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REAL Trending Episode 88: Migration of 2020, 3rd Quarter Earnings, and Commission Compression

On REAL Trending Episode 88, Steve Murray discusses migration of 2020, 3rd quarter earnings, and commission compression.

 

Steve Murray:

From REAL Trends, the trusted source for real estate industry news, this is REAL Trending episode 88. We’re analyzing the most important trends affecting brokerage companies and their agents.

I’m Steve Murray, president of REAL Trends. And today, we are discussing the great migration of 2020, 3rd quarter earnings from some publicly held companies, and commission compression and industry discussion about that. What do these trends mean and how can brokerage firms best deal with them? First, a quick message.

REAL Trends president Steve Murray has been working with and interviewing real estate leaders for more than 30 years. He’s learned a few things along the way about running a successful company, being a solid leader, and more.

Find out his lessons learned in his video series, which offers short, insightful messages that shares inspiration and motivation from others in the REAL estate industry. Don’t miss a video. Go to Youtube.com/realtrends to subscribe.

Steve Murray:

Okay, the great migration of 2020. Best I can tell from all the data we’ve looked at, existing home sales, new home sales, some new data from the United States Postal Service analyzed by the Pew Research organization points out that what has just taken place from March 2020 through today is really an amazing event that has occurred only a few times before in American history.

When we talk about the great migration of 2020, we go back historically, and we can think about the Oregon Trail from 1840 to 1870, when 400,000 people, estimated, made the trek from the eastern part of the country to the western lands in search of new opportunities, going to a place they’d never been before, for most of them. 400,000 in about 30 years.

Steve Murray:

Two other great migrations in our history, one, the great migration from the rural, somewhat poor, South to the richer industrialized North in search of job opportunities, which took place from roughly 1880 to 1920. No exact numbers, but it was in the hundreds of thousands.

Lastly was the hundreds of thousands of immigrants, particularly from southern Europe and elsewhere, that came to our shores between 1890 and 1920, again in search of new opportunities in what was still considered new land.

Steve Murray:

Well, from the best we can examine the data, and we are not statisticians, it would appear that four to 500,000 home sales that took place this summer were people who were migrating from where they lived to a new place. And this is just homeowners. This doesn’t count renters.

That’s the best number we can come up with. We may be a little high, we may be a little low, but it is truly one of the largest migrations of people in our country’s history. One big difference, they weren’t necessarily moving, most of them, to a new opportunity, but leaving what they had known behind.

Steve Murray:

According to the Pew Research study, fully 28% of the people who moved from February of this year to July did so to avoid the dangers of COVID. Another 20-some odd percent moved for financial reasons, or the loss of jobs. And another 20-something percent moved because it was temporary. Some people who just move for six months to a year.

But one must wonder at this time, how many of these moves, number one, still to come out of major urban core areas to suburbs or even further. But the bigger question is how many of those will be permanent? It’s a big question. And it will have a profound effect on housing markets and the demographics of our major cities in the years to come.

Steve Murray:

Third quarter earnings. Well, Realogy lead the way last week, a blowout quarter, one of the best quarters in their history, certainly of the last several years. Revenues up, earnings up. Every single metric was up over clearly over third quarter of 2019. No surprise there, really. Today we’ll have third quarter earnings coming out from people like Zillow and RE/MAX, and Redfin will follow. Keller Williams released their results for the third quarter. And again, their sales were up, their listings were up, their total volume was up. Their transactions were up.

All very much expected, given the July, August and September quarter was probably the biggest quarter in the last 15 years. You’d have to go back before the last recession to see the kind of numbers that we saw in the third quarter. And one would expect the earnings of companies like RE/MAX, Realogy, Redfin, Zillow, and eXp to go up strongly, but we’ll wait to see whether in fact that happened for all the participants or not.

Steve Murray:

We do know that privately owned brokerage companies who report to us through our CEO forum groups had the best quarter for many of them, the best quarter in company history. Not just 15 years ago, forever. They had the best third quarter, and for many, the best quarter period, in their histories. We’ll report on this more in a later podcast.

Steve Murray:

Lastly, number of articles circulating in the last month about commission compression and citing iBuyers and citing Redfin and citing other companies that will create incredible pressure on commission rates. And each one of them in their own way may have some impact in the markets they operate in.

But we’ve said before, and actually publish the data, the biggest factor affecting commission rates is the relative scarcity of listings, particularly compared to the number of realtors. We have tracked the relationship between realtors and commission rates since, really, the late nineties. And there is a very direct correlation.

Steve Murray:

When you have scarce listings and abundant realtor members, you’re going to see commission rates go down in the United States. When you see the number of realtors drop and the number of listings go up, you’re going to see commission rates actually move back up.

It’s all part of the competitive landscape that when you have as many realtors as you have listings, you’re going to have realtors competing with other realtors for scarce listings. And one of the ways they can beat is on the commission pricing they charge. That should be no surprise to anyone.

Steve Murray:

Consumers are also wiser. They do realize homes are moving faster, but so do realtors. And so there’s give and take on the commission rate, which results on top line commission compression. This goes along with what we’ve reported on before about gross margins, or company revenue percent, which has been shrinking for years, particularly the last five.

Again, competition is driving it. In that case, it’s competition for producing agents. But we do note that really well-run brokerage companies, regardless of their business model or brand or location, are doing very, very well at adapting and preserving their profit margins.

Steve Murray:

These are all important trends, but the most important thing to conclude with is you need to look carefully at those three measurements. Your gross commission rate, your gross margin, and your net margins. You’re going to have pressure on the first two, which result in pressure on the last one. But it is within your grasp to affect both the gross margin and your net margin. That is in the hands of broker owners.

Steve Murray:

Learn more about industry trends and success tactics for brokerage firms, agents, and teams, as well as listen to past REAL Trending episodes on Apple Podcasts, Spotify, Google Play, and others. Visit www.realtrends.com/channels/. This has been Steve Murray. Wishing you well until next time.

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