February 2009

Paramount Issue?

Most Significant Issue

The current REALonomics poll will continue to run until the first week of December after which a new poll will be posted.

REALonomics invites you to become a poll participant. You are invited to participate in the current poll addressing this question:

Which issue is the most significant facing the real estate industry today?

The current slate of answers is listed in the poll, together with their running totals. Did you know you can submit your own poll answer?

SEE ALL OF THE REALONOMICS POLLS.

Suggest a POLL TOPIC or Question.

Ohhh…mega, 15teen, PMA & Alpha

Bernanke, our Federal Reserve Chairman, has once again reported to Congress. His verbal treatise indicates that we have not reach economic “omega” and that we can expect the interest rate on approximately 450,000 mortgages to adjust upward in each quarter of calendar year 2008.

450,000 X 4 = 1,800,000. Ohhh…mega!

Our inventories are now at a “15teen” (yes, SIC) month supply. A healthy real estate economy should have inventories running at about 4.5 to 5.5 months as a national average. I hear voices calling for a collective positive mental attitude (PMA) among the rank and file.

Shaping Current Failure into a Growth Model

The foreclosure market is already gaining momentum as a national growth industry. Pick up any newspaper and you’ll see local “Get Rich with Foreclosures” workshops at the local Holiday Inn. Millionaires will once again be made…déjà vu…RTC era style.

We have gross household incomes of roughly $50-70k living in homes with attached mortgages of $650 – $1.5 million. An abnormally high percentage of these mortgages will begin to adjust upward beginning in January, 2008. My HP-12C cannot make 60/75 mortgage qualification ratios work no matter how I hammer on the keys!

Ohhh…mega will come eventually but the stakes will be amazingly high before it does. PMA will not accellerate the process.

The Yellow Smiley Face as a Lapel Logo

As NAR concluded its national gathering in Las Vegas, Nevada, REALonomics perused the out pouring of editorials focusing on an industry in need of PMA…Positive Mental Attitude…in order to counter the negative forces of media reports.

No amount of PMA, individual or collective, is going to cure an industry economic model in need of a quadruple bypass. Don’t get me wrong, there is a place for PMA, but it plays no role in the operating room “fix” needed by an industry whose business model is mathematically and empirically wrong at its economic and consumer core, not to mention our property information delivery schema.

Look at the REALonomics poll results in the upper right hand corner of the REALonomics.net home page. It looks to me like the top three issues people believe are impacting this industry are (1) Sub Prime Issues, (2) Too Many Real Estate Agents and (3) High Listing Inventories. Emotional hype, smile-speak and happy face news releases will not accellerate omega or cure the 15-month inventory level.

What will assuredly produce reversal of the supply and demand trend line (a.k.a. Omega) and cure the 15-month inventory level is a serious reduction in the agent sales force and a washout of the sub prime phenomenon. This is fueled by price adjustment and the cost and availability of mortgage money to qualified buyers and investors.

It’s not Omega We Seek, it’s Alpha

Behind the scenes in the shadows of development there is a bristling reinvention of our brokerage, title and mortgage operating models that will transport us from the stage coach era to the new alpha continuum that will produce better ROI based upon TRUE consumer partnerships, a wide open property information model and new broker/agent relationships.

The industry wants to find omega, the end of our current languish. We just want things to be “normal” again (whatever that means) and to be able to see relief in the form of less inventory and more transactions.

REALonomics believes it’s not just about omega; it’s about alpha. We are caught in major economic and operational vortex that will not be cured by simply finding the end of the dilemma. We are in a quest for Model Perfect and that model will…oops, I should have said “MUST” include more than a face lift and a shot of superficial botox.

We can truly welcome omega if upon its certain arrival we are prepared to enter the New Real Estate Economy with alpha; new brokerage, mortgage and title models for a consumer-centric era.

Our lack of alpha, will extend our ohhh…mega!

An all Carrot and no Stick Industry

The National Association of Real Estate, NAR, has “power”… no, let’s restate that…NAR has “authority”…hmm, still not right…NAR has “opportunity,” there, that’s it…just right. NAR has opportunity.

NAR’s historical imperative has been, admittedly, “stick-like.” In fact, that’s been our industry’s posture with respect to its delivery of property information services to consumers. But now, as everyone scurries for solutions, NAR has perhaps its greatest opportunity…EVER! It’s our opportunity to move from consumer control (stick) to consumer advocacy (carrot). After all, wouldn’t we all admit that the carrot motivates us in ways antithetical to the stick?

Death to the Stick

For decades our real estate business models have attempted to poke, prod, stick, gouge and direct the consumer in ways that create the perception (remember, perception is everything) that control is at the core of our relationship. We designed and operated our business models with ourselves at the center and the consumer revolving around our local associations.

Consumers were granted access to information because we existed, because we allowed them the privilege to know…but, they always had to come to us, to our agents, to our buildings, to our open houses, indeed to our market…this was our STICK.

This is what REALonomics has referred to as the Broker-Centric ERA or, the First Economic Wave of our industry’s development.

The Broker-Centric Era gave way to the Agent-Centric ERA, the Second Economic Wave of the real estate industry. But this era was nothing more than the transfer of the stick into new hands with a corresponding transfer of economic control via high commissions.

NAR represents the interest of the real estate industry, its broker/owners, agents and advocates. A “No Stick – All Carrot” approach to property information is not only possible, it’s imperative and the logical next step in the fulfillment of the business requirements of a Consumer-Centric ERA, the Third Economic Wave of the real estate industry.

The “Stick” has been rejected by the boomers, by generation “X” and there is no way this side of rational thinking that generation “X” is going to opt-in to a system that controls information. We will not prevail against iPods, iPhones and blackberries. We are witnessing the Democratization of Real Estate. what will happen to us when we suddenly wake up and 2+2 no longer equates to four and instead 2+2=5.439 or some other economic resultant.

Carrots, Carrots and More Carrots

Carrots are good for you…so said my mother…that alone makes “carroting” right! The Democratization of Real Estate demands the “carrotization” (is that a word?) of the models we use in a universal market where the consumer dictates profitability based upon freedom of access.

The real estate industry is being redefined and the profitability equation is being rewritten by the consumer whose hand is on the joystick of profitability. “Do it our way, or die,” is the subtle but real high stakes game we now play.

Stick and carrot examples:

STICK: Property information controlled by local associations.
CARROT: Universal property data accessible by all consumers.

STICK: Direct Seller-Buyer dialogue prohibited by agency advocates.
CARROT: Local blogs delivering local Seller/Buyer conversations.

STICK: Local MLS systems as the sole means of property information.
CARROT: Multiple portals allowing national consumer listing services

STICK: Broker controlled access to real estate transaction forms and technology.
CARROT: Online paperless transaction models with universal data management.

STICK: Inhibiting consumer access by creation of artificial market borders.
CARROT: Implementation of a new set of common rules for market access.

STICK: Broker/Owner territorialism defined by franchisors to owner detriment.
CARROT: Open market models that foster horizontal development.

STICK: Time consuming, awkword and expensive transaction closing models.
CARROT: Fast, 24/7/365, universal access to paperless transaction details.

STICK: Mortgage and title services that require extensive paperwork.
CARROT: Fully transparent lending models that foster ultimate disclosures.

STICK: “Listing services that are property and place specific.”
CARROT: “Universal listing plans that guarantee the sale of all property for life.”

STICK: (go ahead…fill in the blank…what stick do you see in the industry?)
CARROT: (got a carrot…stick it in this slot…go ahead!)

NAR is much like a large governmental body…an entity empowered by the real estate industry to act on its behalf and in its best interest. NAR has the opportunity to help us shift our model from a stick mentality to a carrot technology…can it? Can we? Will we? Will it? They are us, we are them.

Scratch and Sniff: Stacking the Economic Deck in Favor of Us

Gambling can be a vice. Gambling can become an addiction. Gambling can ruin a person, a family, a business and even an industry. Yet, every day, we…all of us…gamble. We pick odds, we grasp a nickel between our thumb and index finger and scratch the thin film from our business ticket, hoping this time the numbers will come up right. Yes, we play the odds, stacked as they are, in a high risk industry where scratching and sniffing is becoming an economic norm, rather than a strange exception found only in back alley crap shoots.

The Dealer and the House

Odds, that’s what it’s all about. Sound economic models refuse to transfer the odds of winning to a dealer sitting on the other side of the table. Good business models don’t have to engage in counting cards, another roll-of-the-dice or a hopeful “hit me” in order to survive.

I’ve been watching the closing of real estate offices, title company offices and who could have missed the now 50,000+ mortgage industry employees let go. Each side of the triangle of brokerage, title and mortgage finding that total reliance on transaction revenue alone is akin to scratching lotto tickets. Eventually, the odds go to the dealer and the house.

Stop the Roulette Wheel, Let Me Off

When is enough of something enough of something? We hear stories of companies “hitting bottom” but is that what has to happen for us to scream, “Enough!”

REALonomics has been calling for a New Model Math that rotates the Rubik’s Cube of profitability more effectively, aligning the colors by means of new formulas whose derivations are technology, the Internet, consumer-centricity and industry transparency.

“Let me off” doesn’t mean, “get me out.” The game continues to be played but with a new set of rules where we, the shareholders, take command of the casino and swap roles with the dealer and the house. We should own the models and command the tables.

Cashing in after a Long Night at the Table

Can this industry break its addiction to luck-based business models, (a.k.a. “independent contractors” and “the next market turn around”)? How does our industry make money apart from its sole reliance upon closings? Can we turn the tide of opinion with the consumer toward a whole new service model that earns their trust and us earnings based upon demonstrated expertise in real estate investments? Is our economic model for brokerage, title and mortgage a model sufficient to create new set of winners, if so, who are they going to be and what constitutes victory?

A broker friend of mine once said to me, “I don’t gamble.” I reminded him, “look, we’re both in the high stakes business of real estate brokerage…that’s a form of gambling because we’re betting on things we can’t control and hoping the odds turn in our favor.” He retorted, “Yes, but the difference between me and others is I’ve stacked the deck…in my favor!” This particular broker is right because his operating survival is not dependent solely on his closing revenue.

Do we know how to stack the economic deck in our favor? Can our industry teach itself how to create profits that are no longer dependent on just closing revenue in a luck-based environment we don’t control or refuse to control?

Gambling can be a vice. Gambling can become an addiction. Gambling can ruin a person, a family, a business and even an industry. We need to scratch and sniff until we find a new economic reality…a deck stacked in favor of us!