Can the 2008 Housing Act Stabilize and Turn the Real Estate Cycle Around?

Who would have only 5 years ago expected that we would be staring down such complex and turbulent times in real estate?

Last week, President George Bush signed The American Housing Rescue and Foreclosure Prevention Act of 2008 (the Housing Act) into law. It is the most sweeping housing legislation since the Great Depression. The new Act authorizes the Department of the Treasury to stem the tide of home foreclosures and provide a lifeline to mortgage lenders. With inventory in many large cities sitting at almost a one year level, and foreclosures expected to surpass 6 million by 2012, they have a huge task ahead.

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When the economy did poorly, real estate introduced wealth.

When 911 all but destroyed our faith, real estate restored the American Dream.

In many occasions, and in many years, real estate has been the rock to depend, or in some cases even the rocket to ride to riches. But times have changed and the bright years of 2000-2005 have become a dull memory.

It’s not really that real estate itself crashed and burned, but that with new construction out of control, speculation spiraling and lending becoming irresponsible, the burden real estate had to carry became to heavy and the first nail in the coffin ground what was a good thing, to a halt.

Collapsing financial institutions led to immense write offs, allegations and actions of improper conduct led to finger pointing and investigations that in turn led to layoffs and disaster.

With unemployment steadily rising and home prices in a constant month by month decline, the real estate market is brittle and cautiously teetering on which way to go.

With the unprecedented rally of crude oil tethering at $150, and now two government-sponsored entities, Fannie Mae and Freddie Mac possibly requiring government bailout. The pair guarantee around $5 trillion worth of mortgages – that’s almost half of the $9.5 trillion debt of the United States. I think we have just witnessed the second nail being hammered into the heart of real estate. Not good at all.

Let’s pray and hope that we don’t have a third nail – a major terrorist attack on local soil in the foreseeable future. Barring the above, the road to real estate recovery is going to be a slow and bumpy one. Most likely it may only pick up momentum during or after 2010 – especially for areas such as Florida, California and Las Vegas.

So for those of us that earn our daily bread from real estate my message is a simple one: Batten down the hatches, expand your horizons, re-engineer your company, automate your business, market more online – yes, maximize every opportunity. Survive the years 2006-2010 and come out the other side with an automated, more efficient, new paradigm, consumer focused real estate model and you may very well find yourself in the front row to become the Amazon, EBay or Google of real estate.

This post is also posted in Inman Community under the title: Three Gold Stars and Two Rusty Nails.

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Throughout our history we have deployed control-based business models. Like the real game of Monopoly® our industry has created its own market game board governed by a set of rules we wrote and occasionally edited to extend our control.

During previous eras an owner’s business model was based largely on mechanisms designed to control information, markets, brands and for a long time we even tried to control the real estate agents who were part of companies.

It is equally important important to note and to admit that the real estate industry has historically attempted to control the consumer with respect to our business models utilizing our clever control over access to property information as the primary mechanism for doing so.

Control and Dominance

Large segments of the real estate industry and its core service providers still engage in Realonopoly, a game about market control and dominance. In the game of Realonopoly we carve out spots within defined markets…we then seek to control our position, until, as we have all experienced in the game of Monopoly®, we can no longer pay the rent; a position in which too many owners find themselves today.

Within real estate, mortgage and title companies, creating one’s board is the first initial step; everything flows from there. Position on the board can mean power and power typically equates to a kind of control measured by muscle flexing. Control has historically been everything in the real estate industry.

The ultimate control was consumer control.

Losing control creates a depression and a void…a crack where others can slip in. Yet, it is the contention of REALonomics that each era in the historical timeline of the real estate industry unravels when control is challenged and the challenge typically stems from a change in informational technology…the means by which people gain access to real property data.

Collaboration and Community Forcing Change

Business models typically change when the old models are confronted by new technologies and people empowered by concepts of innovation. Most of the change in business modeling is induced by innovation driven primarily by advances in technology. These advances in real estate technology create a “democratizing” of information, which then empowers others to innovate and challenge the control status of the prevailing models.

This is precisely what has taken place in the real estate industry. REALonomics has presented this as the Democratization of Real Estate, a time where the industry loses its grip on the game of Realonopoly and finally is forced to abandon its position in favor of a new board game. Think of this concept as three distinct eras as follows and notice how transitions occur when new technology is introduced…then, notice how control is relinquished as information is decentralized and ultimately democratized.

Examine the following illustration, extracted from our archives. It demonstrates the evolution of the real estate industry’s business models.

Control works well in business model climates where informational access and free exchange are blunted, where collaboration is limited to the controllers and where the rules only change when the controllers are finally confronted by free thinking people who are initially labeled as rebellious fringe lunatics.

We have now entered an economic era with a new personality being formed by collaboration and communities, rather than control and corporate bureaucracies. Each consumer who is empowered with Internet access is empowered to shape our business models and help us write the rules that will govern The New Real Estate Economy.

There is a new board game emerging that will redefine how we will play the real estate game tomorrow, next month, next year and for quite some time in the future. It’s now a game without many rules, one of collaboration and community, of open, free-flowing dialogue where one person is just as powerful as a group. How do our current models stack up to his new reality.

The question we ask is “Does anyone still want to play the old game, Realonopoly, a game in which we predict there will be no winners?”

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See our previous posts entitled Ummel’s Talk, You Decide and Ummels VS Re/Max.

Marty Ummel appeared on national television news programs such as the Today show claiming that she and her husband, Vernon, were deceived by Little in the process of making their purchase.

A jury of twelve (10 women, 2 men) were not convinced and delivered a unanimous decision after a quick two hour deliberation declaring that Little did not breach his duties and was not negligent in his actions on behalf of the Ummels.

Wendi Brick, jury forewoman, explained the verdict by saying, “We felt that yes, he had acted on their behalf, and we felt he met his fiduciary duties as defined…In any kind of purchase, especially one that big – and most of us have had our own situations we’d been through – the bottom line really stops with you. Whose final responsibility is it to sign a contract? It’s yours…”

Little described his feelings by saying, “I feel incredibly relieved and vindicated…it has been more than two years of quite problematic times for me, and I’m happy to get it behind me.”

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The stock price rocketed after its initial public offering price of $85 dollars in August of 2004 to over $720 in November 2007. At that time only Exxon Mobil Corp., General Electric Co., Microsoft Corp. and AT&T Inc. had a higher market capitalization among U.S. companies. Today at around $470, nearly 40% from its high, Google still commands a market capitalization of over $110 billion and continues to battle with giants such as News Corp. and Microsoft. 

Google, with its network composed of hundreds of thousands of servers, Google’s system never ages. When its individual pieces die, engineers just pluck them out and replace them with new, faster boxes. This means the “Google cloud” regenerates as it grows, almost like a living organism. 

At the same time Google at some accounts has become the gatekeeper of all information. Google also advises us that “real estate” is the most searched category on the Web – with the 2000-05 housing boom and the subsequent sub-prime and foreclosure catastrophe, this is maybe not that all surprising. But let’s look beyond that for a second.  

With some 141 million individually identified pieces of property in the U.S., real estate is at the very center of the American way of life – whether living, working, sport or entertainment. As Google conducts more real estate searches it aggregates more real estate information. Potentially with each new property search, each new listing added to its “deep search” database, each virtual street tour completed, each foreclosure filed, and so on Google gains more knowledge of the real estate industry. 

It actually is becoming increasingly harder to wrap your mind around just what exactly Google is – and more importantly what it may become.   

Could Google become the best advertising vehicle of all time to find and to market a house for sale?  

And if it does, could that reduce the need for various traditional real estate brokerage services?  

And if yes, to what extent and in what way, could Google influence the fundamental re-engineering of one of the oldest sales professions? 

What are your thoughts?

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We are trailblazers…we want to change the industry. We feel we were misled…we do feel angry…we hired our agent because he was a real estate professional, he was expected to do the due diligence…and they (agents) have a code of ethics where they must put the buyer’s first…I think he just wanted to go ahead with the sale and make his commission…he was not concerned about our best interests. We feel that the appraisal was manipulated…we feel that the agent had something to do with that…

Source: Today on MSNBC.msn.com

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The flattening of the industry’s topographical map is leveling the playing field between consumers in the democratization of real estate.

We have many red flags flapping in the howling, bone chilling economic wind. Our common sense is being numbed as we attempt to hike through the arctic blast, unable to see what is in front of us, unable to return to our point of origin, unable to read a compass long since frosted over and unable to find warmth in the sub-zero atmosphere of rapid economic change.

The Red Flag of Information

There are three great inventions that have changed the world. Guttenberg’s press, television and the personal computer (PC). Each of these accelerated the dissemination of information, contributing to a breakdown in traditional institutional control models.

The general speed and specific quantities of information available to anyone and everyone has finally redefined the real estate industry, its markets and the means by which it delivers its services. Information packaging is our economic challenge and the assemblage, packaging and delivery of collated information will become our “economic widget” in the New Real Estate Economy. It’s no longer just about a real estate, mortgage or title office.

Massive dumping of unassembled information into the consumer causeways necessitates and will provide opportunity for the new models. Unbridled info-dumping creates consumer insecurity and retards the decision-making process, producing lethargic markets. Hesitation redefines the revenue capture rate in an already sick market.

We have no traditional place to hide and the info terabytes being swallowed by the masses like so much candy only cause them to demand more from us, flattening our craggy economic models in favor of a smooth, friction-free relationship with those serve. This is good.

The Red Flag of Brand Mash-Up

The powerful historical brokerage, mortgage and title brands we heretofore have relied upon may not be the new delivery channels in a flattened environment. REALonomics believes we will see what we are now terming “brand mash-up” or, the crushing of the potatoes which will change our brand predispositions and assumptions from baked to mashed.

Still, with few exceptions, the industry brands are of our own making and we have said many times that consumers are fickle about pledging allegiance to brands that lack true measurable economic and service distinctions. The reckless pledge of loyalty to a single inside the box brand is a violation of our “Tenth Commandment of the New Real Estate Economy.”

Since the brands are already mashed in the mind of the consumer (as they see little distinction) we will be led to a new form of economic amalgamation where traditional brand matters less and packaged services matter more.

The Red Flag of Market Supremacy

We are learning the hard way about market madness. The notion that we can indefinitely create, sustain and bend markets to our liking is insane. Markets are living, breathing, five-sensed phenomenon that impacts an industry’s ability to control economic outcomes, try as it may. The market is king…long live the king!

But the market is also Frankenstein, a monster we engineer in a dark, damp laboratory that eventually rises from its table to escape into a world where it wreaks its havoc. Here we are in 2008 wondering how to re-capture and strap our market monster to the surgical table.

What we have previously defined as “market” is the worn and extreme notion of local Territorialism (note the “ism”) as the primary component of an economic model.

The new reality is your market is mine and all markets impact all markets because the economic forces influencing them are becoming more universal. We’ve known this for many decades to a lesser degree. Now, with the information deluge, the distinction between Dallas and Denver, Cleveland and Carlsbad is being blurred.

The market is macro, not micro. Our industry models are finally coming to grips with how small the market really is and the fact that what one niche does can impact others.

Reinvention and the transformation of any industry is a very daunting assignment, even when there us compliance on the part of the transformee. Our industry is still kicking, bucking, lashing out and resisting the inevitable. We are mud wrestling with Grizzly bears, unnecessarily.

Thomas L. Friedman wrote about global flattening in his book The World is Flat. Like the world, the distinctions of its smaller components are being leveled. The real estate, mortgage and title industries are being flattened by the forces of property democratization, Internet technologies and an ever demanding hyper-savvy consumer who just doesn’t care about the same things we care about and who is no longer impressed with the images that continue to impress all of us.

Like all business, the one thing that will finally grab us by the throat and command our attention will be our inability to simply operate with any degree of predictable profit. The red flags signal the final flattening of the terrain, enabling us to implement more effective business models with our new business partner, the consumer.

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Whether you believe the industry is changing very rapidly, or will gradually and incrementally adopt new technologies with brokers having little to worry about, your goal should be to truly understand the wants and needs of your market and how you will meet these needs better than the competition.  So please explore with me now how you do this, and what true marketing is all about.

Understanding the Wants & Needs of the Market

You have two major tasks to complete before your can really understand the wants and needs of your market, and then determine how best to meet them.  First, try to erase all that you know about real estate, the MLS, being a broker, and your concerns of being paid.  In other words, be a typical home seller sitting in their kitchen trying to make sense of real estate and the internet, and weighing their options in light of everything the marketplace now offers.  You’ve got to scrape your brain and think selfishly as a seller would.  This is not a negative comment.  Every one of us thinks “selfishly” and in our own best interest when making purchase decisions.  This is good—it’s how free enterprise operates.  Once you acknowledge this, you are in a better position to understand your market.  Whew, that was the most difficult of the two tasks—done.  Let’s jump to number two.

To understand how best to meet the wants and needs of the market, you have to define what they are.  This is what true marketing is all about.  Marketing is not the ads you see when watching the Super Bowl, junk mail relentlessly blasted at you, or a broker’s post card with their dog all done up for a glamour shot.  Marketing, real marketing, is understanding what a tightly defined market truly wants and needs, figuring out how you will meet those needs better than your competition, and doing it at a profit.

So what does the typical seller really want?  That’s very easy to define.  They want their home sold quickly, for the price they know it’s worth, 24/7 full-service from a broker, no inconvenience of any kind, and to pay a $500 commission.  Am I wrong?  Honestly, I don’t think so.  So that’s the first part of true marketing: understanding what your market wants.  If you meet those needs right this minute, you will be inundated with business.  However, let’s look at the rest of the definition of marketing, “…figuring out how you will meet those needs better than your competition, and do it at a profit”.

Creating a Profitable Market System

Can you create a system to exactly meet the market’s defined needs in enough volume to make a profit?  If so, you are now rock’n.  If not, you will need to adjust your system until an equilibrium is reached between what the market wants, and what you can do while making enough profit to stay in business.  All the while, do not forget about the competition and what they are offering; your sellers certainly are not.

Whether the real estate industry changes in a flash, or incrementally adopts new technologies over time, you must remain focused on your market’s wants and needs, constantly monitor what the competition is offering whether it’s the newest tech option or just your regular brokers offering some new tools and services, and determine how you can meet the market’s need better than your competition.

The Selfish Watching Market

The market will perpetually be watching for the offerings that best meet their needs.  They will selfishly and relentlessly gravitate toward what they perceive to be the best option for them.  You have the choice to help create those options, or hang in there hoping you’ll be able to always make a living doing just what you have done for the last decade.  So how did you buy your last airline ticket or hotel room?

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