Mortgage

Does a Bear Sit in the Woods?

There’s a bear in the woods of the economy and in the real estate sector in particular…he’s tired, angry, confused and very hungry. His insatiable appetite can no longer be assuaged by an industry lacking the fortitude to initiate collective, pragmatic and meaningful change to its business model and its relationship with the consumer.

Who is the bear?

As REALonomics forges this post, we estimate that nearly 40% of all real estate brokerage firm owners are the edge of financial collapse. Agents are leaving the industry for jobs at the malls. One said to me, “hey, I gotta eat.” The bear grunts its disapproval and hot steam shoots from its nostrils.

Who is the bear?

While the mortgage industry scrambles around attempting to locate financial relief, 1.8-2 million homeowners will experience up-ticks in their adjustable rate loans in 2008. The money changers are reaching out to foreign investors for capital due to a weakening dollar, indications of recession, bailouts of some of our most cherished lending institutions. Countrywide was just absorbed by Bank of America in what has to be one of the sweetest deals in decades. The bear rumbles through the woods, pacing and snorting.

Who is the bear?

Title and escrow companies have already started trimming, not the Yule tide tree but rather, their staffs…more layoffs are just around the corner…office consolidations are underway…middle managers are updating their resumes…sub-leases opportunities are growing. The ability to sustain the overhead and retain experienced personnel is waning. The roar of the bear is deafening and its hunger is obvious.

Who is the bear?

The landscape of contemporary and financial relevance is starting to shift under the feet of real estate franchisors whose transaction revenue streams have plummeted to amazingly low levels. It’s likely that franchising may become a negative growth industry in 2008…this will be a first since 1976. Wanna buy a real estate company? Eight of ten may be on the market by mid 2008. Market value, zero. The bear stalks the woods, its movements tracked by the sound of snapping branches.

Who is the bear?

The National Association of Home Builders (NAHB) reports are full of sub-prime finger-pointing and predictions that new home recovery will rebound in 2009. Some Midwest markets report that contractors are simply shutting down, packing up and walking away from unfinished projects and unfinished home construction jobs, leaving owners in a lurch with no trades available to complete their project. The forest belongs to the bear and no segment of the terrain is beyond its reach.

Who is the bear?

Finally, the National Association of Realtors (NAR), with declining membership and revenue, while locked in an ongoing and costly herky-jerky legal dance with the Department of Justice (DOJ), recently announced its plans for change, relevance and transparency as only it can define it…drill-down pseudo Web 2.0 mapping for major markets via www.Realtor.com coupled at the neighborhood level with FSBO MLS listing opportunities through www.HousePad.com. Indeed, strange bedfellows. The bear’s ears are penned to its head, flattened in an instinctive response to a threat…he rises on his hind legs, assuming a posture of potentially fatal engagement.

Does a bear sit in the woods? If so, who is the bear?

New Improved Real Estate Model Math

REALonomics coined the phrase “new real estate model math” to convey the long overdue and much needed critical economic analysis of how our real estate brokerage business models work and how they produce revenue.

REALonomics is expanding the scope of its analysis in 2008, applying the idea of “new real estate model math” to brokerage, agents, mortgage and title services. The tip of our pencil will need to be sharper and the use of the eraser more vigorous. The fact is, each participating entity related to the real estate industry is going to do a lot of writing and a lot of erasing throughout 2008.

New economic principles are coming into play that redefines the model math equations for profitability. There are less predictable variants in the market place that we have never fully recognized as part of the new model math for profitability.

CAUTION: Don’t use ink! If you do, you will need a 50-gallon drum of white-out.

ERASE THIS: A market is clearly defined. It’s a city, zip code or delineated geographic area defined by brokerage firms, mortgage providers, title companies and franchisors as “effective market area,” “effective service area” or “market service area.”

WRITE THIS: Markets are macro, cyber and fluid environments where consumers seek information, conversations and property information about multiple locales. Markets are needs not lines. They function by personality not by perimeters. Lines are largely irrelevant.

ERASE THIS: Technology and the Internet provide real estate industry service and product providers with websites where static information about offerings is posted and where consumers are asked to provide personal information in order to proceed to the status of “lead” and become valuable as a potential customer.

WRITE THIS: Technology and the Internet create business environments for information exchange services relevant to the consumer’s core set of needs. From these environments relationships are developed by allowing interaction, posting, questioning, suggesting and empowering individuals with information they can use in their quest for solutions to real estate dilemmas.

ERASE THIS: Operating models are in-house labor pools maintained by real estate service providers in order to create a closing apparatus, execute adequate paper trails and meet legal and regulatory requirements associated with unit transactions.

WRITE THIS: Operating models are service enhanced value propositions, driven by high speed Internet technology tools, accessible by all parties (principal and beneficiary) that create constant interaction between principals and chosen service providers before, during and after the real estate investment decision has been made. The relationship transaction data is forever accessible by the consumer from any Internet access point with all property related value assessments available to everyone.

ERASE THIS: Execution is defined by “closed” loops where finishing is a line designating transaction consummation.

WRITE THIS: Execution is the ability to protract the line that defines the relationship between provider and consumer as a fluid forward moving economic flow, where the consumer may select multiple services for the duration of the relationship and thus create protracted ROI for the provider.

ERASE THIS: Profit is based upon the industrial transaction model known as the “closing” or “recordation” of a particular single real estate service component such as real property, mortgage lending or title services. The end is the justification of the means.

WRITE THIS: Profit is illusory and ever evolving, being created from multiple and truly valuable service and product models beneficial to the consumer. Changing the profit model is never shaded but fully transparent to the consumer. Information is always extended with precise accuracy and without perceived or actual duplicity. The profit model is protracted and filled with constant change, flux and adaptation. The provider is the servant of the consumer, bringing expansive propositions to the table which meet immediate, intermediate and long terms needs.

ERASE THIS: Leadership sets standards internally and business components execute the performance standards measured by factors related to financial objectives (the traditional CEO model). Leadership operates an organization that moves in lock-step to the flow charted demands of accounting and dividend reports.

WRITE THIS: Leadership is primarily the art and science of understanding consumer needs in a rapidly evolving information-based models and leading transparent environments in the production of packaged services and products in these environments. Performance is measured largely by ideas that create and sustain relationships and therefore produce profit opportunities and actual revenue while retaining and extending the consumer conversations to the next profit cycle. Accounting is empirical, as it should be, but CEO leadership is measured by the true value of extending consumer loyalty, therefore, redefining the role.

Can the real estate industry thrive in a business climate where the name of the game is sustained transparency in an open market model with the consumer front-and-center?

This will be the New Real Estate Model Math for 2008 and beyond.

Bail Out or No Bail Out

Should the Federal Government intervene in the sub-prime mortgage crisis? That’s the new REALonomics poll.

If so, what form should the bail out take? Is there any connection between election year politics and the proposals being set forth by politicians about how to deal with the impending results of adjustable rate loan interest rates that are scheduled to increase throughout 2008?

More importantly, what is the position of the real estate industry? Should we allow the capital markets to run their course with respect to the current mortgage and foreclosure crisis? What responsibility, if any, does the mortgage industry itself have with respect to what has been created as a result of its policies and practices?

Vote now in the REALonomics poll on this page!

Post your comments about the government’s roll in this crisis.

Make suggestions for the next REALonomics Poll.

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!

Foreclosures: The New Normal

RealtyTrac just released the foreclosure numbers for the first half of 2007, compared with both the previous six month period and the prior year six-month time frame. Most markets in the report are showing increases, with metro service areas showing the highest growth in foreclosures.

Foreclosures are the new normal for the real estate industry. Barring some economic surprises or federal intervention on the part of the Bush administration, it’s going to be a slippery, winding and dangerous road ahead for the next 18 months or so. But all is not doom and gloom as the report shows some declines in foreclosures in some markets.

Marketing Opportunity

During this time period brokerage firms can begin to penetrate the foreclosure markets by offering specialty services to Banks and mortgage companies who would, in some cases prefer short sales to actual foreclosure.

Refinancing is not altogether dead or even dying. Past clients may provide real estate agents and brokers with new opportunity for realistic pricing on the part of owners facing the foreclosure dilemma.

We expect a new round of foreclosure investors to emerge who will creatively take-out or partner with existing owners who are facing the foreclosure process.

Get the Foreclosure Report

The RealtyTrac report ranks foreclosures by the top 100 cities with the highest per household foreclosure rate. Of the top ten, Stockton, CA is number one with 1 of every 27 households in foreclosure, followed by greater Detroit, Las Vegas, Riverside, Sacramento, Denver, Miami, Bakersfield, Memphis and metro Cleveland.

Get the PDF foreclosure report here or online, courtesy of and copyright by RealtyTrac.

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