realonomics

Is the real estate industry bloated from an economic standpoint? Do we have too many people in the labor force? We are one of only a few national industries that doesn’t feel the need to lay off people to improve economic performance. Why? I know, I know, you’re going to tell me it takes care of itself, naturally, by attrition and the survival of the strong…something akin to big fish eating little fish. The REALonomics response? No, it doesn’t, please keep reading.

Floyd Wickman, the well known real estate sales trainer, once commented, “Real estate is a funny business…it’s easy to get into, easy to get out of and optional in between.” Floyd is referring to the question of how to get an agent who is an independent contractor to actually show up for work, even when they don’t want to; the employee versus independent contractor tension.

Raise the Bar - Elevate the Standard - Vent the Bloat

Because the bar of entry into the industry has been set low and the cost of entry nationally is below $2,000, there is a propensity to bloat up. During the decade-long run-up a $2000 investment could easily yield a net annual return of $20,000 and even in some cases $200,000. A great investment by any standard. However, what happens the morning after the crash?

When a publicly traded company announces a layoff, buy their stock! Why? Usually, stock values climb over the short term when a publicly traded company lays off people. The reduction of their bloated workforce represent efficiency to investors and efficiency represent a better ROI. Unlike the real estate industry’s business models, other companies are actually trying to build long term equity and asset positions for shareholders.

Run the Industry like a Business - Order the Liposuction

What are the bloat statistics and what do they tell us? Plenty. And the news isn’t good. For example, consider the following data supplied by NAR:

• In 1975 NAR membership was 435,485
• In 1990 NAR’s membership grew to 810,607
• In 1993 NAR’s membership bloated to 976,960
• In 1994 NAR membership was 729,397, staying below this until 1999
• From 1997 to 2006, NAR membership grew 89.6%, to 1,364,196

In February 2007, unbelievably, the number of real estate licensees in California was still growing at 8.2 percent measured against February, 2006, rising from 486,395 to 526,308. According to national sales statistics, 50 percent of MLS participants have less than 2 transactions a year! Two! What happened to the so-called 80/20 rule?

Why can’t we streamline these insane numbers, that only increase the cost per transaction for owners and diminish profitiability? The issues are complex and have to do with such things as industry traditions, competition to have more agents than one’s competitor (a silly idea), cultural methods that overpower sound economic principles. Is it the Al Gore principle, “no governing authority?” Could it be that we as an industry are actually too entrepreneurial. Ouch…that’s going get some attention!

Do we really need this much of us? Who is us, anyway? Who should be us? How does this industry streamline its workforce just as other companies have been doing in order to sustain profitability during the downturn? Is this an industry whose participant must always endure the senseless feast-or-famine cycles without having any alternatives? It’s no wonder owners are not realizing the profitability they deserve for their time, talent and commitment to the industry.

REALonomics advocates massive layoffs, a higher standard of entry in terms of education, marketing skill and yes, entry and operating fees. What would happen if the annual cost for a seat at the industry’s table was $10-20k per year? Maybe NAR should go public and only shareholders with a minimal investment can be licensees and brokers? I can feel the hair rising on the back of some necks! Calm down, these are thoughts, designed to stimulate creative economic thinking.

There’s No One Quite Like Us

As the real estate industry remodels itself for the Consumer-Centric Era we ought to force ourselves into admitting, up front, in unabashed in your face terms, that there is no one quite like us. This is good while being bad.

Under the current business model structure there exists little or no stomach (no pun intended) for the hard business choices like those implemented by the mortgage industry with its layoffs and office closures. Yet, REALonomics believes we will eventually get there in our Quest for Model Perfect and in so doing create what we have termed the “new real estate model math“.

Attrition will take its course. Our numbers will decline in the face of a market slow down but will they decline fast enough and to a level necessary to bring about a shift in profitability for owners who are lagging behind the ROI curve and to career agents in need of a pay raise?

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