In 2006, a Harsher Reality for Realty

Posted by: Peter Coy on December 27, 2005

One of the smartest and best-read publications on residential real estate is the monthly REAL Trends, edited by an industry veteran named Steve Murray out of Littleton, Colo. (Click here for more info.)

The December issue has a bit of a gloomy feel, touching on the themes I wrote about just before Christmas. An essay by Steve Murray traces the enormous boom in home sales and then speculates on the impact of a cooling-off. Here are some tidbits:

—Home sales volumes exploded from $695 billion in 1995 to over $2.1 trillion in 2005.
—Residential real estate commissions grew from less than $25 billion in 1995 to over $63 billion in 2005.
—Membership in the National Association of Realtors grew from about 720,000 in 1995 to nearly 1,200,000 in 2005.

Now, says Murray, it looks like there will be a shakeout. But who will get shaken out? Traditional full-service, full-commission brokerages argue that the discount brokerages, flat-fee firms, and do-it-yourself operations will be the first to bite the dust because sellers will be willing to pay well for the services of trusted guides in a more treacherous environment.

But Murray isn’t so sure. Markets that cooled first like Denver and Atlanta haven’t seen any rebound in commissions. And some homeowners who need to sell will have so little equity in their homes that they won’t be able to afford full-service commissions. So, he says, the discounters are here to stay.

How can full-commission brokerages survive? Murray says leading firms have added mortgage, title, and other settlement services; established Internet marketing and service to communicate better with customers; and invested more in recruiting and training.

That’s expensive, yes. But as Murray says, quoting an unnamed “wise man” (Melchior, maybe?), brokers who hope to make a buck from real estate without investing in the business are like “people who show up at a covered-dish picnic bringing only a fork.” That ain’t gonna work anymore.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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