REAL Trending Episode 19
Steve Murray talks about housing affordability hitting a new 10 year low, results from our Harris insights consumer study, and an all around update on mergers and acquisitions.
Today we are discussing affordability hitting a new 10 year low, some additional results from our Harris insights consumer study, and an update on what’s going on in mergers and acquisitions.
So let’s get to it.
Affordability hit a new 10 year low according to report out of the National Association of Realtors. This was coming on for a long time. We had prices going up 6, 8, 10, 12, 14, 15 percent a year in some markets, while household incomes were only growing 1.5 to 2 to 2.5 percent. It was only a matter of time when an asset price rises that fast above the rise in incomes before that asset became unaffordable.
Complicating this was the FED raising interest rates for two years to get them back into a more normal range. This is actually a very good thing for the economy. Not a good thing for housing. Mortgage rates are predicted to reach five percent on the 30 year benchmark, traditional 30 year fixed mortgage. We don’t need to freak out about this. It’s slowing down the housing market, which has been characterized as no inventory, prices rising rapidly out of reach as this new study shows. A new 10 year low in housing affordability. It spells longterm disaster unless something changes. Because that would drive down the home ownership rate, it would drive more young families into renters and ultimately they may choose not to come out of those rentals.
So this is all in the short term, tough news to swallow for the housing market and particularly for brokers and agents. We know that housing sales have declined six out of the last seven months, but we’re only talking about one to two percent declines. Even if it’s three to four percent declines, it’s nothing to panic about. What brokers and agents need to do, as we’ve said in prior episodes, is we’re heading into a flat market. Inventory will grow, prices will cool off to some extent, and that creates great new opportunities for really good brokers and really good agents. As my friend Mike Staver of the Staver Group used to say, don’t panic, get back to work. It’s a time of a market which we haven’t seen in a long, long time. It’s not going up rapidly. It’s not going down rapidly. We’re going to get into a flat, normal market, a balanced market. Remember what that looks like? Hardly. People can hardly remember what such a thing looks like, but that’s where we’re heading. That’s what it looks like.
Longterm, it’s very good, short term, a little pain. But for companies who focus on the fundamentals of the business, whether you’re agents or teams or a brokerage company, great rewards await you. No question about it.
Real Trends with our partners, the California Association of Realtors and the CE Shop, hired Harris Insights to do a consumer study between January and June of 2018 with recent buyers and sellers of homes. In past episodes, we covered the fact that the really good news was that 90 percent of all buyers and sellers used an agent, which is up five points from the same study four years ago and nine points better than it was 17 years ago when we first ran the study. But there’s some other interesting tidbits in the study that brokers and agents need to be aware of.
Here’s a point. Only 42 percent of those surveyed felt that when they were ready to buy a home, it was extremely important to work with the agent they used in a previous transaction. And some 34 percent said it was not important at all to work with an agent with whom they had worked in the past. That is not good news. It’s indicative of an industry, which we’ve known about for all 40 years that I’ve been in the industry, which is even good agents, successful agents, don’t do a good job staying in touch with their past clients and customers. They get too focused on the transaction and not enough on the relationship. Keep in mind that the typical family may buy four to six homes in their working active lifetime. And if you have somebody buy or sell a home in their thirties, there’s a lot of transactions ahead.
This study shows there is a great opportunity here for those agents and teams that stay in touch. What can be so hard at the very least about a monthly or quarterly personalized mailer to your past client database. And how about a birthday card or how about a once a year phone call on an important date, like a birthday or Thanksgiving or Christmas. It’s amazing, isn’t it, that even after all this time and all the automation that’s available, all the wonderful marketing tools and CRMs that are available, that we’re still faced with the fact that most agents don’t stay in touch with past customers as it is shown by these results out of the study.
M&A and Valuation Activity
Okay, so housing sales are off a little bit. Prices are slowing down. We have an enormous compression going on with company revenue or gross margin, net company dollar, whatever you prefer to call it, as brokers continue to fight and compete over the retention of their most productive agents. That has had an impact and will continue to have an impact on merger and acquisition.
As the market flattens out, brokers are faced with this prospect. You will no longer be in a market where a double digit rise in volume and commission revenues can bail you out from your inability to grow organically. So what’s happening as a result, is at least here at Real Trends, we have a record number of valuation assignments, we have a record number of brokerage companies for sale, we have a record number of brokers looking to buy other brokers. It’s all very good. So what we’re looking at is Realogy announced the first part of this year, they would no longer be investing their capital in the acquisition of additional large brokerage companies. They said they would use their capital to help their affiliates by other brokerage companies, but they themselves would not be doing so in any significant way. Home Services has communicated to the market that while they’re still going to acquire great brokerage companies, they’re going to slow the pace of their acquisitions down a little bit and they’re probably going to get a little softer on their prices and terms. We’ll have to keep you posted on that as the last quarter of 2018 continues.
On the good news, however, there are still very many brokerage companies at the local or regional level. Howard Hanna would be a good example and many others are looking to take advantage of this slowing market by acquiring medium to small brokerage companies. They can do so at probably a lower price and better terms than they could have just a year ago. We talked to other consultants who work in our space and do some merger and acquisition evaluation work. At least one other consultant is also basically sold out. He’s at capacity. It’s going to be a very interesting fourth quarter and very interesting year next year. We have seen this before. It’s been almost 30 years ago, 1988 to 1993, we had a relatively flat, calm housing market in terms of unit sales, prices were not going up very much. Out of that grew some of the finest largest brokerage companies of the last 25 years. Edina, Long and Foster, DeWolfe, Ebby Halliday, Allen Tate, William Raveis. A bunch of great companies grew out of those times. But let me give a word to the warning, companies that didn’t cut their costs and get very efficient during that time, well, five of the top 20 brokers in the country didn’t. They didn’t cut their costs. They didn’t get careful. They didn’t focus on the basics, and five of the top 20 didn’t see 1993. Mergers and acquisitions are a great way to grow a brokerage. There’s going to be a very active market.