Home Brokers & Agents Seven Predictions for 2014: Power Ballads Edition

Seven Predictions for 2014: Power Ballads Edition

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You realize these fashions WILL be coming back, right?

I wanted to get to this before 2014 dawned, of course, but… it was more fun to hang out with my boys. And by that I don’t mean my posse of secret real estate pundits, but my actual biological progeny.

In any event, it’s customary here at Notorious to make predictions that are sure to go wrong, or your money back! 2014 should be no different in that regard.

This year’s musical selection comes to us from the days of my youth. I never imagined that we would one day have an entire satellite radio channel devoted to hair metal but… what a wonderful world this is indeed! For those of my friends attending Inman Connect in NYC, I heartily recommend stretching your vocal chords with these selections at karaoke. 🙂

1. The Housing Market Slows Down, Unexpectedly

We know by now that 2013 was a banner year for real estate, and most economists and experts are predicting a slower but steadier, “healthier” recovery for housing. Prices rose between 5% and 13% in 2013, depending on who you ask, but a Zillow survey of 110 economists found the average was 4.3% price gain in 2014. So a solid, steady, but not the red-hot growth of 2013.

Most experts are pointing to mortgage rates that are near-certain to rise, more supply of housing on the market as price appreciation brings more sellers out from under the rocks, and a rotation away from investors to family buyers.

Here’s to hoping! But every rose has its thorn. In the case of housing, every rose has a veritable undergrowth of bramble. Let’s deal with three such thorns.

First, we have new government regulations in 2014. There is a consensus amongst economists and experts that mortgage rates will go up. Some think that means mortgages will be easier to get, offsetting the impact of rising rates. For example, Lawrence Yun of NAR:

With higher mortgage interest rates, he expects refinancings to collapse in 2014 to the lowest level in at least 15 years, and hopes purchase applications will begin to rise. “This is an incentive for banks to increase mortgage origination, especially considering the low default rates in recent years. But even with cheap mortgages for the past four years, all-cash buyers stayed high, accounting for over 30 percent of sales,” Yun noted.

Trouble is, the banks themselves are sounding the opposite note. Here’s some reports from a panel held at NAR Annual, titled “Top Lenders Forecast Housing Market Gains Despite New Ability-to-Repay Rules”:

The Qualified Mortgage, or ability-to-repay rule, will become effective in January 2014 and contains a number of underwriting standards that will constrict mortgage availability and deny credit to some first-time homebuyers, said Bill Emerson, CEO of Quicken Loans. The QM rule requires significant documentation from consumers to justify lenders’ underwriting decisions; lenders face strict penalties if a loan is made outside of the specific criteria. Kevin Watters, CEO of JPMorgan Chase, agreed that lower- and moderate-income buyers, as well as self-employed buyers who don’t have a consistent flow of income, might have a tougher time in the new lending environment. “We need to work together to help first-time buyers into affordable housing options.”

That hardly sounds like lending standards loosening up. In fact, it sounds like the exact opposite to me. Sure, the bankers end up agreeing that 2014 will be a good, healthy year, and that they’re stepping back into the market and so on, but… they also have little certainty from Washington DC, and they’re scared to death of mortgage putbacks. Huh.

Second, it appears that the boom of 2013 was fueled by investors. Okay, now if everyone is expecting investors to pull out and regular family buyers to come back in… then normal macroeconomic factors should reassert themselves. The thing I’m just not seeing is job growth. Investors already have money to buy. But regular families don’t have that luxury. There is no doubt that the fundamentals of housing requires employment. Yet we’re just not seeing that, and haven’t seen it in years. Even the decline in unemployment appears to be the result of lower labor force participation, rather than robust hiring.

Third, combine the above and what you get is a picture of the upper middle class — and the Gen-Y professional elites — likely being able to have an easier time getting more expensive mortgages. But the lower income families will be squeezed out of the market even more than they are today. That creates political pressure to “do something” to help the “middle class”. We’ve already seen moves by the FHA to return to its roots in affordable housing. With 2014 being a midterm election year, I foresee even more attempts by various of our betters who know better than we do on how to manage the housing market. (More on this below).

Taken together, I am cautiously optimistic about 2014. Or, perhaps the more accurate description is reluctantly pessimistic: I’ve been a pessimist for so long and proven wrong so often that I’m sort of hoping that we make 2014 yet another year when I’m wrong about what happens to the market.

2. Say Hello to Regulation

We don’t know where we’re going, but we sure know where we’ve been. But here we go again with new government action in real estate.

At the tail end of 2013, FHA dropped the loan limits as was expected. But the more important signal is the continued insistence by the government that they want out of the home financing business. One can hardly blame them given the never-before-seen-in-human-history levels of debt and deficit spending. And it is clear that the Obama Administration really desperately wants private capital back in the mortgage market in a much bigger way.

Thing is, what politicians really want is to have their cake and eat it. On the one hand, they want to stop spending on housing; on the other hand, they want to keep voters happy. How do you expand available rental stock for lower-income voters, keep housing within reach for middle-class voters, and keep the investor class happy, all while spending less money? And all of this is without taking any social issues into consideration; just fiscal issues of housing.

The only possible way is to mandate what the market will not do on its own. The CFPB (Consumer Finance Protection Bureau) has more or less taken over the mortgage industry with its regulations, and there are more regulations that will be finalized in 2014 around mortgages as well.

Once you’re done regulating mortgage market and mortgage people, though, what next? Is it possible that bureaucrats will somehow overlook real estate brokers and agents? I mean, we’re not talking about the most popular group of people in the United States here, like fire fighters and cops. We’re talking about an industry that is little understood by laymen, whose value is eroding, whose practitioners take home tens of thousands of dollars at each closing. Seems like a soft target to me.

I can easily imagine Richard Cordray giving a press conference talking about how CFPB is going after abuse and fraud, about how while not every real estate agent is a greedy liar, we all need to root out the bad apples, and so on. If the CFPB is redoing mortgage documents for greater transparency, I see nothing that stops the CFPB from requiring new agency disclosure docs, new “commission transparency” documents, going after affiliated businesses (in-house mortgage, title, etc. — and this is already happening), and maybe even getting involved in the interminable “real estate data” kerfuffle.

In fact, I’m going to go beyond imagining such and predict that by the end of 2014, we will see at least one significant piece of federal regulation on real estate brokerage. Here I go again.

3. The Gap Widens

We have seen this trend develop for a few years, but the real estate boom of 2013 brought it to the forefront. 2014 will be the year when we see the growing gap between the Haves and the Have-Nots in real estate.

We saw some significant moves in 2013 amongst the largest brokerage companies. Realogy, having survived the storm and gone public, has been steadily acquiring brokerages. Not to be outdone, HomeServices of America, the second largest company in real estate, made some real splashes in 2013, launching a new brand with Berkshire Hathaway HomeServices, and making major acquisitions like Fox & Roach and Koenig & Strey. As the market improved, some brokerages that were in the red throughout the bust years are making money again, which makes it possible to price them and acquire them. The larger brokerages are getting larger still, and 2014 is shaping up to continue that trend.

The shot fired across the collective bow of MLS and Associations by The Realty Alliance, a network of the largest independent brokerages in the U.S., in 2013 could be seen as one sign that the big brokers are feeling more comfortable once again. But one thing that we have seen as a result of the brouhaha is that the big brokers have the technology and the money to do some things, to make some noise. In one respect, the conflict between the MLS and the big brokerages is really a conflict between big brokerages and smaller brokerages, with big brokers feeling that they are subsidizing their smaller competitors directly through the MLS.

The Gap, however, goes beyond just brokerages. One of the effects of technology is that fewer people can do more. Top producers are taking more and more market share, often leveraging teams and assistants that are nothing short of brokerages-within-a-brokerage. The old 80-20 rule in real estate is slowly but surely transforming into 90-10 and beyond, because the ancient rule of capitalism asserts itself: He that hath, gets.

The raging debate at the tail end of 2013 around AgentMatch has as a subtext the growing gap between the Haves and the Have-Nots among real estate agents. Some agents who have super teams under them are reporting hundreds of transactions for unimaginable volume; other agents who don’t have that sort of infrastructure regard these “team leaders” with a gimlet eye. Maybe it’s not straight up lying to say you’ve done 400 transactions, when in fact, you have a team of 10 agents under you, but the Have-Not agents don’t really want to be ranked alongside those guys and gals, y’know?

Furthermore, I think over the past couple of years, we’re seeing a new plateau in real estate technology. The easy, cheap, off-the-shelf stuff like blogs and websites and IDX plugins are totally commoditized now. There is no differentiating with some magic silver bullet, or QR code reader, or Pinterest account. The technology that does make a difference isn’t cheap or commoditized just yet; I figure we’ve got a couple of years of this left but 2014 is when we begin to see it in a big way.

I think 2014 will mark a resurgence of those who have size, capital, and technology getting more and more, whether organically or through acquisitions, at the expense of the smaller and the poorer. A few brokers and agents will be living large; many, many more will be living on a prayer.

4. The Fall of Organized Real Estate

I see 2014 as a watershed year for organized real estate. At the precise moment when a united front for political power will be the most necessary, the REALTOR Association will be facing crisis after crisis. What’s more, the leaders of organized real estate are more or less resigned to the fact. Dale Stinton, NAR’s longtime CEO, is on record saying that NAR’s leadership wants to tackle some tough issues:

“You can’t ever talk about a national MLS without getting into trouble. You can’t talk about the number of associations without getting in to trouble. You cant ever talk about professional standards without getting in to trouble,” Stinton warned. “What I’m here to say on behalf of leadership is we’re ready to get in trouble.”

Fewer associations, fewer members, national technology plays — these are all signs that the senior leadership of organized real estate recognizes they are at a crossroads. The recent REThink Future series is finished, and presumably, NAR gathered a whole lot of information from it. Now we get to see what comes out of it. But what could come out of it? With dissatisfaction from large brokerages, disconnect with the vast majority of REALTORS who are members in name only, and a growing chorus of questions about the value and nature and mission of the Association, 2014 isn’t shaping up to be a kum bah ya type of year for organized real estate.

I predict a year of chaos, with the three-way agreement under serious pressure, and a robust effort to de-link the MLS and the Association around the country. Perhaps some political event will wake up a whole lot of REALTORS(r) but then again, most of them might not care in the least, or even disagree with the Association’s stance.

I’m not predicting that NAR will be kaput by end of 2014. I am predicting, however, that by the end of 2014, we will see significant decreases in membership numbers, and real debate by the industry as to whether Associations are necessary at all.

We won’t know what we have, until it’s gone. But that’s a trip we may all need to take to get to the next step in the evolution of organized real estate.

5. Keller Williams Goes Public

Keller Williams Realty International (KWRI) surpassed Coldwell Banker in 2012 as the largest brand in real estate. Based on the IPO papers, it looks like Re/Max might have surpassed KWRI, but we’ll hear the announcements soon enough. Plus, given their growth and apparent success, KWRI probably could have gone public anytime in the past decade. So why now?

Well, at this point, KWRI is the only major brand/franchise that is privately held. Realogy is public, HomeServices of America is sort-of-public as a division of a company owned by Berkshire Hathaway, Prudential was bought by HomeServices, and Re/Max just went public. It is the Re/Max IPO that is significant, because unlike Realogy, which has the NRT, and HomeServices of America, which began as brokerage and launched its own brand (Berkshire Hathaway HomeServices) and bought Prudential, Re/Max was a pure franchise/brand.

The primary use of funds by Re/Max after it went public was to acquire the largest master franchisee, Re/Max of Texas. Plus, the additional financing flexibility of being a public company gives Re/Max certain advantages (like using its equity as currency). Realogy and HSA have been there for a while already.

I think KWRI goes public to keep up with the Joneses, and the Smiths, and the Peltiers. Sure, they have to disclose more of their operation to go public, but the additional capital could help KWRI setup a true company-owned operation that generates the real dollars in that world. (See, e.g., how much the NRT contributes to Realogy’s top line.) Furthermore, as we’ve noted above, I think 2014 is when the big get bigger through acquisitions. I don’t think Realogy and HSA are going to slow down in the least.

KWRI can’t simply sit back and watch their competitors acquire brokerages, agents, and market share. Sure, there are things about the KW model that is more attractive and more effective in today’s team-driven environment, but to keep pace with the biggest of the big boys, I think KWRI has to tap into public markets and the financial strength that brings.

Finally, the market for real estate stocks has never been better with Realogy’s successful IPO back in 2012, and then Re/Max in 2013.

I say KWRI at least files to go public by the end of 2014.

6. Portals Take The Next Logical Step

2013 saw Zillow pulling ahead of its two main competitors. We’ll see what happens with the vertical integration that Trulia pulled off, and the new relationship between Realtor.com and NAR will need time to have much of an impact. But, at the end of the day, chances are that 2013 ended with Zillow being way, way, way ahead of Trulia and Realtor.com at least in traffic and growth. We’ll see when full year numbers are released in a few weeks.

But Zillow’s strength puts Trulia and Realtor.com into a bit of a bind, for different reasons.

For Trulia, it now owns Market Leader, which gives it capabilities that Zillow lacks, but those are capabilities that aren’t going to bring any more eyeballs to its website or mobile apps. Those vertically integrated CRM-type of capabilities are useful to brokers and agents, but not so much to consumers, who know nothing about any of that.

For Realtor.com, its insistence that data accuracy matters to consumers is simply not getting much traction in the actual marketplace. Wrong or right, consumers show precious little indication that they’re super interested in “data accuracy” the way the industry appears to be. So what then?

The next logical step for both — and possibly for Zillow as well — is to take the next step beyond just ‘we’re an advertising platform’. There are two possibilities.

One, the portals could start offering real services of value to its actual customers, the brokers and agents who pay them. For example, virtual assistants, transaction coordinators (not just transaction management systems, but actual human beings who will do it for you), and so on. At the top of the list for my money is lead-screening services, similar to what companies like Weichert and Long & Foster offer to their agents.

The biggest problem of online real estate, whether Zillow, Trulia, Realtor.com, or franchise/broker or even individual agents, is response time. Huge chunks (I’ve seen stats as high as 60%) of online inquiries go completely unanswered. Even those leads that do get answered might get an email a day later, which is way after the buyer has already moved on. Smart brokers and agents already stress responding to inquiries as quickly as possible (e.g., Realogy and its LeadRouter system is designed to get rapid response out to consumers), but those are expensive to build and maintain.

I predict that Trulia and/or Realtor.com, and possibly even Zillow, would launch a similar service sometime in 2014. Perhaps it’s a tier of a premier paid service, where Trulia/Realtor.com would put together a call center and immediately respond to consumer inquiries, do initial screening, and then send only “qualified” leads onto its paying brokers/agents. It’s a win-win, as the brokers/agents who use such a service would get inexpensive pre-screening and far higher quality of leads, and the portals would deal with one of their biggest headaches: response time. If credit card companies are competing on the basis of “talk to a human being when you need help”, I can easily see the portals competing on the same basis.

The second possibility is a bit more interesting, and easier to implement. The portals could copy Estately.com and move to a referral-based business model. The initial reaction might be… ah… incendiary, depending on who did it, but fact is, Estately.com has been around for years, with happy customers, and no one is talking shit about them.

It might be a different deal, I suppose, if one of the Big Three were to do the Estately thing. But I can see it. The difference in money is gigantic. Instead of some piddly $150 a month, we’re talking about 25% of the commission. That’s enough of an incentive to think hard about it.

If anyone is going to do it, my bet is on Trulia, as Zillow has little to gain from such a big move, and Realtor.com likely can’t get around NAR for something so significant. Trulia, though, acquired quite a lot of brokerage licenses when it bought Market Leader, which owned RealEstate.com and its brokerage licenses. Although Trulia has publicly said that it is not going into the brokerage business, and has said it plans to do nothing with those brokerage licenses, it may be that as 2014 drags on and the gap between it and Zillow is not closed… Trulia might think again.

Either way, keeping in mind that these are predictions sure to be wrong, or your money back, the portals — especially Trulia and Realtor.com — have to do something in 2014. If they can’t close the gap with Zillow, then they’re really going to have to offer more than words to keep the affection of the industry. I say they take the next logical step, one way or another.

7. Rise of New Discount Models

Finally, I believe that 2014 will be when we see a real rise in new discount brokerage models.

If, as many experts and economists and industry leaders believe, 2014 will be a continuation of the hot housing market of 2013, then we are likely to see some sort of discount brokerage model emerge. Remember back in the first real estate bubble, stories like this one from the New York Times were everywhere, along with firms that catered to that market. Yeah, I remember you.

The collapse of the housing market and the total shift into a buyer’s market pretty much killed most of those discount models off, but not all. The most significant survivor is Redfin.com, of course, which still does the commission rebate thing. In recent years, however, we’ve seen companies like Jason’s House, which caters to consumers, and United Real Estate, which caters to practitioners, arise.

The larger reason is a simple one, and well-articulated by Dan Duffy, the CEO of United Real Estate. Advances in technology has made real estate far more efficient than it was in the 90’s, and yet, the cost savings really haven’t made their way down to consumers. The direct-to-consumer models like Jason’s House will face resistance, but it will get traction, especially as buyers do so much of the legwork these days themselves, and sellers know it. The models like United Real Estate (or similar low-cost to agents models) make it possible for agents and agent teams to start offering their services at lower cost, creating competitive advantage that way.

I saw the first Facebook ad for Jason’s House the other day, and I’ve profiled United Real Estate in 2013. I have a feeling that we’ll see more of them in 2014. Remember yesterday. We’ll see it again, in a new form. I remember you, and we’ll all remember in a few years as well.

Conclusion

This is one of my favorite posts, because… well, it’s fun to prognosticate, knowing some, most, or even all of these predictions could go oh-so-wrong. But the other part of the fun is in thinking about predictions, whether to make them, what the reasoning is, and getting into the nitty gritty of this weirdly compelling industry of ours.

We will, of course, revisit this post at the end of the year to see how many of them I got right, but in the meantime, I hope you had as much fun reading it as I did writing it. If you have thoughts and/or comments, please feel free! I’d love to hear your predictions if you have any.

Happy New Year, everybody!

-rsh

 

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