Home Brokers & Agents Inside the Brokerage Numbers, Part 1 (AKA, Umm… WTF?)

Inside the Brokerage Numbers, Part 1 (AKA, Umm… WTF?)

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Numbers make me hot!
Numbers make me hot!

Over at the OnBlog, I posted an item discussing the difference between how much brokerages spend on print advertising vs. their website. That was for the clients (past, present and future) of Onboard Informatics. This blog is where I get to talk speculative BS with friends in the RE.net.

So… let me start out by saying how much I love the REALTrends guys. They are providing an invaluable service to the industry with their research into productivity numbers and metrics. If you don’t subscribe, and you have anything to do with brokerage operations, you probably should. Go. Subscribe. Buy their reports. Tell ’em the Notorious One sent ya.

I am getting most of my inspiration from the 2007 REALTrends Brokerage Performance Report. (I’m sure this stuff is copyrighted, but I have no desire to hurt REALTrends; I’m considering my usage of their stuff as fair use in order to discuss the issues.)

Ummm…

So the first thing I noticed is from the Executive Summary, where RealTrends noted that Productivity Per Person (PPP) dropped again in 2006, and noted that this drop “continue[d] the downward trend of nearly 10 years”.

Wait a second. Nearly 10 years? Ten?

So we’re talking about 1998 – 2008… during which time period we have had the single biggest real estate bubble in the history of the United States, nay, the world resulting in the financial cataclysm of 2008. I don’t quite understand. This means that the PPP is divorced from the real estate market as such — even during the height of the real estate bubble, the PPP dropped.

Let us keep in mind that this ten year period is when the PC revolution truly hit home: “Productivity grew from 1.33 percent to 2.07 percent between the periods 1975-1993 and 1995-2000, according to Dale Jorgensen of Harvard University, Mun Ho of Resources for the Future, and Kevin Stiroh of the Federal Reserve Bank of New York.” If you’re so inclined, you can read the original report here (PDF).  It’s actually really good.

Anyhow… so it appears that in the midst of the biggest increase in worker productivity in a generation, real estate brokerages suffer a drop in productivity.  What explains this phenomenon?

Could it be that real estate is somehow immune to productivity gains from technology? Having email, computer, smartphones, and all the rest simply do not make buyers want to buy any more houses, or buy them faster, or with less work on the part of the agent?  Did real estate agents decide that with all the productivity gains they were making thanks to technology, they weren’t going to work any harder, but spend more time on the golf course?

Again, the market conditions of the past couple of years can’t explain this. This drop in productivity was happening throughout the biggest boom in real estate in memory. So what explains the PPP numbers?

WTF?

If those numbers make you scratch your head, this one will blow your mind.  Again, according to the REALTrends Report, “Profitability slid to 4.3% [in 2006] from 7.4% [2005] and 7.8% [2004] for the previous two years respectively.”

Now.

From the exact same executive summary, we learn that

(a) employment costs dropped 0.4% of GCI from 2005 to 2006;

(b) advertising expenses dropped 0.55% of GCI from 2005 to 2006; and

(c) occupancy costs (i.e., office rent) rose 0.3% of GCI from 2005 to 2006.

These three things taken together make up 75% of all costs of operation in 2006.

So in summary we have a whopping 41.8% drop in profitability for all brokerages in spite of their cutting employment costs and advertising costs, because office rent went up by 0.3% of GCI?

It seemingly makes no sense, until you consider that apparently, at least the Top 100 Brokers (that is, the Top 100 of the REAL Trends 500 list) actually added agents and offices between 2005 and 2006.

In 2005, there were a total of 210,154 agents working for the Top 100; in 2006, that number was 212,431.  The number of offices went from 4,034 to 4,077.  Meanwhile, PPP (Per Person Productivity) went from 9.5 to 8.1 — a drop of 14.8% — and total # of closed units went from 1.99 million to 1.73 million (a drop of 13%).

Incidentally, the 2005 numbers were worse than 2004 numbers.  PPP went from 10.0 to 9.5; total closed units went from 2.08 million to 1.99 million.  But agent numbers went from 208,000 to 210,000 and office numbers went from 3,998 to 4,034.

So let me get this straight.  Brokers were adding costs while their productivity and revenues were falling… not as an aberration, but as part of a trend?  And people were trying to become real estate agents in the midst of what was clearly a bubble bursting?  And other people were hiring them?

o.0

Maybe the three-to-one spend on print advertising over website is not the biggest problem that brokerages have.  And maybe our industry needs fewer Web 2.0 consultants and more straight-up business consultants that understand arcana like “cash flow” and “ROE”.

-rsh

9 COMMENTS

  1. *Very* interesting. Very.

    I’m sure neither RealTrends nor any of the Top 100/ 500/whatever give a flip about a little eight agent independent “boutique” brokerage in Phoenix, AZ, but I can tell you one thing — my productivity, profit, etc numbers **smoke** theirs on a percentage basis.

    I’m not an MBA but I’m guessing maybe the low overhead from having no brick & mortar presence and a policy and model of not just hiring anyone with a license and a pulse may have something to do with that.

  2. *Very* interesting. Very.

    I’m sure neither RealTrends nor any of the Top 100/ 500/whatever give a flip about a little eight agent independent “boutique” brokerage in Phoenix, AZ, but I can tell you one thing — my productivity, profit, etc numbers **smoke** theirs on a percentage basis.

    I’m not an MBA but I’m guessing maybe the low overhead from having no brick & mortar presence and a policy and model of not just hiring anyone with a license and a pulse may have something to do with that.

  3. I haven’t seen the REALTrends report but if PPP is the number of sales per agent – their research does not surprise me.

    Sales per agent – which is about the only thing that really determines income for agents has been down trending long term due to the huge increase in the number of agents as the market went up in units. The new agents tend to come into the market faster than they leave as the market turns down.

    The total number of sales in the U.S. could drop from the present level and most agents still could do quite well …. if there were about 2/3 less agents.

    Operations like Jay’s will almost always outperform any major company – anywhere – on a PPP basis.

  4. I haven’t seen the REALTrends report but if PPP is the number of sales per agent – their research does not surprise me.

    Sales per agent – which is about the only thing that really determines income for agents has been down trending long term due to the huge increase in the number of agents as the market went up in units. The new agents tend to come into the market faster than they leave as the market turns down.

    The total number of sales in the U.S. could drop from the present level and most agents still could do quite well …. if there were about 2/3 less agents.

    Operations like Jay’s will almost always outperform any major company – anywhere – on a PPP basis.

  5. PPP is in fact closed sides divided by number of agents, Russell.

    So your view is that the increase in the number of agents have outpaced any increase in number of sides/value of transactions over the past ten years? That would be a good explanation of the declining PPP. What I wonder about is whether there are companies that did not add large #’s of agents during the same period and experienced dramatic PPP growth from the productivity gains from technology.

    I mean, all the anecdotal evidence about how email and cellphones let agents do their thing faster and more efficienty is just that: anecdotes. I’d love to see some numbers, hard or soft, measuring productivity gain from IT on real estate.

    Jay — my next piece is going to be right up your alley then. 🙂

    -rsh

  6. PPP is in fact closed sides divided by number of agents, Russell.

    So your view is that the increase in the number of agents have outpaced any increase in number of sides/value of transactions over the past ten years? That would be a good explanation of the declining PPP. What I wonder about is whether there are companies that did not add large #’s of agents during the same period and experienced dramatic PPP growth from the productivity gains from technology.

    I mean, all the anecdotal evidence about how email and cellphones let agents do their thing faster and more efficienty is just that: anecdotes. I’d love to see some numbers, hard or soft, measuring productivity gain from IT on real estate.

    Jay — my next piece is going to be right up your alley then. 🙂

    -rsh

  7. I don’t have any real comparative stats to prove the point but I am convinced that the fax and the cellphone changed just about everything for our business. Later, email turbocharged those changes. We sell houses in an area that would cover well over 1,500 square miles. There was a time that to deliver an offer it took a 45 minute drive – each way. The fax machine changed that overnight. When I got my first cellphone (1985) my life was transformed. I never again had to use a pay phone to call in and check for messages (usually, I didn’t have any anyway back then:) – I could find that out while I was still driving.

    The amount of business that a single agent could do after the cellphone and computer was just SO different. However, this did not change the amount of business most agents *would* do; but did make new highs possible for those that really wanted to reach for them.

  8. I don’t have any real comparative stats to prove the point but I am convinced that the fax and the cellphone changed just about everything for our business. Later, email turbocharged those changes. We sell houses in an area that would cover well over 1,500 square miles. There was a time that to deliver an offer it took a 45 minute drive – each way. The fax machine changed that overnight. When I got my first cellphone (1985) my life was transformed. I never again had to use a pay phone to call in and check for messages (usually, I didn’t have any anyway back then:) – I could find that out while I was still driving.

    The amount of business that a single agent could do after the cellphone and computer was just SO different. However, this did not change the amount of business most agents *would* do; but did make new highs possible for those that really wanted to reach for them.

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