The agent-to-broker ratioInformation courtesy of the California Department of Real Estate (DRE)
In a stable market, a natural equilibrium develops in the ratio between brokers and agents. This ratio has historically found balance at the level seen on the above chart between 2000 and 2002; approximately 1 broker for every 2.5 agents. The crossover point on the chart, when the number of agents expanded dramatically, indicated the beginning of a real estate bubble.
As real estate entered its boom phase of the market cycle, new agents arrived en masse with the optimistic belief that extra money could be made in real estate. Rather than just selling properties, they also bought and flipped them, speculating in the market while operating as insiders pulling (or saving) a fee when they, their family members and their friends decided to purchase property they located. As the housing market fully returns to functioning based on economic principles and real estate fundamentals, expect the above chart to show a return to the standard 2.5:1 agent-to-broker ratio.
Will this ratio last? Not likely. Continued federal deregulation of lenders, and the relaxation of rules on lender conduct will ameliorate the marketplace by encouraging increased sales activity, which will eventually lead to another boom. When this happens, agents will begin to multiply once again. It will be up to California’s Department of Real Estate (DRE) to protect society from adverse licensee conduct by tightening up the passing rate of the agent licensing exam, limiting new agents to the most qualified, dedicated and committed.
Whether the DRE will be politically able to do this in the face of opposition from big brokerage offices, which want a flood of agents-for-hire to blanket the market with, is doubtful. Fortunately or unfortunately, demographics point to this return to “excitement” in the field of real estate around the time period of 2017. [For more information on the role of demographics in the future of real estate, see the first tuesday Chart First Time Homebuyers and New Housing]
Agent and broker population, past and future
A more immediate cause for concern is the current precipitous decline of approximately 3000 real estate agents per month (at a rate which forebodes an even greater loss of agents yet to come). This decline coincides with the decline in real estate sales following the collapse of the real estate bubble. In early 2008, 7% (1 in 14) of all single family residences (SFRs) in California stood vacant, owned by speculators—buyers of second homes (which were acquired in large part due to speculative fervor)—or as the REO property of lenders. Many of these speculators were first-time agents who were only suited to function in a real estate market during a boom phase.
With the current batch of entrants (2008-2010) embracing more sustainable, long-term real estate strategies, the “quick-buck” real estate agents are exiting the stage swiftly and in large numbers. With them goes the artificial support they and other flippers gave, and still give, to sales numbers.
The fever to speculate, while not yet entirely vanquished, is likely to remain dormant until 2014. In the interim, builders and existing-home sellers will have to get rational about pricing (per square foot) and listing periods (six months) for non-REO sellers. There will no longer be the sort of high competition between agents that helped push up prices between 2003 and 2006. The return of fundamentals to lending (and open market bond rates) will set a slower pace in the market, and will push prices down well into 2011.
Furthermore, agents accustomed to working with flippers (and earning two sets of brokerage fees in the process) are no longer around to load their friends, relatives, and social contacts with properties. All of these agent interactions contributed to the price “bubble,” and the corresponding influx of purchasers who were neither investing nor buying their principal residence. Such purchasers, all too frequently, were nothing more than long-term tenants at heart, not fit to be homeowners.
Large SFR brokerage operations with branch offices have always depended upon a constant flood of newly-licensed agents to fill their cubbies. This practice was enabled in the past by a high agent turnover rate, as these freshly-minted agents burned through their contacts without developing a viable client base. Brokers and office managers were able to mitigate the loss of agents due to inactivity and turnover by aggressively soliciting new licensees and quickly bringing in replacements.
Real estate educators also got into this loop by placing new licensees with brokers. These list-and-run agents have nearly disappeared from the ranks of the new agents, as the total number of new agents has dropped dramatically—from 5,000 monthly during the peak years of 2004–2007 to a nearly constant rate of 1,100 monthly in 2008 and 2009. [For the annual number of newly licensed agents and brokers, see the first tuesday chart, Newly Licensed Sales and Broker Population]
When viewed in the context of disappearing short-term agents, rather than vanishing home buyers (which has not occurred—only the speculators have vanished), it is plain that the economic reality is forcing brokers operating branch offices to shutter the least productive branches, release the weakest office managers and under-performing agents, and attempt to relocate agents who generate business. However, as in the wake of any crisis, many new optimistic faces in brokerage are appearing as they figure out how a real estate brokerage business can be run to prosper during the recovery. [For more information on which major CA brokers have prospered in the recession, and which have not, see the first tuesday chart, How CA’s Mighty Have Fared]
Even more troubling for large brokerage operations is the bickering arising over brokers’ fee-splitting arrangements with their agents. The agents are now making fewer sales at prices one-half that of 2005 or less. In the meantime, the brokers are taking in fewer dollars and shouldering the costs of overhead, promotion, and servicing excessive and unmarketable listings. Gradually, the younger and more aggressive agents employed by large brokerage offices will look to become brokers or team up with brokers and other agents in smaller operations, or join a “rent-a-desk” operation, in order to reduce the fee percentage due the broker. These agents too often do not have the business acumen to set up and operate a broker office, even if it is their own one-man operation, but they attempt to do so under the belief, right or wrong, that their current broker is getting too large a share of the fees.
Large brokers may need to retrench or regroup, and develop more efficient operating methods if they are to be competitive and attract long-term clientèle. During the boom, large brokerage offices had the luxury of keeping many low-producing agents on the off-chance they would swoop in on a buyer and bring him in for the office, with its expertise, to close the sale. Now, even with the dearth of newly arriving agents to fill desk space, the non-productive (and even the under-productive) agents may have to be released.
The remaining agents must be trained to ‘fire’ those sellers who have listed with the broker but will not pay for reports needed by the agent and the broker to build a marketing package proper for the demanding inquiries of reluctant buyers. Also, sellers who continue to demand unreasonable prices (the sticky price phenomenon), or who involve themselves in other conduct which keeps the property from selling within a 30- to 60-day marketing period, need to have their listings cancelled.
Blasphemas talk? Not at all if an efficient brokerage operation is what it takes to get into the recovery stage without going broke. Property that looks good from the curb and has a price close to what it can sell for in 30 days will get an offer within 30 days, a standard that will provide for the survival and success of the rational seller, the broker and his agents. In a recessionary market and during the early stages of recovery, time lost hurts everyone, a lesson the intermeddling lawmakers – both state and federal – are beginning to learn from the “extend and pretend” loan modification fiasco.
Brokers who learn to cut overhead and eliminate operating inefficiencies while beefing up their staff during the next few years will be in the best position for the up-tick in the annual sales volume likely to begin by mid 2012 or 2013. Planning ahead will be a defining behavior of the brokers who will still be operating in 2012, and they will have to be well prepared if they are to get in on the action when the federal government and Wall Street turn money loose for the next fiesta.
Demographics for the 25-34 age group will supply increasing numbers of home buyers, as the pool of first time homebuyers enlarges and eventually peaks in 2017. And yes, a hoard of speculators will be right behind them, competing with those homebuyers by withdrawing housing from the market, only to later return it for profit on resale. All this momentum will push the housing market into another boom. Prices will rise just as if there had never been a bust, or the pain caused by that bust’s repercussions.
Looking ahead for smaller brokerages
In the near future, small brokerage offices with fewer than 16 agents will probably continue to recruit agents as they always have. Large brokerages typically use mail-blitzing campaigns and seminars to entice newly licensed agents into their offices. Conversely, smaller offices traditionally recruit from local word-of-mouth contacts. Since brokers maintaining a single office with a staff of agents tend to have several different types of business clientèle and are not focused on just the listing and marketing of SFR properties, more thoughtful entrants into real estate will see the long-term advantages of being around others who work income property, land, and property management.
During real estate recessions, property management departments in small brokerage offices tend to expand to meet the needs of owner-speculators with vacant property who wish to reduce their negative income positions. Also, lenders are going to continue to need agents to inspect the vacant real estate they own (REOs), report on its condition, and eventually sell it.
In fact, property management is probably the most recession-proof area of real estate. In the middle of 2008, 7% of SFR properties in California were vacant. This economic condition bodes well for property management operations conducted by one-office brokers. Many of these owners are speculators that are (by necessity) going to have to rent their properties, and they will most likely do so by employing property management to reduce their negative cash flow so they can continue paying their loans.
Others affected
Real estate schools, whose revenue from licensing and continuing education courses is inextricably tied to the amount of money earned by real estate brokers and agents. The boom during the mid-2000s saw five times as many individuals enrolled in licensing courses as compared to the late 90s. That revenue is all but gone, and has been reduced to 20% of its peak four-year run.
If that is not bad enough for real estate educators, the license renewal rates among sales agents (especially those hit-and-run agents who arrived during the past six years) are dropping to unprecedented percentage levels—below 60% renewal rates. 2010 will likely see the rate of renewal for those agents continue to fall. Many will let their licenses expire, then wait to see if the real estate market picks up during their two-year grace period for late renewal. Most will be disappointed, since some time still remains before the next party boom.
When that boom takes place, some agents will jump back in, but those expiring during the next two or three years will not see any exciting pick-up in the market until after their grace period has run out. It is anticipated that the collective revenue among all real estate related education will drop to roughly 50% of its peak in 2005-2006, and will drop further still for the schools that failed to get and maintain their former share of the license renewal business of enrollments in CE courses. However, the optimistic and resourceful among us generally find a way to succeed.
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