Coming off of an awesome, Hall-of-Fame type of year in which I batted .600 in predictions (or, alternatively, a year in which I only got 6 out of 10 predictions even remotely close to right, and hence am a big #FAIL), I thought I would don the Nostradamus hat once again and make foolish predictions for 2011. I know I should make 10 predictions, but… y’know, I’m sort of stuck on that number Seven.
Here are seven predictions for 2011. Many are guaranteed to be wrong, or your money back! But as a bonus, each prediction comes with a music video for your entertainment.
[Warning: don’t read this is you’re feeling happy and optimistic, and you want to stay that way. I’m personally feeling happy and optimistic, but as I put this together, I can’t help but want to reach for strong drink for the industry as a whole. I know I tend towards bearishness, and some might suggest, alarmism, so… I’d suggest you go read some other 2011 predictions posts as well. Here are a few I’ve seen myself: Lani on Agent Genius, Greg Robertson on VendorAlley, and this whole series over at Inman.com.
1. The Beginning of the End of the Homeownership Society
Like it or not, 2011 will see the start of the end of the Homeownership Society that America has become since the New Deal. I wrote about what the Obama Administration is up to here, here, here and here. Much of that is likely to be proven wrong in 2011, but at the same time, a few of those moves and initiatives are likely to be implemented.
I for one believe that the mortgage interest deduction (MID) is probably eliminated altogether, or severely limited, in the course of 2011. The 112th Congress will be a historic one, where voter revolt actually translated into a huge influx of Tea Party fiscal conservatives taking huge chunks of seats at the table. We’ve already seen examples where the new political reality is influencing Washington DC.
Although I’m certain that NAR and the rest of the housing lobby will go to bat in 2011 to preserve the MID, to increase subsidies to housing, to create a better environment for builders, REALTORS, and others, housing is a case in which neither party is particularly friendly to the arguments. Democrats are invested at least rhetorically in populist class warfare pitting the “banksters” against “the people”. Republicans are invested at least rhetorically in free market ideologies, which would argue against government subsidies and distorted incentives.
The phrase I’ve been harping on in 2010 was “sustainable homeownership”. You simply don’t find any defenders, left, right, inside the industry, outside the industry, anywhere for how things used to be during the Bubble. Everyone, including NAR, thinks that making zero-equity no-doc ARM loans to irresponsible borrowers was a horrendous idea. Given the foreclosure crisis going on right now, it’s awfully difficult to argue against “sustainable homeownership”.
Different people have different ideas of what constitutes “sustainable homeownership” of course; Ron Phipps, President of NAR, is not going to share the same idea of what that means with say, Secretary Donovan of HUD. But whatever else “sustainable homeownership” might mean in the details, it must mean that homeownership will be more difficult in 2011 and beyond than it was in the pre-2009 era.
As I’ve detailed here, I believe that we’ll see a concerted policy push encouraging rentals and discouraging purchases. I believe we will see the start of this new national housing policy starting in 2011.
2. Mass Confusion in Real Estate Finance
The national policy of “sustainable housing” will come into place in 2011 because 2011 will also be the year when the hitherto underground problems in the real estate finance industry will blow up into a full-blown public crisis. The Administration and Congress will have no choice but to respond in some way, shape or form, to calm the capital markets; else, we face the prospect of a bona fide meltdown of the global financial markets.
At issue is the hitherto unknown entity know as MERS (Mortgage Electronic Registration System), various complex laws governing secured transactions, the interaction of local and state laws that date back hundreds of years (Pennsylvania, for example, still uses the law passed in 1717), mortgage insurance, loan servicing practices (some of which may have been straight up fraudulent), the particularities of REMICs, title insurance, and a dozen other topics.
I’m still studying all of the issues and probably won’t even scratch the surface of the complexity, but at stake is the roughly $12 trillion (with a T) securitization market, of which some $7 trillion is mortgages. There are obviously differing opinions from very smart lawyers on the issue. A starting place would be the American Securitization Forum’s white paper vs. Chris Peterson’s law review article on the same topic. Fact is, while both sides present their view as absolute, and everything is “perfectly clear”, a reasonable observer would (and should) conclude that nothing seems absolute and nothing is “perfectly clear”. Different courts in different states have reached opposing conclusions about the arcane legal issues, such as whether MERS has standing to bring a foreclosure action, but the implications of those arcane legal issues are massive and very real. The nightmare scenario is that due to flaws in the transfer process, and due to the very shady way that MERS organization was setup, a huge portion of the RMBS trusts that have taken in trillions of dollars in investor funds may be found to own nothing in fact, be in violation of REMIC regulations and state laws, and end up in a total mess. That would put an immediate halt to capital being available for mortgages, and likely cause a global financial meltdown to boot.
This whole mess has been going on for quite some time. Why do I think 2011 is the year when tensions bubbling beneath the surface breaks out into the open?
First, Congress has begun to hold hearings on foreclosures. You never know where such hearings are going to go, but you do know that media organizations are now on notice and will start to report on these issues, especially when sob stories of innocent poor homeowners being victimized by rapacious Wall Street bankers can be told.
Second, some of the more influential blogs are starting to rage about the issue. Here’s Part I and Part II of a series on Huffington Post for example. Stories that get traction on these types of blogs and sites (especially the liberal-left sites like HuffPo) have a way of finding themselves onto the front pages of the New York Times and Washington Post in due time given the proclivities and ideological makeup of journalists.
At a minimum, I see massive litigation between everyone and everyone else. Investors will be suings REMIC trustees, who will be suing servicers, who will be suing MERS, and homeowners going through foreclosures will be suing everybody, bankruptcy trustees will be filing suits left and right, and there will be opposing decisions from one court to the next… until something is done. Whether that’s a Supreme Court case that decides some of these issues once and for all, or new legislation, something will need to be done (or at least begun) in 2011.
Why? Because until we get some clarity as to who owns what and whether investors in mortgage backed securities could actually get their money back… capital flow to mortgages will be problematic.
The most optimistic view one could take, I think, is to say, “There’s no way in hell that anyone would allow such a catastrophe to come about, so Congress and Obama will do something to prevent it.” Well, I hope so. You probably should too.
3. Double Dip in Housing
Maybe it is the case that economists and forecasting organizations, like Case Shiller, Moody’s, Economy.com, and so on have already taken these policy and litigation related issues into account. But from what I can tell at a high level glance is that most everyone thinks the market in 2011 will be worse than in 2010, without reference to most of these issues.
Nouriel Roubini, aka Dr. Doom, is probably one of the better known bears, and he thinks the double dip in housing is already underway. The less bearish (in theory) S&P reports that the Case-Shiller Index is showing a double dip. Here’s the graph:
In fact, apart from Lawrence Yun, it’s hard to find a voice out there who thinks 2011 is going to be a great turnaround year. Even Lawrence is sounding less than super-excited. There are enough caveats and if-then and hedging-of-the-bets in that report to render it a bit of a downer. We expect Lawrence, the Chief Economist for NAR, to sound a bit more cheerleader-like. That report is the equivalent of the Buffalo Bills cheerleader chanting “We’re going to WIN… if the quarterback doesn’t throw another interception, and if our defense can actually stop the run, and if our coach doesn’t make a boneheaded mistake, then you betcha, we’re gonna WIN!” Hardly inspiring.
Given that real estate still is very local (my town in New Jersey, at least for five more days, seems immune to the macroeconomic factors), some areas will be fine, while others will be absolutely devastated. But on the whole, it seems to me that the market in 2011 will be worse than the market in 2010, which in turn was worse than 2009.
What worries me is that the organic decrease as projected by various people do not appear to take into account the possibility of a significant legal crisis (my #2 above) or political change (my #1 above). If either or both of those come to pass, the decline may be far greater than what anyone expected.
Is 2011 the bottom? Who knows. Much depends on the political and legal issues around real estate finance.
4. The Age of Less Will Arrive
Combine all of these factors, and even under an optimistic scenario, I believe 2011 will herald a new era in real estate, which I have dubbed The Age of Less. Less business, less money, fewer deals, fewer agents.
In some way, this will be the start of a real reversion to the historical mean. I wrote back in November that NAR may be headed to 800,000 members. And I started to sketch out what the impact would be on various parts of the industry, so you can go re-read those if you’d like.
As it happens, there are quite a few people who can’t wait for the Age of Less. The widespread sentiment throughout the industry, that there are far too many real estate agents, that it’s far too easy to become a real estate agent, that professionalism is sorely lacking, etc. etc. strikes me as a sort of sobering-up the morning after a wild party. Much good could come from this painful period.
But at the same time, I don’t believe that we will get back to those years in the foreseeable future. Business models that thrived during the Party will fail, and many will applaud. Consolidation will accelerate, not slow down. Business as usual may continue on pure inertia, but I expect 2011 to be the year when we start to see concrete evidence that the Age of Less is here to stay, and this is the New Normal.
5. The Real Estate Industry Will Fail To React
Unfortunately, on the whole, I think the real estate industry will fail to react to the Age of Less. There will be exceptions, of course. But I fear that the vast majority of companies, brokers, agents, Associations, MLS, tech vendors, and others will spend an inordinate amount of time and energy rearranging deck chairs on the Titanic. There will be much effort spent focusing on ancillary issues like agent ratings, franchise IDX, the DotMLS domain, QR Codes and so on while the entire infrastructure of contemporary real estate crumbles around them.
I’m sadly certain that we’ll still find ourselves at some REBarCamp in the summer of 2011 talking about the latest Facebook Groups feature that will let the agent conduct personal branding for a “return on engagement” and so on. Meanwhile, the capital markets will be completely frozen up and Obama will be signing a national foreclosure moratorium into law.
There will, as I’ve said, be exceptions. Forward-looking professionals will realize that in times like this, what the consumer really wants is not a social media expert or a branding expert but a real estate expert, who can help them navigate the truly treacherous and uncertain waters of the even-more-confusing-than-normal housing markets. They will, of course, have already figured out all the marketing stuff and have that in place by the time 2011 really gets underway, giving them the ability to focus on what is now important to the consumer.
The reason to hope, of course, is that while 2011 might be a lost year, perhaps more and more people will come to realize that the Same Old Way of doing business is not going to work in the Age of Less. Maybe it will be painful lessons learned. Maybe not. Perhaps more people will see the example set by the leaders and realize that battening down the hatches and cutting office space aren’t going to work this time around, and by 2012, be ready to take on the challenge of transformation.
6. Return of the Broker
One such hopeful sign will be that 2011 will see the return of the Broker to the industry. We have been seeing signs of this rebirth for quite a few years, but they have all been beneath the radar in small companies, in a few larger innovative companies, and at the “Agent Team” levels. But the trend will break out in 2011.
What do I mean by return of the Broker?
Today’s real estate broker is not in the real estate business. Although in theory, every 1099 agent works for a broker, who is in fact the person being hired by a consumer to carry out a real estate transaction, fact is that the standard operating procedure for the broker is that he has no consumer clients. This phenomenon is not limited to “big box” brokerage. Whatever the size of the brokerage, the industry has evolved to a point where brokers provide services to agents, who in turn have consumer clients.
The problems of this model are, I think, pretty well-documented by now and fairly well-known to all industry participants: lack of quality, total lack of brand meaning, abdication of fiduciary duty, the ‘churn and burn’ mentality, the focus on recruiting and retaining agents, glorification of number of agents, and so on.
The alternative model has been growing under the surface at the “Agent Team” level, where the lead agent still has consumer clients. In fact, in many agent teams, the lead agent still regards the consumer as his or her client, and the team members as servicing his or her client. I have long held that the Agent Team is little more than a proto-brokerage, especially in companies like Keller Williams where teams are emphasized.
In the Age of Less, as more and more agents are driven out of the industry, the old ‘recruit and retention’ models face significant problems. That lays the groundwork for the return of the Broker: a company that regards all of the consumer clients as its clients, and the agents who service them as its employees in fact if not in tax treatment.
Small independents will lead the way, of course, but by the end of 2011, I expect to see some of the savvier larger brokerages start to reassert themselves as real estate brokers first, and agent-servicers second.
7. No Groundbreaking New Technology
My final prediction in this gloomy Eeyore-like post is that we will see no groundbreaking new technology in 2011.
QR Codes will not make an appreciable impact, although it will generate a ton of hype and chatter.
The iPad will be a small efficiency gain perhaps, but nothing more.
The various Android pads will not change the industry.
Perhaps wide availability of 4G through Verizon will make a difference, but I don’t think in 2011.
HTML5 will become more widespread, but that isn’t going to make a fundamental difference to either consumers or to companies.
Looking at what various companies in the real estate technology space are working on, all I see for 2011 is incremental improvements, rather than fundamental shifts. Move, Inc. will be up to some cool stuff with their new acquisition, ListHub, but that will result in needed reform rather than a full-blown shift. There will be competition in getting consumers to mortgages, but mortgage portals hardly matter if the entire real estate finance industry is in turmoil (as above).
So as I see it, no new business models will be enabled by breakthrough technology, and no existing model will be threatened by technology. No, 2011 is about business disruption through competition, economy, and government, rather than through technology.
I realize these predictions tend to be on the gloomy side. Who am I kidding, they’re downright terrifying in some ways. I batted .600 for 2010. I hope I bat more like .150 for 2011.
Of course, each market is local, each company and each individual agent is different, and there will be success stories even as the macro conditions worsen. In fact, truly great service combined with expertise and truthfulness (as opposed to truthiness) are what more and more consumers will seek out in 2011. Those that are prepared, willing to take risks, and able to focus on the important things while disregarding distractions will emerge from 2011 stronger than ever.
So even if you think I might be right, take heart! Through the fire and flames, we carry on.