLS cannot solve the problems Jeff is laying out, it is important to at least get a high level understanding of what Open Source is and is not.

Wikipedia’s definition of open source software says:

Open-source software (OSS) is computer software that is available in source code form: the source code and certain other rights normally reserved for copyright holders are provided under an open-source license that permits users to study, change, improve and at times also to distribute the software.

A more refined definition can be found at Open Source Initiative, and there are a couple of critical points there:

1. Free Redistribution
The license shall not restrict any party from selling or giving away the software as a component of an aggregate software distribution containing programs from several different sources. The license shall not require a royalty or other fee for such sale.

2. Source Code
The program must include source code, and must allow distribution in source code as well as compiled form. Where some form of a product is not distributed with source code, there must be a well-publicized means of obtaining the source code for no more than a reasonable reproduction cost preferably, downloading via the Internet without charge. The source code must be the preferred form in which a programmer would modify the program. Deliberately obfuscated source code is not allowed. Intermediate forms such as the output of a preprocessor or translator are not allowed.

What open source means is that anyone can modify the software, as long as those modifications are themselves freely distributed, modifiable, and available in source code form. The point of open source is to develop software collaboratively, as a community. One person looking at the same code might come up with a solution that others haven’t seen. Groups of programmers criticizing each others’ efforts, making changes, and going through various iterations can achieve something that a private company may not be able to.

Without getting into too much detail, there is much to recommend open source for software development.

What open source is not, and what it happens to be pretty bad at being, is a system of rules and procedures. The whole point and intent of open source, to some extent, is to free up talented developers from rules, business requirements, and other restrictions, to see if they could come up with a better mousetrap.

Open source is also not some technological neo-Marxist state where happy workers contribute according to ability and take according to need. It turns out to be far more complicated a story than that.

Why Open Source MLS Cannot Solve The Problems

The first major issue to point out is that an Open Source MLS would deal with only the underlying software that runs the MLS. So if your MLS runs one of the major MLS vendor systems, such as Paragon by LPS, all that OSMLS would do is to replace Paragon with something else.

(If what Jeff wants is for the data contained inside the OSMLS database, then he’s arguing for something more than OSMLS; he’s arguing for Open Source Data, which is a whole different proposition, and one that the industry is absolutely dead-set against. Look at the Sindication Kerfuffle.)

The point is that there is nothing inherent in OSMLS that makes access to data any easier, any more efficient, or any more logical than it is today.

OSMLS by itself does nothing for efficiency. There may be some cost savings, but even that, it turns out, is somewhat doubtful, depending on the level and amount of tech support the MLS would need. OSMLS would do nothing to eliminate fragmentation of data, since data ownership is quite separate from the software it runs through. OSMLS would do nothing to remove the organic monopoly of the MLS, since that’s based on the network effect: all buyer agents go there because all the listing agents advertise there because all the buyer agents go there because… voila, positive feedback loop.

OSMLS would help with innovation since anybody with some coding skills could get into the source code and mess around with it… but that ain’t a simple thing either, as it turns out.

The Difficulties of OSMLS

Despite the above, the fact that OSMLS would help drive innovation to some degree might make the venture worthwhile. But there are some real difficulties you would need to consider, if you choose to tread where more foolish men (like me) have already trod.

The first major one is that there will be a lack of standards. You might call it diversity of code base if you’d like, but the point is that one version of the OSMLS will differ from another version of the OSMLS in quite significant ways. Jeff brings up WordPress as an example of open source software; it’s a good one. But so is UNIX, which has dozens of variants. (And UNIX has an organization that certifies certain flavors as being authentic UNIX; if you can think of a similar organization in real estate, I’d like to know about it. RESO is on its way there, but it’s far far from what The Open Group is.)

That diversity (or lack of standards) means that technical support becomes an absolute nightmare. You could implement some flavor of OSMLS, and your CTO may know all about it. Then he leaves for greener pastures, and a new CTO comes in, who knows a different flavor of OSMLS. Depending on how much variation there is, you may be in for a world of headaches.

That diversity is one reason why companies like Red Hat exist. Red Hat’s whole business model is providing tech support to companies that have chosen to implement its particular flavor of LINUX. My business plan, back when I was pursuing the OSMLS concept, was to provide tech support for a particular variant of OSMLS, much like Red Hat does.

Trouble is, real estate — especially the MLS sub-segment — is not your ideal technology playground. Let me suggest that the market for corporate LINUX installation is quite different than the market for MLS software. Maybe you can make those numbers work; I know I could not without enormous sums of venture capital. Even if the free-spirited developers who work on open source projects do so without payment, the people who have to work the phones with MLS tech staffers to figure out why their system just crashed will not do it without getting paid. The business model supporting that is thin indeed.

The second major difficulty is that each MLS has its own set of rules that govern the actual conduct of the subscribers/members. Software exists to serve the business needs of the organization, and there is little doubt  in my mind that OSMLS would end up with as many variations as there are MLS’s.

Jeff writes:

Yes, yes… I hear you.  There are still a lot of granular details to consider.  Data formats, API’s, user access and editorial control rights to levels of data, other revenue models, equitable revenue distribution. . .  rules need to be written.

But who would write those rules? The existence of free, open source MLS software does not by itself create some rulemaking body that can impose its will and standards on the individual MLS. The issue of data formats has been something the industry (through groups like RESO) have been working on since before I came into the industry. We’re getting close, but we’re nowhere near the finish line. Jeff does offer one possibility:

Who writes these rules and how they are implemented requires a novel approach, moving away from the aforementioned traditional committees and organizations who get bogged down in the politics and self serving agendas.  Fresh blood must be infused using truly innovative methods like open source, agile, community-based development.

I love the optimism and the idealism, but… even supposing that this novel approach without layers of committees and such does produce a set of rules… who would enforce them? Expecting open source methodology, volunteerism, and unstructured processes to do the grinding work of enforcement is simply asking too much. Again, technology offers no answers to that dilemma of rules enforcement.

Organization and Talent

The power behind WordPress

This would be a good time to take a look at the example of WordPress, which Jeff cites as successful open source software platform par excellence. That is true. But WP is not exactly the uncontrolled wild west. For all intents and purposes, the core WordPress source is tightly controlled by a company named Automattic, which has quietly become a software powerhouse with $45m in projected revenues in 2012. Yes, Automattic has open source in its DNA, and anybody could create whatever variation of WordPress he’d like. But much of the work (QA, core product updates, etc., for example) to ensure that the WP platform is as rich as it is goes on behind the scenes at the for-profit, money-making venture of Automattic with 106 paid employees.

I don’t know that there is a single MLS vendor with 106 employees (in the MLS division, at least).

This is the third major problem I ran into squarely as I was trying to get the OSMLS concept funded. Simply put, finding the right talent became prohibitive because I’m not one of the “right talent”. That is, if I were as connected into the global open source developer community as a Matt Mullenweg (founder of Automattic) is, then yes, I probably could have built up an organization. If you’re not one of those guys, good luck finding a CTO who is, and isn’t already working at some major tech company or startup.

Open source projects demand far more from managing its development than does traditional development, simply because you’re not paying anybody. So the CTO can’t order the chief architect to turn in code by some deadline; the chief architect might be working for free, and could (and would) tell you to go pound sand. It can be done, of course, but it requires a particular type of management talent, and one that is completely missing in real estate, as far as I know.

Great Ideas, But Be Warned

Reading back through this post, I’m disheartened that I sound like a nattering nabob of negativism. It is not my intent. I absolutely love the idea of OSMLS; I love it enough that I invested tens of thousands of dollars of personal capital into exploring it. I agree 100% with Jeff when he writes:

There are real ideas here.  The greater industry needs to change at foundational and fundamental levels if it ever hopes to ‘raise the bar’, ‘increase professionalism’ or any other euphemism that is today little more than lip service and noisy chatter in the social media echo chamber.

Maybe an open source MLS is a part of that overall fundamental change. It might even be a necessary condition for fundamental change. But it is by no means a sufficient condition for real structural change that is needed.

The lesson that I learned, which I impart to all you doers (h/t: RETSO), is this:

The problems of real estate can not be solved by hardware or software; it can only be solved by wetware.

-rsh

Related posts:

1. Extinction Event Horizon: Real Estate
2. In Which I Clarify My Worries Over Syndication and IDX, And Connect The Dots
3. Introducing: Aybaf – A New Virtual Brokerage

"We are a nation with a government, not the other way around."

A few weeks back, Bill Lublin and I engaged in a spirited debate about the future of the Association, stemming from this post of mine from March. Bill’s initial response is here.

Well, my post then became the basis for my presentation at RETSO, which gave me impetus to expand on the topic.

During that debate, I suggested that Bill was simply defending the status quo to the hilt since his first post was nothing but a robust defense of all things NAR. Since he said that he has many ideas for change at NAR, that he wasn’t happy with everything at NAR, I asked him to lay out some reforms he’d like to see.

Bill has now posted the reforms he’d like to institute at NAR in Part 2 of his Ask What You Can Do for NAR post. I, of course, argue with Bill after the jump, partially because I learn things through debate, but really, because this topic is a critical one for the industry. We may as well have it in public.

Summarizing Bill’s Arguments

Bill makes two main arguments in his “Reforms I Would Enact To Show I’m Not a Devoted Defender of NAR”. Unfortunately for his contention, the first argument happens to show that when it comes to NAR, Bill is like the mother who can’t see any flaws with her baby boy no matter what. And the second argument is a total non-sequitur.

Bill’s first argument amounts to, “What’s wrong with NAR is its members.” He writes:

I believe that the primary problem face by NAR and the State and Local associations is not the size of the organization, but the lack of education and involvement on the part of the members.

He then goes on to suggest a reform:

One solution – don’t decrease membership, increase dues – substantially,but then credit the involved member back an amount equal to the increase  based upon ;

1. Attendance at Association events (educational, social or political)
2. Donations to RPAC and participation in political events
3. Memberships in committees and the local, state or national, levels
4. Their participation in Association sponsored community events

By doing this, members would increase their professional growth, learn what the association does, gain new and better relationships with volunteer leadership, association staff, and their colleagues. Experience has shown me that people who get involved in association committees regularly, and over a period of years,  become association advocates, and when they believe the association needs new directions, become the catalysts for change. The benefit of a plan like this is that the people that don’t serve or attend, will pay a financial penalty for their failure to make the industry a better place, instead of being carried on the backs of others.

What I don’t quite understand here is how “people that don’t serve or attend” is a “member” of an organization at all. It’s quite like claiming that despite the fact that despite the fact that Kate Beckinsale has never called me, has never consented to go out on a date with me, and doesn’t know that I exist, she’s my girlfriend.

In my youth, I “belonged” to a union, because I wanted a dishwashing job in my college cafeteria. Since my university was a closed union shop, part of my paperwork included my signing over part of my paycheck to pay union dues. I never once considered myself a member of that union (can’t even remember the local number or name), never attended a single meeting, never volunteered for anything, and generally never thought of the union except when I looked at my paycheck to see the money deducted. I was not then a “member” of that union in any meaningful way.

Yet, Bill’s contention is that these individuals are indeed valued members of NAR, simply because they pay dues. It doesn’t matter to him, apparently, that most of them pay those dues because they feel forced to pay those dues in order to have access to the MLS and to the lockbox. They do not attend meetings and do not serve, because they are members of NAR in the same way that I was a member of that local whatever of Big Labor Union. Which is to say, they are not members at all if the word means anything.

Take a step back and look at the “proposal for reform”. There isn’t a hint of any suggestion that the Association could possibly have done anything wrong. There is no sense of critique of any policy positions, organizational inefficiencies, or use of funds. The reform that Bill proposes comes down not to fixing what might be problematic in the organization, but fixing what’s problematic in the “membership”.

Everything wrong with the Association, you see, is the people’s fault. It’s their fault for being uneducated, unenlightened, and uninvolved.

The solution, then, is to jack up the dues, and then to issue refunds back to those who are involved. Because belonging to an Association apparently is a duty, which can be fulfilled either by service or by money:

The benefit of a plan like this is that the people that don’t serve or attend, will pay a financial penalty for their failure to make the industry a better place, instead of being carried on the backs of others.

The members exist to serve the Association, not the other way around. Which is fine, if those people joined the Association voluntarily in order to serve it. But given that the vast majority of “members” did not join voluntarily, the “reform” boils down to taxing the unwilling to benefit the core membership who would have joined anyway.

I also advocate raising dues, but the timing is different, because the animating philosophy in our visions are different.

I advocate letting those involuntary members-in-name-only go, and then raising dues on the remaining real members, who have joined not to get MLS access, but to make change and to advocate for American homeownership. The animating philosophy is that the Association should be an organization of political activists coming together voluntarily on the basis of their agreement on the mission.

Bill advocates raising the dues, not letting the members-in-name-only go, and then badgering and hectoring them to get more educated and more involved. The animating philosophy is that the Association should change nothing, since supporting the Association is a moral duty for anyone with a real estate license; you can fulfill that moral duty either through service, or through money.

As it happens there are some organizations that function much like the membership-is-a-duty Association of Bill’s vision. The Teamsters, AFSCME, the teacher’s unions….

I just happen to think that particular vision of the Association is not a good one. Your mileage, of course, may vary.

(Bill’s second point, about taking control over listing data, is such a non-sequitur that I don’t even know where to place that in the context of this discussion. That whole topic is relevant to the MLS, but I thought we were talking about the Association and its value apart from providing access to the MLS? So we’ll just skip over that for this discussion.)

The Smaller vs. Larger Argument

To be fair, Bill’s “reform” is premised on the more interesting and important argument we’re having. That issue is whether it is better for the Association to emphasize quality or quantity in its “members”. As Bill writes:

I think that Rob’s idea of a smaller organization would not in any manner benefit the industry or the political efforts of the organization, because, as I have pointed out in the past, the larger the group, the more attention it gets from politicians, and that attention is important to the lobbying efforts of organization.I appreciate Rob’s analysis of response to calls to action and the number of major RPAC donors, but in addition to those efforts, politicians respond to the threat of concerted action by voter blocs, which, due to the tradition of closed ballots, cannot be measured, but like Damocles sword, hangs over anyone who needs to be elected to their job.

This, frankly, is the heart of the matter, rather than the membership-by-fatwa proposal Bill floated.

Bill believes that my original post was intricate rhetoric, but rhetoric nonetheless, whereas the reality of political advocacy is the larger is better.

The issue here is that Bill is framing only half of the argument: bigger is better than smaller. Of course bigger is better than smaller. All other things being equal, more people = more attention = more power. That is a truism in a democracy no one would disagree with.

The issue is that you have to bring in the other half of the equation: commitment. Is bigger and disengaged really more effective for lobbying efforts than smaller and engaged? That’s the real question, and one that people interested in the topic need to think about.

Take, for instance, the Rally to Protect the American Dream that NAR has called for on May 17th. This is supposed to be precisely the kind of show of power that Bill fantasizes about. When Congressmen see thousand upon thousands of REALTORS waving signs and so on, they’ll cave quickly on the various issues that NAR advocates. From the NAR press release:

Every May, NAR holds its Midyear Legislative Meetings & Trade Expo in Washington, D.C. Although thousands of REALTORS® attend the Midyear meetings, this year that’s not enough. With the challenges facing real estate and home ownership, this year we are having the REALTOR® Rally to Protect the American Dream at the Washington Monument on the National Mall.  NAR leadership has asked us to FILL THE PARK with REALTORS® on the morning of May 17th.

Okay, the capacity of the National Mall is supposed to be about 1 million. Around the Washington Monument itself, I’ve seen nothing concrete, but I do know that a Glenn Beck rally drew about 76,000 people to that section of the park.

To “FILL THE PARK with REALTORS” would mean 100% participation of all roughly million “members” of NAR. I think we all can agree this will never happen. To “FILL THE PARK”, at least around the Washington Monument, would require let’s say a minimum of 50,000 REALTORS to show up.

I think it’s fairly obvious that no such filling of the park will be happening on May 17.

Keep in mind that this rally is something that NAR President Moe Veissi has said is historically critical:

Our industry is facing a crucial moment. Never before in the history of our great nation have housing and real estate been forced to defend the benefits they provide our country. The very foundation of civilization is no stronger, nor more enduring than the integrity of the homes on which they rest.

Since roughly 10-12,000 people attend NAR Mid-Year at all (according to Association sources I spoke with), it seems doubtful that the Rally to Protect the American Dream would draw more than say 7,000 people. 7,000 people are going to look awfully small next to the Washington Monument.

So the question is, do we believe that Congresscritters and their staff — all of whom are professional political operators — are stupid or blind or both? Would they continue to believe that NAR represents some huge “voter bloc” when it can’t mobilize even 1% of its so-called membership to attend a rally that its President has called crucial, critical, historical, etc. etc.? Consider for a moment that the leaderless, disorganized Tea Party movement brought 60,000-70,000 people to the Washington Monument in 2009. If you were a professional politician, which “voting bloc” scares you more?

The question is, in today’s high technology environment, when campaigns and political staffs include data analysts with access to highly segmented voter databases going back several election cycles… do you really think that some Senator with millions in funding can’t figure out that NAR might be a paper tiger? The answer, at least to me, is obvious.

The Old and Busted vs. the New Hotness

The essential problem with Bill’s formulation of political effectiveness is that it is based on an old outdated model of political organization, where political bosses purported to speak for huge numbers of people, and politicians believed them.

Old and Busted

The Internet, which changed politics long before it ever impacted the general public, has undermined that old model. Those people who have been paying attention have noticed that the old unions, for example, are suffering defeat after defeat. Politicians both Democrat and Republican have defied the will of these “voting blocs” in recent years and have not only survived, but thrived.

Even the established political parties are not the power they once were — witness, for example, the Occupy Movement on the Left, and the Tea Party on the Right. Notice how Ron Paul is defying political conventional wisdom.

The new model is the one being used by the various popular movements, where activists empowered by technology are influencing John Q. Public on a personal basis. The success of the Tea Party movements, for example, has nothing to do with professional lobbyists and big organizations, but everything to do with things like the Precinct Project.

Bill’s philosophy and suggested “reforms” are very much in the vein of the older, top-down, political bosses model. And they can only perpetuate the same old and busted model of disaffected “members” being lectured to by the enlightened elite. That way lies perdition.

My suggestions for a leaner, meaner Association, made up of only those committed REALTORS who truly believe in a vision and a mission for organized real estate leads naturally to adopting those newer technology-enabled social organizing models that have been successful from Egypt to Utah. It is the new hotness of political activism, and it is one that NAR, State and Local Associations desperately need to adopt.

One quick data point in support of the New Hotness. The average Facebook user has 229 Friends. I believe that the average REALTOR has many times that number in Facebook Friends, because of her business and her personality. I think it’s fair to assume that the average REALTOR on Facebook has 500 Friends.

The New Hotness

Convert NAR into a focused, committed political organization filled only with activists, and lose 80% of the membership. The remaining 20% has a Sphere of Influence that is 200,000 x 500 Friends = 100,000,000 Americans. And that’s just on Facebook. As we know, many REALTORS are leaders in their local communities and have real influence in their towns and neighborhoods. Even if they’re not engaged in politics, they know hundreds of people locally.

Find a way to unleash that network, that energy. That is political power in the Social Age.

Oh, by the way… an organization built around a core, with solid principles, can only grow. So even if the Association starts with pruning, it will grow back more powerful, more focused, and more numerous than can be imagined.

This got long, but the discussion is an important one. I am grateful to Bill Lublin for continuing to have this debate with me, as it informs all of us — myself included.

-rsh

No related posts.

Oh my...

Back in November of 2010, I wrote about Move’s acquisition of ListHub and what it might mean for “Syndication Quality”. I thought then that the reason why Move acquired ListHub was strategic — to control the source of listing data, in order to impose on its main competitors the same restrictions that Move had on operating REALTOR.com:

There was little doubt in my mind when the acquisition was announced that what Move was doing was a strategic maneuver to neutralize some of the advantages that its big competitors had — freedom to do whatever they wanted with the data, given the widespread ignorance of brokers and agents on intellectual property issues.  Having spoken to Messrs. Berkowitz and Samuelson, as well as other players in the drama, I have confirmed that this is indeed the mutual vision of the Move and ListHub teams.

“Let’s see how Trulia and Zillow compete if they have to live up to our standards of data protection and data integrity” might be something Move executives never actually said, but I rather think they are thinking it.

Well, it only took a year and a half, but I believe we’re starting to see the strategy be implemented:

ListHub, the largest syndicator of real estate listings and website analytics, today announced the launch of the ListHub Preferred Publisher Program. Real estate brokers syndicating listings through ListHub’s Preferred Publisher Program can now quickly identify preferred publishers and publisher rules, rate publisher websites and access reports through the control panel. The new features bring greater transparency, control and protection to real estate brokers as they syndicate listings to multiple publishers. ListHub is operated by Move, Inc., (Nasdaq: MOVE), the leader in online real estate.

Earlier this week, prior to the press release, I had the rare opportunity to get a demo from Luke Glass, General Manager, and Mark Wise, VP Operations and Technology, of ListHub of these new features, and to ask them some questions about what they were doing. Well, what they’re doing is a small step, but it is one fraught with real significance for real estate data policy.

There are two things in the new ListHub that work together to create the significance. Let’s dive in, shall we?

More Broker Control

Since I’m not a ListHub user, and not a MLS executive, it’s been quite some time since I’ve seen the ListHub control panel. I also gather that some of this ability has been in place for a while, but hey, it was kind of new to me, okay? So here’s a screenshot:

From Move/ListHub. Highlights are mine.

The new things on this screen (from what I’m told) are highlighted in red.

Filter Skelter

First, I believe brokers have always had the ability with ListHub to pick and choose which websites (“publishers”) got their listing data via syndication. What’s been added is the ability to filter publishers with a function called, oddly enough, “Filter Publishers”. The screenshot shows seven filters:

• No Re-Syndication
• Posts Redirect Link
• Provides Error Reports
• Provides Metrics
• Shows Broker Contact Info
• Timely Listing Removal
• Timely Support

Clicking on any of those changes the search results below to allow brokers to more easily choose who gets the listing data. Presumably, many of the brokers upset with syndication would choose to select all seven. I did not get to see how many of the 55 publishers meet all seven criteria.

The little blue question marks provides hover-over text explaining what each term means, and I assume ListHub customer support would gladly answer whatever detailed question your IT person might have.

Luke and Mark mentioned that ListHub decides what the criteria here mean, based on their years of working with publishers. For example, what is meant by “Timely Listing Removal”? ListHub defines it; it is not user-definable… yet. Perhaps we’ll see a feature in the future that allows brokers to decide what is and is not timely for them.

Imperfect as it may be, this Filtering system still represents a step forward and an improvement in the ability of brokers to control where their listings end up.

Real Estate <3 Ratings!

Another new feature is the star rating system on the right. Each broker would be able to rate a publisher on a five-star scale, and provide a brief comment as well. So if you had a particularly horrible experience with RealEstateBukkake.com or something, you can go and trash them on ListHub… and every other broker would see your 1 star rating and your comments about the horrid publisher.

I believe Mark/Luke (I’m going to just write it that way, since I can’t recall who was speaking at what time… although Matthew and John were most definitely absent, as was Acts, Corinthians, and Galatians) mentioned that they would look at incorporating a filter based on ratings. That would allow a broker to say, “Show me only 4+ star publishers” for example.

I asked whether there were plans to make this rating data public, since I think consumers might find how real estate professionals rate a website fascinating… and the short answer is, No, but that’s an interesting idea that we’ll think about.

Auto-Subscribe, Using Filters

Finally, in this section, I found this interesting:

The idea here is that a broker can “auto-subscribe” (which really should be “auto-distribute”) to a new publisher in the ListHub network who meets one or more of the filter criteria.

So if you hate Re-Syndication, then you’d click on that box, and any new website that comes on who does in fact re-syndicate (according to ListHub’s criteria) would be left languishing without your data… unless you manually add them later on.

All of these things — as well as numerous other refinements that I’m sure I’m failing to remember now — adds up to more fine-grained control by the brokers as to what happens with their listing data and where it goes.

Mark/Luke made clear that ListHub can easily add/change the filter criteria to meet the needs of the fast-evolving technology space. I imagine that we would see some sort of filter on mobile apps sooner rather than later, to allow brokers to syndicate (or not) to publishers that have a mobile app, for example.

The Other Shoe: MLS Preferred

The thing that really intrigued me, however, was contained in two sentences in the press release:

ListHub’s Preferred Publisher Program gives MLSs the opportunity to designate publisher sites as preferred based on criteria important to the MLS and their members. Brokers can then use the MLS preferred list as a guide when making their listing syndication choices based on which publisher site will best fit their marketing needs

As I understand it, basically, a MLS can go into ListHub and designate one or more publishers as a “Preferred Publisher”. This is similar in concept to what CMLS and Point2 propose with “MLS Certified” program. The idea is that brokers would trust those “Preferred Publishers” because their MLS has examined them and found them not wanting. Mene, mene, tekel, NOT Upharshin, as it were.

If a MLS decides to get into the publisher preferring game, its brokers would have another Filter added to its menu of choices: “MLS Preferred”.

What the criteria are for being Preferred is not something ListHub wants to get into (although, more on this below). Each MLS is free to make up its own list of criteria for Preferring one publisher over another. And if money should change hands, I don’t believe ListHub would make that any of its business, although the brokers in said MLS might decide to make that their business.

Even where the MLS has Preferred some set of publishers over others, the brokers can ignore the preference and choose to send data to whomever they wish, since… well, they own their own listings, and if they want to send property information to SecretServiceHookerCondos.com… that’s their prerogative.

Also, a MLS doesn’t have to prefer anybody. It can just leave that whole feature alone, and let their brokers make up their own mind without any guidance from the MLS via ListHub.

Where Things Start To Get Interesting

So far, so good, and so easy to understand. I think it’s a smart move for ListHub to make this capability available to MLS but not make it mandatory.

Where it got interesting is when I learned that ListHub has “bare minimum standards” for a website to be considered for inclusion in the roster of Publishers at all. For example, Mark/Luke mentioned that ListHub recently dropped Oodle.com as a publisher, because the team at ListHub felt that Oodle simply did not meet the minimum standards for data security and integrity. I do not know what these minimum standards are, although I did ask. Perhaps Mark/Luke would send me their written guidelines on these bare minimums after reading this post. (Right guys? Yeah! Send it my way!)

The reason why I think it’s interesting is that those “bare minimum standards” might be of extreme interest to MLS organizations, Associations, and brokers around the country. Indeed, a broker who is hostile to syndication because of the loss of control might well ask how Re-Syndication does not violate “bare minimum standards”.

Furthermore, Mark/Luke mentioned that ListHub works with over 48,000 brokers (I think that’s the right number). Well, in my considered opinion, less than 1% of those brokers (that’s 480 brokerages) would take the time to do any filtering and selecting of publisher websites. And I’m not certain that many of those 480 brokerages would even understand the filters adequately to know how to fine-tune their control over listing distribution. Certainly the larger companies with an IT geek on payroll would pay attention to it. Would the average broker really think about Error Reports and what that might mean?

In my post from a year and a half ago, I thought we might see the development of something like the Homeland Security Advisory System. Publishers would be ranked from Green to Red based on standards developed and defined by somebody (more on this below), and enforced by companies who deal in data: ListHub, Point2, MLS, etc. So the “pure and holy” publishers who jump through all the hoops and keep brokers (and their representatives) happy would earn the Green rating, while the evil pirate websites out to ruin realtors would earn the Red Alert rating. And the broker can simply choose what level of terror he’s willing to put up with: “Give me only Green websites” or “Yellow and Below Only” or some such thing.

What ListHub has done with the MLS Preferred program is a step forward, and a significant one. But it cannot and will not stop there. It will have to evolve into something like the Terror Alert system: something simple for brokers to choose, with an administrative apparatus to define, classify and enforce those levels.

And it is my considered belief that ListHub cannot be that administrative apparatus. As I wrote previously:

One thing to consider, however, is that in execution, it is highly unlikely that this will be driven solely by Move.  Even if there is widespread agreement that it would be a good idea for brokers and agents to know what they’re getting into when they send a listing to a website, there is not yet any sort of agreement as to what constitutes what level of trustworthiness.

And this is not the sort of thing that one company, no matter how well-meaning, could impose on the industry.  That goes doubly so for Move, who stands to benefit significantly from the establishment of such syndication standards.

What I expect to see, therefore (and may try to work on), is the creation of some sort of third party industry group that will collaborate on syndication standards and come up with those tiers and levels.  The major publishers will certainly be included, from Realtor.com to Yahoo, along with some sort of voice from smaller publishers (e.g., Estately.com), NAR representing the agent, likely some group of MLS’s representing the broker, and quite possibly LPS, CoreLogic, or both, representing data vendors.  Who knows what the ultimate composition might be, but these are the main stakeholder groups.

This should be an independent-as-possible organization whose standards are the result of negotiation and discussion between all of the stakeholders, whose ability to enforce those standards lies in the member organizations control over the source (MLS) and distribution (ListHub) of listings data.

ListHub’s effort simply cannot have the legitimacy it requires as long as it is something done by a single company owned by Move, Inc.

Take the Next Step

What ListHub has shown, however, is that the technology infrastructure for doing this is in place… because they’ve put it into place. The combination of Filters and MLS Preferred Publisher goes a long way to making the Red Alert System possible.

They now need to put the political infrastructure into place. It is the only path to legitimacy and true collaboration amongst the data tribe of the real estate industry. These stakeholders have to be brought together into a single organization that sets “bare minimum standards” as well as the varying levels of compliance/holiness to earn the Green rating vs. the Fire Burning Red rating:

• Publishers/Users: obviously, the portals like Realtor.com, Zillow, and Trulia, but also the mainstream portals like Yahoo, and data-users such as LPS, CoreLogic, RPR, and others.
• Brokers: One real problem is that there is no organization that actually represents brokers, since the Association represents individual agents as REALTORS.
• MLS: I believe that either CMLS or the Cove Group could be said to represent MLS interests in an organization like this.
• Agents (?): NAR would be the obvious choice here, except that I don’t know if individual real estate agents are a stakeholder at all, since they aren’t publishers and don’t have a copyright interest in the data.

I think this can be done rather easier and faster than was possible 18 months ago, because syndication has become front-and-center on the minds of the industry. How?

Move should just fund the damn organization, and invite everyone to participate. It wouldn’t cost that much — a single Executive Director to organize the meetings, rent hotel conference rooms, and publish the minutes. Maybe an administrative assistant to help out. An office somewhere in Move’s HQ, with a telephone and a laptop. Travel budget. And Move can just dare Zillow and Trulia to not contribute similarly to such an effort. How much? $250K from each of the three should do it. And I suspect the other major companies (LPS? RPR? Corelogic?) are going to want to show their community spirit by making some contributions as well, not to mention that they have a vested interest in making sure that the Executive Director of this Independent Council on Syndication Quality isn’t entirely in the pockets of Move, Inc.

Mid-Year is coming up in a couple of weeks. Get it going, guys. You can make a big splash by announcing something like this there. And within the year, you’ll have the industry thinking you’re on the side of angels. Make it happen.

ListHub has done some yeoman’s work here. These new features really do add to the ability of the broker to control where his data goes and what is done with it. It isn’t perfect, but… the world is an imperfect place where screws fall out all the time. The Preferred Publisher program will evolve into something far, far stronger; it’s just a matter of time and will. And I do hope they’d take the next step and organize this thing already.

One Last Thing…

I’ve decided to bury the most important takeaway since most of you will not have made it through the dense forest of 2500 words above. In fact, I suspect most people clicked the Back button half an hour ago, right around “mene, mene, tekel, NOT upharshin”.

I asked ListHub just how difficult it would be to implement this Filtering system inside a MLS. The answer was that it wouldn’t be difficult at all. It would actually be very easy, since ListHub already has most of the data, and the filters can be easily added/changed/edited.

So I asked how difficult it would be to subject the IDX feed to this Filter system. Mark/Luke sort of hemmed and hawed, since that question, I’m certain, was not one they had prepared for… but they did admit that technically, IDX could be subjected to the Filter system easily. And they did concede that subjecting IDX to the ListHub system would provide brokers with the kind of detailed traffic report that ListHub provides when it comes to publishers.

Oh, is that so? Well, yet another step towards the End of IDX…. As I wrote there:

If the technology to pick-and-choose which site gets my listings already exists… why would it be so difficult for me, the broker, to pick and choose which of my competitors gets to use my listings on their website, in exchange for my using their listings on mine? Hey, tell you what, I promise not to put listings of the participants who I do not grant IDX to on my site. We good then?

Once you cross the line into “partial syndication”, and make it plain that not only do you the broker have the right to send your listings only to the sites you select, but also that the technology to make this easy and simple to do already exists… well, good luck trying to hold on to IDX-As-We-Know-It.

And ya know what? The technology to pick-and-choose which site gets my listing already exists. In fact, the technology to pick-and-choose based on FILTERS like, “Only within same zip code” or “Only to agents/brokers who have sold in this area” exists. ListHub just deployed it.

A small step by ListHub, but fraught with significance.

-rsh

Related posts:

1. Move, ListHub, and Syndication Quality Assurance
2. Deceased Equine Shall Be Assaulted: Start Thinking Beyond IDX
3. In Which I Clarify My Worries Over Syndication and IDX, And Connect The Dots

I’ve been traveling pretty much nonstop since attending the best event on the real estate conference calendar: RETechSouth (or RETSO for short). As always, Brad Nix, Mike Pennington, and Ben Carter (with an amazing team of people) put on a fantastic event. I did a little debate on syndication with Jay Thompson, leveraging my expensive legal education to argue positions I don’t believe in. And then I gave a little ten minute speech on the future of the REALTOR Association:

Click here to view the embedded video.

I am grateful to my friend Sue Adler for taping the speech, and to the RETSO team for giving me permission to publish video footage of their conference. The audio isn’t the greatest, but considering that Sue filmed this on her iPhone, I think she did a fantastic job. And technology is pretty damn amazing.

What I recommended, essentially, is an echo of this post, entitled, “Ask Not What Your NAR Can Do For You“:

Second, having rediscovered your core mission, start purging. As it is today, only about half of the nation’s real estate brokers and agents belong to the Association and can call themselves REALTORS. And that percentage may be less, since NAR dipped below the 1 million mark recently. Smaller and dedicated beats larger and apathetic every time.

I’d like to expand on this notion a bit.

First, Some Data

The impetus for writing further is that thanks to some friends who pointed me to an invaluable resource, I have some data to play with. The data in question is the response rates fo the Call for Actions that NAR sends out to its membership. You can get the reports from 2008 till 2011 here.

It’s a fascinating table for a variety of reasons.

First of all, NAR reports that in 2011, it had 1,009,940 members. But apparently, in 2011, NAR only had 782,831 working emails. (I left out District of Columbia, Puerto Rico, Guam, and the US Virgin Islands, but adding those in gets the working emails number to 785,550.) Some 22% of NAR’s own members either do not have email, or failed to provide a working email to the Association in which they are a “proud member”.

Second, the overall response rates to the Calls to Action are interesting. In 2007, the average participation rate (where the REALTOR actually does something like sending an email to a Congresscritter, or making a phone call) was a paltry 5.2%. But it appears that the Call to Action program itself was new then. We see a steady year-over-year increase from 2007 to 2009, and then a huge drop in 2010, followed by a surge in 2011.

I’m not sure I understand why 2010 was such an anomaly. Maybe it was the issues themselves.

In 2009, there were two Calls to Action: one in support of the American Recovery and Reinvestment Act of 2009 (aka, “The Stimulus” by Obama), and the second one in support of expanding and extending the First Time Homebuyer Tax Credit. The participation rate for the Stimulus was 8.3%, while the rate for the First Time Homebuyer Tax Credit was 18.2%. Obviously, quite a few REALTORS thought very highly of the $8000 taxpayer subsidy to first time homebuyers in 2009.

But in 2010, there were only three Calls to Action, and two of them had to do with National Flood Insurance and Rural Housing Insurance, garnering 8.5% and 5.2% participation rates, respectively. The other Call to Action, entitled “Prevent New Tax Burdens on Real Estate” drew only 7.8% participation rate.

Then in 2011, we had four Calls to Action:

1. Tell Congress to Reauthorize the National Flood Insurance Program (9.5%)
2. Tell Congress: Ensure Your Clients Have Access to Affordable Mortgages (13.5%)
3. Tell Congress: 20% Down Payments Put the American Dream Out of Reach (10.3%)
4. Preserve, Protect and Defend the Mortgage Interest Deduction (16.0%)

Three big issues were going on in 2011, and more REALTORS responded. Flood insurance, however, wasn’t getting that many people excited, apparently.

Third, the percentage of Working Emails vs. NAR Membership was way down in 2011. In 2008, the Working Email count was 84% of NAR Membership. In 2009, it was 92%, and in 2010, it was 93%. In 2011, only 78% of REALTORS were providing working emails to NAR. That’s… interesting.

What To Make of This Data?

Different people will interpret the data differently. In my view, the data as a whole says a couple of things fairly clearly.

First, it seems to me that somewhere between 5% and 10% of REALTORS are the truly hardcore political activists, with the average coming in around 8.5%. I’m basing this on the fact that even the Flood Insurance Calls to Action got about 5% of the people to contact Congress while several “indirect” Calls to Action (e.g., the Extend the Stimulus) got about 8.5%.

Second, it also seems that roughly 13-16% of NAR’s members are engaged in political action at all. When a Call to Action to defend the Mortgage Interest Deduction (something that NAR has sworn to “go to the mattresses” to protect) only draws 16% participation, it’s difficult to classify the remaining 84% as people who care much about political matters. (Although, it is possible that there are conservatives and libertarian REALTORS who refused to respond because they believe that the mortgage interest deduction should be eliminated.)

Third, NAR members either don’t care or disagree with NAR more today than they did in previous years. I don’t know how else to interpret the huge drop from 93% of members providing working emails in 2010 to only 78% doing the same a year later. That’s over 200,000 NAR Members who have dropped off the Call to Action rolls.

What To Do About This Data?

The short answer is, “Let them go their way.” It is what I proposed in the speech above, and what I proposed in the prior post.

Consider only those who actually respond to a Call to Action to be a true member of the Association. Depending on the state, that number goes from a low of 7.9% in Florida to a high of 36.7% in North Dakota. (To be fair, Washington DC, the epicenter of the American political world, has an even lower participation rate amongst REALTORS at 6.4%.)  If a “member” does not provide a working email address, she is no true member. Let her go her own way.

And with the remaining 8% or 15% or 30%, immediately call for a meeting of the membership and come to agreement about the issues that the REALTOR Association — local, state, and national — will tackle, and come to at least a majority support of a particular position on those issues. If they are true members, they will find a way to attend, even if it’s over the Internet, and agree to the core mission.

Having defined the core mission, and having restrengthened the commitment of the true membership, figure out a financial plan to keep the organization going in service of that mission… while cutting loose an unthinkably large part of the dues-paying membership. It will mean both austerity in spending and additional dues for the true membership, and it will take some time. But the renewed and re-energized membership will know that the funds go to support the core missions that they themselves have agreed are important, rather than financing a large bureaucracy for the sake of bureaucrats or lavish perks for various peers of the REALTOR realm.

Why Even Think About Such a Drastic Step?

Apart from the ideal of ensuring that only those who truly believe in the REALTOR mission should be part of the Association, and apart from the obvious fiscal discipline such a focused Association would impose on itself, there is a practical element as well.

American politics has become poisonous over the past decade. 2012 promises to be the most divided, most partisan, most bitterly contested election in a generation.

NAR will be forced to support one candidate over another, based solely on its analysis of where that candidate stands on issues important to NAR and its members. Perhaps Romney’s recent ruminations about eliminating the mortgage interest deduction for second homes might tip NAR into supporting Obama in the Presidential race. Or maybe NAR decides that Obama’s call for higher taxes would suppress demand for housing, and will tip towards Romney. And that’s just for the Presidency. Numerous state, local, and Federal positions will be contested in vitriolic terms this year.

REALTORS are human beings, and most of them will end up making a choice on candidates based on something other than real estate policies. I simply cannot imagine that a diehard Code Pink Progressive in San Francisco would find it amusing that his Association is spending his dues dollars running ads for Romney. Vice versa, I can’t imagine a hardcore gun-totin’ Tea Party activist in Alabama being cool with NAR supporting “Nobama” if that’s what happens.

And this divisiveness in our politics will not end in 2012. There are just too many differences of opinion, too much conflict over visions of what America is and should be, and even too much cultural difference between the various sides that I cannot imagine 2014 being some sort of a return to harmonious civil discourse amongst gentlemen. Nor do I think 2016 will usher in the politics of kum-ba-yah.

The 15% or so that are your true members of NAR will be activist enough to stick with the Association through thick and thin. Even should such a member prefer a different candidate than the one chosen by the Association, she is more likely to understand why the Association chose to back one guy over another: because of real estate policies.

That is a united front. It is an Association that harkens back to the original mission of NAR: “effectively exerting a combined influence upon matters affecting real estate interests.” Even if that Association were to be 20% of today’s numbers, it would be one to be feared and respected — even more so because of the focus and the commitment of its members.

Next Up: Using Facebook to Explain Why Leaner and Meaner is Better

I know that conversations are happening throughout the country about the future of the Association, about the future of NAR, about the future of organized real estate. I lay out my case once again for urging a smaller, more focused, more activist organization.

In a future post, I hope to lay out the mechanics of the counterintuitive: getting more powerful and more valuable, by getting smaller. Facebook will be mentioned, yes.

-rsh

No related posts.

Home Prices, 1970-2011 in Gold

I’m on the road so don’t have a ton of time to be doing a long post, but a reader emailed me a post by Barry Ritholtz of the Big Picture Blog that was an Op/Ed in the Washington Post. It’s worth reading in full, so go check it out here.

I thought I’d try to add one tiny little piece of data to a specific point that Ritholtz raises:

Regardless of the asset class — stocks, bonds, commodities, houses, etc. — assets do not merely stabilize. We have never seen a stock market run up into bubble territory and then revert to fair value. Instead, we careen wildly past that level, to deeply undersold and exceedingly cheap.

That is the marvelous mechanism of markets. It is how assets are repriced, distressed holdings liquidated, capital markets stabilized, fools revealed, speculators punished — and money returned to its rightful owner, the prudent investor.

For a lasting recovery, we need to see houses cheap enough that they fall into “good hands” — long-term owners who can afford their mortgage payments.

First of all, I happen to agree with Ritholtz 100% on this point. No asset bubble inflates and then simply reverts to the mean. It goes deep into negative territory, and then bounces back to the mean (i.e., “fair value”).

But I do wonder if we haven’t hit that point of housing being deeply undersold and exceedingly cheap. I suppose the definition of cheap depends on the buyer’s perspective, but the graph above is one from a post I wrote a while back looking at the price of housing in terms of gold — that ultimate holder of value, the non-fiat money in this world of fiat currency.

According to that chart, housing prices in 2011 were down to 1980 levels at least in terms of gold. 1980 was the absolute depths of the Jimmy Carter Malaise, when annual inflation was 13.5% and mortgage interest rates were around 18%. (Reagan didn’t take office until January of 1981, and you can see home prices recovering by 1982.)

The question is whether 1980 price levels are “deeply undersold and exceedingly cheap”, especially when rates are at historic lows thanks to the printing presses of the Fed going full speed. If you have the cash or the gilt-edged credit to get a mortgage in today’s environment, it may just be that prices have tumbled to “exceedingly cheap” levels thanks to unreported devaluation of the dollar.

I’ll have more speculating to do later on Ritholtz’s fantastic series on housing, but I did want to add this little tidbit for now.

-rsh

No related posts.

One of the most eye-opening books I’ve read in the past few years is Coming Apart: State of White America 1960-2010 by Charles Murray, a sometimes controversial scholar at the American Enterprise Institute. This is not a full book review, as there have been dozens of them already done, and there will be hundreds of discussions started throughout the country because of this book.

But there were a couple of items that really piqued my interest as it relates directly to the real estate industry. Since I know that real estate economists from NAR, Zillow, Trulia, and others sometimes read this blog, I’d like to pose the questions and ask them for some answers after crunching their data.

SuperZips and the Isolation of The New Elites

Murray’s basic theme is that Americans are dividing along class lines. While there has always been elites in America, they still shared the values, assumptions, social mores, culture, and most of all, geography with the rest of America.

He tells the story of his childhood home of Newton, IA, where the heir to the Maytag Company (a Fortune 500 company back in 1960′s) lived with other wealthy Maytag executives, side by side with other elites and non-elites:

Within three blocks of Fred Maytag’s home in each direction lived the owners of the second-largest company in town (the Vernon Company), several Maytag executives, several physicians and attorneys, the publisher of the local newspaper, and two owners of local auto dealerships. Other residents within that three-block radius were the sheriff, whose wife gave piano lessons, the city employee who ran the town’s waterworks, a couple of insurance agents, the proprietors of a drugstore, a dry-goods store, and a lumberyard, the high school band teacher, and many low-level white-collar workers and factory workers. There was also the dilapidated house of a recluse known as Over the River Charlie, who kept chickens in his backyard. (Coming Apart, p. 74)

Murray then points out that by 2010, most of the senior executives of Maytag had moved out of Newton completely (to affluent neighborhoods of Des Moines) or into high-end housing developments “populated exclusively by people who could afford to buy the large homes in them, which meant no factory workers, no low-level white-collar workers, and no high school band teachers.” (p. 75)

To trace the concentration of the new elites geographically, Murray comes up with something he calls “SuperZips”, which combines median income of a zip code with the percentage of residents who have at least a bachelor’s degree. SuperZips are those zip codes who are in the top 5% of all the zip codes in the United States if you combine income and education levels. According to Murray, there are 882 SuperZips, out of roughly 43,000 total zip codes in the United States.

Murray then uses the SuperZips to analyze the degree to which Americans are becoming strangers to each other. One of his basic points is that back in 1960, both the elites and the non-elites shared culture, social mores, community activities, and so on, while in 2010, the elites live in a world with beliefs and views that are not shared by the non-elites.

There’s a whole bunch of things Murray gets into that I’m not particularly interested in exploring, so I invite you to read the book and go check out the various book reviews of Coming Apart.

SuperZips and Real Estate

What I am interested in exploring on this blog is the very obvious connection to real estate. There are a few.

First of all, I’ve been trying to reconcile the numerous statements about the Millennials (Gen-Y) and how realtors have to change their business practices to serve that critical generation of homebuyers with known facts about them. For example, take a look at this webinar from CRS from the smart and compelling Travis Robertson (I’d link to the website, but Google tells me it’s “compromised”?):

Click here to view the embedded video.

On the other hand, we also know from official facts that Millennials have the highest student debt load in history, can’t find jobs, are moving back home to live with mom and dad, aren’t getting married, and so on and so forth. But real estate brokers tell me that they’re working with Gen-Y buyers all the time, and that they really are demanding in ways that older generations are not, and so on.

Second, we now have a whole lot of concrete data supporting the idea that the real estate market has bottomed. Buyer demand is up, way up. And I’m hearing things from brokers and agents all over the country that multiple bids are becoming commonplace, that inventory is way down, and so on. And that made me scratch my head wondering where the heck all these buyers are coming from.

The answer to these seeming dichotomies, I’m thinking, may be these SuperZips.

Even if unemployment is high amongst Millennials as a whole, the highly educated new elites (who are concentrated in high-paying careers demanding cognitive abilities) are not having problems finding jobs. Even if large percentages of Millennials are moving back home, these new elite Millennials are not, and have been renting while stacking up cash. Even if family formation is way down amongst Millennials as a whole, the new elites are still getting married, albeit later in life, and looking to buy nice homes in desirable neighborhoods. (One of Murray’s main points is that marriage rates amongst the elites remain high, while the marriage rates amongst working class people have collapsed.)

In other words, the flurry of activity in real estate is coming from basically two places.

First is investor activity. As NAR has reported, a third of all home sales in 2011 was to investors.

The second may be from members of the new elite who do in fact find themselves in a once-in-a-lifetime opportunity for homeownership: historically low interest rates, and prices that are way off the highs of the Bubble Years.

How Economists Can Help

So here’s how I’m thinking real estate economists can help analyze this. If the hypothesis above is correct — that the bulk of the non-investor buyers are coming from this new elites especially amongst Millennials — then two things should be true.

First, if we could break down all of the sales in 2011 into zip codes, we should see a significant concentration of activity in and directly adjacent to the 882 SuperZips of Murray. Those are the most desirable neighborhoods in the country, where the new elites congregate. Those are the places like Weston, MA, Los Altos, CA, New York City, etc. The 32-year old corporate attorney and his 30-year old marketing executive wife are not going to be looking to buy homes in Irvington, NJ (23%) where only 12% of residents have college degrees and median income is $53K. They’ll be looking at Short Hills, NJ (99% – the third highest SuperZip) where 80% of residents have college degrees and the median income is $261K. Having lived in that area, I don’t know that I’d want to drive through Irvington if I could avoid it, nevermind actually live there.

What percentage of non-investor sales in 2011 were concentrated in and directly adjacent to the 882 SuperZips? That is the question. The answer could be illuminating.

Second, if investors are motivated largely by the rise in rental rates, then we should see more of that activity in the non-SuperZips, particularly in the single-family detached segment. In theory, the family buyers in the SuperZips are affluent enough and creditworthy enough to want to buy a home. The next level down (perhaps in the top 20% but not in the top 5%) may still be nice neighborhoods attractive to renters, but not so nice that it motivates the affluent to purchase. And of course, the lower income neighborhoods should be where one would expect to find a lot of renters.

Anecdotal Feedback

For those readers who aren’t economists, I’d love to get at least some anecdotes that either support the hypothesis or undermine it. If you’re a realtor who works a range of zip codes, and they cross between SuperZips and non-SuperZips, do you have any experience as to the kinds of buyers, and what zip codes they want to be in?

The whole list of SuperZips can be downloaded here.

-rsh

No related posts.

Poets for the People! Share!

Over on the Raise the Bar Facebook Group, I posted a question to the thousand-plus members:

Question for this group, because it has so many ultra-engaged and informed people in it.

If your MLS proposed to change fees from a flat-fee subscription to a percentage of closed transaction (NB: FMLS in Atlanta area does this), would you support such a change or oppose it?

Please explain your reason, if you can.

The answers were fascinating, mostly for the reason that they were pretty much uniformly against the idea because it would subsidize the unproductive. A few examples:

The responses are not surprising, since the entire Raise The Bar movement has as a theme the idea that there are too many bad real estate agents out there who are giving a bad name to the good agents. Furthermore, the existence of too many of these “accidental salespeople” in the words of David Charron, CEO of MRIS, hurts the business opportunities of better agents.

But the question of subsidies is a bit more complex than that.

Subsidies Go Both Ways

First, given that upwards of 50% of members in a MLS does not a single transaction in a year, there is no question that the current system of monthly subscription fees results in subsidies of the productive by the unproductive.

The contemporary MLS has an economic model similar to a health club. Everyone pays the same fee, but some work out five times a week while others show up once every couple of months. Without the payment from those inactive members, the health club could not stay in business without substantially raising fees on the active members. Similarly, an agent who is constantly using the MLS system generates costs to the MLS, whether in administrative support, tech support, compliance (more listings = more compliance), or system upgrades. The unproductive agent, who maybe gets a random inquiry once in a blue moon, does not.

A similar mechanic exists for health insurance: the healthy subsidize the sick. An insurance plan filled only with people constantly needing expensive medical treatment would soon go bankrupt. Without people who pay in more than they take out, no insurance company would stay in business for long.

What makes one subsidy great and a different subsidy awful is a bit unclear. I think I can argue for the present subsidy (where the unproductive subsidize the productive) on a policy basis: paying the same no matter the level of usage creates incentives to become more productive.

Like a health club, if someone chooses to pay and not go to the gym… well, it’s her loss. The incentive is to go to the gym, work out all the time, and get healthy, to get your money’s worth. The reverse, where one pays based on usage, creates an incentive not to work out.

For real estate, I can see a strong argument that MLS fees should create an incentive for agents to be as productive as possible, to maximize their usage of the MLS. Everyone benefits, from the agents to the brokers to vendors to mortgage lenders, title companies, and every other entity connected to real estate.

The Consumer Subsidy

Which leads us to the other big subsidy: productive consumers subsidizing the unproductive consumers.

It cannot be seriously argued that how real estate works today results in successful buyers and sellers subsidizing the unsuccessful. Because realtors do not get paid until a successful close of transaction, they spend a great deal of time working with “clients” who end up doing nothing at all, whether because they changed their mind, or because of circumstances (e.g., the lender refused to fund the mortgage, something comes up during inspection, etc.).

The risk to the agent is quite significant. They could end up spending hours upon hours of time, not to mention expenses of driving a buyer around or marketing a property, only to end up with nothing. The result, then, is that those consumers who do end up actually closing on a transaction must pay more in order to keep the real estate agent in business.

What none of us knows is just how much this “risk premium” to the consumer is. Agents I’ve spoken to about the risk premium have given me answers ranging from 25% to 50% of the total, but even that isn’t accurate since agent compensation also depends upon the sale price. It may be that the risk premium is lower for lower-priced homes that tend to get to closing more frequently, and much higher for luxury segment where more work has to be done to get to an actual closing, simply because the buyer pool is necessarily smaller.

There is no question, however, that the contemporary compensation structure leads to the productive consumers subsidizing the unproductive.

The question, then, is why is this okay? What is the incentive structure created here?

If changing the MLS fees to one based on usage leads to the perverse incentive of encouraging the not-serious, part-timer, the “folks who shouldn’t be in business in the first place”, then doesn’t the current commission-based compensation structure encourage the not-serious buyers and sellers who shouldn’t be in the market in the first place?

NAR tells us that one out of three purchase contracts in January failed. That’s a substantial amount of work by a couple of real estate agents down the drain — showing houses, writing up the offer, negotiating it, etc. etc. Would those buyers have acted differently if they had to bear the cost of the contract failure? There is little doubt in my mind that they would have.

Demand Change? Raise the Bar?

Logic dictates that raising the bar amongst real estate professionals cannot be done without raising the bar amongst consumers. After all, if consumers are incentivized to regard realtors as free labor, they will continue to use realtors as free labor, and the incentive for realtors then becomes working with as many consumers as possible in the hopes that a few of them will actually make it through to closing. It isn’t substantially different from playing the lottery.

And out of economic necessity, realtors have to charge the successful buyer and seller a fee that does not correspond to the actual work put into the transaction, in order to cover their costs from providing services to all of those consumers that paid them nothing. The informed consumer knows that he is subsidizing all of those others who used the services of his agent without paying for them, but he doesn’t have a choice: is it any wonder that consumer resentment pops up from time to time at having to hand over a $15,000 check at the closing table?

Three questions to close, then:

1. Do realtors, particularly those committed to client service, who take fiduciary responsibility seriously, and who believe in transparency, inform the consumer that should they actually close, they will be subsidizing all those who did not?
2. Do realtors, particularly those who believe that the productive agents should not subsidize the unproductive agents, support the idea that productive consumers should not subsidize the unproductive consumers?
3. Are realtors, the Associations that represents them, and the brokers who hire and train them, working towards a pay-for-service model?

Consistency would dictate that there be a massive movement, especially out of the nascent Raise the Bar movement, to charge consumers for services either up-front or on an as-you-go basis. At this time, I’m only aware of one major brokerage that is taking a step towards this model: Koenig & Strey in Chicago. But then, consistency is the hobgoblin of little minds, so I’m open to the idea that one subsidy ain’t like the other.

-rsh

Related posts:

1. Repositioning vs. Reengineering: Real Estate Brokerage

Maybe they're checking Redfin's mobile app...

I think this might be a bleg (that would be a blog/beg) for help in making sense of some recent buyer data. Some of this just makes so little sense to me that I’m asking the Notorious community for assistance.

The buyer data comes from Redfin. I’m focusing on it because I know Redfin’s corporate culture is data-driven, and because the folks there are really good at data. They constantly survey their customers, they take pride in their NPS-derived customer satisfaction surveys, and pretty much have been data junkies from day one.

Given that we’re only looking at buyer survey data from one brokerage, and a fairly unique one at that, it isn’t clear how much weight we could/should put on the data. But it’s something. If you’re aware of any other brokerages (NAR’s survey is a bit too broad/diffuse, and I’d like to look at broker-level surveys) who have this kind of buyer data, I’d be interested in knowing about them.

So let’s get into it.

The Redfin Buyer Survey

I’m not going to copy the whole thing — go ahead and read the post in full, as I think it’s worth reading. The basic conclusion that Glenn Kelman comes to is in a different post that is also worth reading in full:

• Canaries are coming back to the coal mine: the annoyingly smart people who sold homes in 2007 and rented for five years are now buying again. When we surveyed 1,000+ Redfin customers buying a home this year, a whopping 14% were people who had owned, rented and were now buying again. First-time investors are coming out of the woodwork, with Redfin’s classes on how to evaluate income-generating properties filling up fast. We’re recruiting Tom Vu and his posse to speak.

Basically, the point is that the real estate market has bottomed out. That very well may be true, although I’m not completely sold on it, for reasons discussed previously.

But since Glenn based his conclusion on the Buyer Survey, I looked through it. And here are some of the more interesting answers.

Image Property of Redfin

Note that this chart doesn’t have to add up to 100%, since respondents can check multiple answers.

A full 20% — one out of five — of Redfin’s buyers said they have better job security. Another 16% said they got a pay raise, enough to warrant thinking of buying a home. 12% said they have increasing confidence.

Where is this land of job security and raises? Who are these buyers? Despite “official” unemployment stats looking slightly better (and by that I mean, the patient is out of intensive care, but hardly the picture of health), all indications are that most of the improvements in the unemployment numbers are coming from people simply dropping out of the labor force. That is to say, they’ve given up on finding another job.

Who are these buyers that are getting raises, feel like they have better job security, and have more confidence? Are they all in the Washington DC suburbs? It’s the only explanation I could come up with.

Then we have this:

Chart property of Redfin

The most unusual datapoint here (which I asked on one of the posts) is that only 2% of Redfin buyers are Investors. We know from NAR stats that investors were responsible for some 30% of all sales in 2011, and anecdotes with real estate agents in CA, AZ, and even NY/NJ area suggest that investor activity is a big part of the buyer demand out there.

But there are a couple of other interesting data points.

First, 48% of Redfin buyers are renters who are looking to become homeowners for the first time ever. It’s unclear what the demographics of this group are, but I imagine we’re talking about the 30-something young family crowd here. How are they getting financing?

The Mystery of Financing

We’ve all known about (and NAR has been complaining for years about) lending standards that went from nonexistent to financial proctology exams. Saving up for 20% downpayment is no joke, even if house prices have dropped significantly. And that assumes you don’t run into other problems like debt-to-income ratios.

I also have to imagine that most young people (late 20′s, early 30′s) who are in a position to even consider homeownership are going to be white-collar college graduates, rather than Starbucks baristas or blue-collar Burger King workers. Which means most of them are going to be saddled with record student debt loads.

Barry Ritholtz of Big Picture, an influential finance blog, is in the midst of writing about the real estate market. In one of his posts, he wrote about this precise issue:

In the real world, the home buying process begins with two key financial factors: The potential buyers down payment, and their ability to qualify for a mortgage.

In today’s world, most American families are cash poor and debt rich. They are deleveraging, not saving. They simply do not have the $40,000 that is the standard 20% down payment on the median priced US home.

Those that do have the extra cash must then meet the next hurdle: Qualifying for a mortgage. This means they must have a good credit score, not be carrying too much debt, have a steady income, etc. (Even those that qualify must then make sure that their house appraises at the sale price, but that’s a latter discussion).

I have to think that most of these first time homebuyers are relying on FHA loans, which only require a 3.5% downpayment, instead of the 20-30% that “traditional” loans may require. Indeed, usage of FHA loans for purchases have soared from around 4.5% in 2005 or so to 38% in Q4 of 2011.

Two Concerns About FHA Loans

First, they’re getting more expensive and harder to get, as the FHA tries to get out of funding nearly four out of every ten home purchases in the United States. As the HUD spokesperson says in the article, “It’s a way of protecting consumers from getting into loans they ultimately can’t afford.”

And apparently, the FHA is concerned for good reason:

What the press release didn’t say, however, is what percent of properties backing FHA-insured mortgages in its database were in a negative equity position (it gave the number, but its database does not include all mortgages). CL was nice enough to give me that figure – according to CL, 31% of the properties in its database backing FHA-insured mortgages were in a negative equity position in December. That compares to 21.8% for properties backing non-FHA mortgages.

Almost a third of all FHA loans are underwater, which isn’t that difficult to imagine, since the buyer only has 3.5% equity in the house at start. Prices dropping by a mere 5% would put that house and that loan underwater. With the stigma against foreclosure all but gone, what stops these young buyers from just walking away from the mortgage?

This applies to the 48% of Redfin buyers who are current renters, but want to be first-time homebuyers. What about the 7% who are living with mom and dad, or freeloading off of friends? Who are these young people living at home and wanting to take the jump to homeownership? How are they getting financing?

Could Be Just Redfin

As Glenn notes in conclusion, the survey may reflect the unique demographic profile of Redfin users:

The high proportion of renters among our customers may just reflect the tendency of Redfin’s buyers to be young. But I think it also shows that in a market in which prices may be near a bottom, the people who want to buy the most are the ones who don’t also have to sell.  My guess is that there is probably a broader youth movement among American home-buyers.

But that broader youth movement is what concerns me the most.

They’re the hardest hit in the Great Recession. They have record breaking student loans, but are facing the bursting of the higher education bubble (where the good jobs that supposedly would have allowed them to repay their student loans just aren’t materializing), an employment market that might require them to move, never-before-seen gender gaps inhibiting family formation, and a changing home finance environment.

Oh yeah, and they’re competing with cash-rich investors (some of them vulture funds with billions in assets) for the lower end of the market that would be the properties they are most likely to be able to afford. (There’s your multiple offer, low-inventory problem right there.)

In Which I Ask for Help

So help me out here. The premise of the optimism throughout the industry right now appears to be that there is a large cadre of young professionals who are flush with cash, who are getting raises, feeling far more secure about their jobs, who think home prices aren’t going to go any lower who want to buy now when rates and prices are at historic lows.

Is this what you’re seeing in your markets? Are your first-time buyers really feeling more confident these days? Have any of your own buyer data you can share?

-rsh

Related posts:

1. What A Real Estate Website Should Be
2. A Few Thoughts On Redfin’s Scouting Report
3. Spartans and Redfineans

Courtesy of NAR Research — one of the more valuable things on Facebook — comes this CNBC article on how investors are flooding the residential real estate market:

The number of homes sold to investors more than doubled last year, as rising rents and low-priced distressed properties fueled demand. Investors, half of them using no mortgage, bought 1.23 million homes in 2011, a 65 percent jump from 2010, according to the National Association of Realtors. Half of the homes purchased were distressed properties, that is, foreclosures or short sales (when the bank allows the home to be sold for less than the value of the mortgage). [Emphasis added]

The video above references this explosion in investor interest as well, but goes well beyond that.

This new information from NAR, which the CNBC story references, answers a couple of questions for me on the hot housing market of the past couple of months. As a result, I’m not ready to call the bottom on housing, nor do I think that Renter Nation will pass us by.

Quite a few of my friends in real estate have already called the bottom, and are embarking on a round of marketing to consumers that this is a once-in-a-lifetime opportunity to buy real estate. I would urge them to tap the brakes just a little bit, since credibility is the coin of the trustworthiness realm.

NAR Answers A Puzzling Question

The thing that has puzzled me for the past several weeks is report after report from REALTORS I know and trust that the market is as hot as it’s ever been. In San Diego and Orange County, for example, I’m hearing firsthand account after another that days on market are way down, that multiple offer situations are increasingly common, and that there’s no inventory to be had in certain price ranges. Then we also have respected commentators like Calculated Risk calling the bottom. And NAR has been pointing out that things look really quite decent, despite the slip in February of Pending Home Sales:

Lawrence Yun, NAR chief economist, said we’re seeing the continuation of an uneven but higher sales pattern. “The spring home buying season looks bright because of an elevated level of contract offers so far this year,” he said. “If activity is sustained near present levels, existing-home sales will see their best performance in five years. Based on all of the factors in the current market, that’s what we’re expecting with sales rising 7 to 10 percent in 2012.”

What I couldn’t understand was where all this buyer demand was coming from.

We haven’t seen a fundamental shift in the overall economy or the labor markets in years. Real unemployment rate is almost certainly not the 8.3% or so that is reported. Even a lefty Obama-supporter like Ezra Klein has noticed this. And ShadowStats.com thinks the real unemployment rate is north of 22%. We haven’t seen significant GDP growth, we haven’t seen major new economy-altering technology introductions (e.g., steam engines, the automobile, the Internet, etc.), and the rest of the global financial market appears to be headed into a storm. We have seen significant inflationary signals, like the price of food and energy skyrocketing, and we have seen other signs that we’re not looking at Morning in America here.

So what accounted for all this frenzied activity?

The NAR report contains the answer, in my opinion:

NAR’s 2012 Investment and Vacation Home Buyers Survey, covering existing- and new-home transactions in 2011, shows investment-home sales surged an extraordinary 64.5 percent to 1.23 million last year from 749,000 in 2010. Vacation-home sales rose 7.0 percent to 502,000 in 2011 from 469,000 in 2010. Owner-occupied purchases fell 15.5 percent to 2.78 million. [Emphasis added.]

Got that? At the same time that we saw investment sales jump 64.5%, we saw owner-occupied purchases (that would be the families buying homes) drop 15.5%.

NAR’s point in releasing this report is to argue against the bulk REO sales being contemplated by the Feds (which is an interesting topic in and of itself, but not the point of this blogpost). But what I see is no sign that the fundamentals of the housing market are anywhere near healthy.

Why?

The Thing About Investors…

Because so much of the market activity is being driven by investors. I’m an investor in various things; I suspect most of you are as well. The one thing smart investors do not do is fall in love with any investment. You could be a Mac fanboy to the hilt, owning multiple Mac computers, multiple iPhones, and have lined up to buy the iPad 3 as soon as it was released. But if Apple stock doesn’t meet your financial objectives or your risk profile, there’s no doubt in my mind that you’d be dumping it as fast as possible.

The point is that real estate investors do not fall in love with houses, the way a first-time homebuyer might fall in love with her dream home. They care only about return on investment, taking risk into account. Any change in the financials would see a mass exodus of investors from the market. The CNBC article above notes the risk:

While nearly half of investment buyers said they were likely to purchase another property within two years, housing and mortgage analyst Mark Hanson calls them a “thin cohort” and worries that they add ever more volatility to the current housing recovery.

“They are fickle and volatile. They will go away on the slightest of conditions changes. They also won’t chase prices higher or buy new homes from builders. Lastly, without the heavy flow of distressed supply, there is no U.S. housing market recovery. Distressed sales ARE the market,” says Hanson.

What Hanson means by “fickle and volatile” is simply that an investor might buy a property at Price X, given rents at Y, and taking various risks, fees, regulation, etc. into account. Change any of those factors and the investment might not be worth making.

One of the comments to the CNBC post illustrates the point perfectly:

I looked at several luxury 1 & 2 bed mid-rise condos near a very desirable and hip town square. Prices are half of 2006/7 prices. The mortgage would be low. Yet the HOA fee, property tax and insurance would be more than the mortgage. With the leasing management company fees, my cash flow would be 0! HOA fees are upwards of $300/month, which should be my profit.

I really want to buy one of these now for investment and living in later as my intown residence, but I need to net a profit.

I can’t justify it when I can net $300 buying and renting out a decent house.

Investment is all about the numbers. Change anything where the numbers aren’t as attractive — even something as minor as HOA fees — and investor demand dries up. To an investor, a house is not a home: it’s cashflow + equity. They analyze a house in exactly the same way they would analyze a bond or a stock.

Supply, Demand, Prices

It so happens that a fundamental law of economics is that prices go up when demand outpaces supply. That in turn encourages new market entrants, enticed by the higher price.

The trouble is that for an investor, if prices go up, that changes the financial return calculations… and significantly so. A house worth buying at $200K may not be worth buying at $220K — who knows what that investor’s risk tolerance is, or what his return expectations are?

A home might be the most special thing ever on a block, and a family would kill to be in it. The investor simply wonders if those special things means that he can get higher rent for it, or sell it at future date X for more than he paid, minus taxes, expenses, fees, etc.

Even if house prices don’t change, if rent rates drop (due to the influx of these investor-owned houses now being available for rent), that changes the financial model. Now the investor isn’t interested even if the price remains at $200K, because his cashflow projections are all out of whack.

Any hint of rent regulation, and an investor would have to be a fool, politically connected, or pay such a low price that he’ll still make money under rent control, to even consider buying rental properties.

Tap Those Brakes

For these reasons, and more, I’m thinking that the wise course of action for the working real estate professional today is to be cautiously optimistic. And I would emphasize the caution over the optimism.

When investment sales are up 64.5%, and family buyers are down 15.5%, now does not strike me as the perfect time to be calling the bottom, telling people that Now Is The Time To Buy, or any such thing that could come back to haunt you mere months from now.

Yes, yes, each market is different, national trends are useless, and so on and so forth.  I get it. I know.

But then have a story, backed up with evidence, as to why your local market is different. A city like Houston, TX, where job growth has been extraordinary due to the boom in energy, there are few onerous restrictions on building, and the local economy is strong will have a totally different story than a city like Detroit. So have a story, with local employment trends, local rent rates, local regulatory environment, and local economic trends. Maybe something like this (from the GoodLife Team) or this dated post from Stuart Sutton.

Otherwise, tap those brakes, people. Investors could disappear like the morning dew if house prices rise even a little, or if rent rates fall, or vacancies rise, or some local factory just laid off a couple thousand people, or the local city council starts debating some random wacky rule about tree maintenance or some such.

As for myself, as long as a third of the market is investors, and family buyers are down 15.5%, and we have the lowest family formation rates in decades… I ain’t buying the market bottom story. Not yet.

-rsh

No related posts.