From REAL Trends, the trusted source for real estate industry news, this is REAL Trending, episode 44. We're breaking down trends of the week and showing how they impact brokers and agents. I'm Steve Murray, president of REAL Trends. Today, we're going to talk about a wrap-up of the industry's national conferences this spring, the dual challenges of rising rents and softening home prices, and what is the purpose of a brokerage or a team?
We learned a lot about what's on the minds of not just the leaders of these national brands, these very large national companies, but had a chance to talk to a lot of brokers and agents. It's very interesting to note that there were common themes that ran through all of these national conferences.
The talk is about technology. Artificial intelligence, big data, integrated platforms, every single national organization put that almost at the very, very top of the agenda of the presentations to the assembled gatherings. By the way, I might add, even though 2018 was down in terms of housing sales, to the best of our knowledge, almost every one of these national companies saw record attendance this year. Maybe that's because the second thing we learned is high anxiety among broker/owners. They're under attack from a variety of new entrants, whether it's people like eXp or Compass or HomeSmart or Fathom or Realty One Group or from the iBuyer companies or from companies like Redfin or Purplebricks.
Shrinking gross margins and net margins, profit margins under pressure have got brokers really concerned about the years ahead. As I said earlier, the national leadership seems really concerned that they get left behind at the tech gate, and they're investing collectively hundreds of millions of dollars in order to build that fully integrated all-in-one full-tech platform offering, combining and gathering large amounts of data and being able to use that data to help make agents more productive and brokerages more profitable. Clearly, that's what we heard at that level.
Unusually, of all the agents we talked to, and again it didn't matter which national brand we were with, the good agents that were at these conferences, they actually were very optimistic. They felt like their business was good. They felt like there was plenty of business to get. They literally did not exhibit anywhere near the anxiety of broker/owners, nor did they exhibit the tech anxiety of the national real estate companies.
It's kind of interesting to note that I don't know how that plays out, and I doubt anybody does. Does it mean that the national companies are building out these tech platforms, which may or may not benefit their broker/owners, that's uncertain and unclear at this time, and agents may not care as much. We just don't know. It's very unclear whether there's some casual connection between the lack of anxiety by agents and fear about new players and/or technology. It's just inexplicable at this time, but it's worth every broker listening to this to note that as a broker 30-plus years ago told me early in my career, you have to inspect your expects. Is it technology that your agents and teams are really looking for, or is it something else that they need from their broker/owner, some part of the value equation that they look for as opposed to being necessarily technology. We'll cover that further in a later podcast.
Secondly, there were back-to-back reports, one out of realtor.com, concerned about rents rising again. Almost simultaneously, US News reported that home prices are softening. Now, let's not get crazy. Home prices are softening doesn't mean they're going down. It means the increases are not what they were the last few years. It means the direction of home price changes is not what it was. Will they actually decline? That remains to be seen. But there actually are some fundamental demographics behind both of those issues. You know what I'm going to say. It has to do with that big affordability issue.
Even though household incomes over the last 18 months have risen at the most rapid rate of the last 10 years, it's still a long way to go to catch up with where home prices have gone, and so affordability, particularly among first-time home buyers and move-up home buyers and even for downsizers, it's becoming a real problem to find something that makes sense price-wise.
Well, if you're a first-time home buyer and you can't get into the housing market, and by the way, we're creating 1.4 million net new households a year in this country while only building 1.1 million homes, then the first-time home buyer who can't get into home buying are piling into rentals, which are also becoming scarcer. What you have is this enormous wave of demand for housing by new households, mostly young families coming into the housing market. Doesn't mean they want to or have to buy. Many cases, they can't right now, so they're going into the rental market, which is not keeping up with demand in most markets, and so you're getting this price-push on rental, whether it's single family or multi-family, while at the same time, particularly in the upper third of the market in the United States right now, a great deceleration of demand, whatever that price point is for homes in that upper third of the price points. Why is that?
Well, one of the big reasons is that the Gen X generation is 20-30 percent smaller than the boomer generation, so all of the big two-story, big-box homes built to house boomer families are now trying to be sold into a market where there are not nearly enough households to absorb them, so you have softening in prices that's very noticeable in the upper third of almost every market in the country. No such problem in the lower third, and it's all driven mainly by demographics as is the push on rental, and so the two-stories are very much interconnected. It's about affordability, and to a great extent, it's about demographics. We have too few homes, both rental and for purchase, at the entry level to satisfy demand from new households, and we got an overabundance of properties from people like yours truly trying to downsize, and so it will go for many years to come with a prayer that at some point, home construction, both multi-family and single-family, catches up to household formations.
We've had the opportunity over the years to talk with many brokerage companies and recently, a large number of teams in counseling them of how to derive the greatest financial benefit from the ownership of a brokerage of a team. As we counsel brokers and teams that we interact with right at the outset, it's important for somebody who owns a brokerage or a team to ask themselves a fundamental question: Why do I own this business? Is it for its ability to generate income, secondly, is it possible that I'll build equity that will give me something to sell in the future, or third, am I doing this for personal satisfaction, I want to own my own business.
Those are all valid reasons, and frequently, brokers/teams will tell us, "Well, it's a little bit of all three," and that's probably true, but we would offer this to anyone who owns a brokerage or a team or is thinking about owning a brokerage team, ask yourself the question, 'What's my purpose?' 'Why do I want to do this?' You have to prioritize one over the other two. Is it your primary interest just to build something with income, is it equity, or is it personal satisfaction? There is no wrong answer here. But you can't devise a strategy for your business without answering that fundamental question. Is it for income, is it for equity, or is it for personal satisfaction?
The best example I can give is we've counseled a numbered of teams, a growing number of really successful teams doing two, four, six million in gross commission income. Because so much of the business is related to the leader of the team in terms of sphere of influence, that's not really a transferrable or salable asset for any real money. Often, we will advise a team, or even a top individual agent, to focus on generating the most income you can, and then invest it elsewhere: rental properties, developable land, stocks and bonds, and build your equity outside the brokerage business.
For brokerage companies, it's more interesting because of the way valuations work, the more income you generate, typically, the higher the value the brokerage company. But it's the same thing. A broker has to decide what's my purpose, why do I own this company, and you have to ask yourself is it income, is it equity, or is it because I like owning my own business?
Lastly, on this topic, the most interesting conversations we have are with teams or agents who are thinking about leaving their brokerage to form their own brokerage. After we remind them that, in fact, as an independent contractor, they already own their own business and they're merely paying perhaps a split, marketing fees or franchise fees, you're buying services from a brokerage. Now, whether that's a fair exchange of value, that's between that brokerage and that agent/team. We counsel agents and brokers that if you leave a broker and form your own team now, your name is on a lease and your name is on loans, and your name is on all legal and regularity documentation. Is it really worth your, "freedom" to own your own brokerage when, in fact, all the benefits were there in the first place with your existing brokerage?
As you're thinking about your future, focus on is it income, is it equity, or is it personal satisfaction that drives you to own your own practice. Learn more about industry trends, marketing, and technology strategies as well as listen to past REAL Trending episodes on our website, www.realtrends.com/blog. This has been Steve Murray, until next time.
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