Matthew Ferrara, Philosopher
 

Real Estate, The Day After, Part 2

In Part 1, we started the countdown towards May 1: The Day After tax credit subsidies expire for housing purchases. Leading up to that date will be a frenzy of purchases and that will make it “look like” the market is bouncing back. But are we kidding ourselves? When the clock strikes twelve, the housing market will fall again – just like it did in December 2009, the month after the tax credits “almost” expired last time. Only this time, it’s going to happen for real – and it will make the 17% December decline look like a blip on the chart of decline. In Part 2, we offer a few suggestions as to how REALTORS can stay in business when the dust settles.

In the few days since we started the clock, the housing market hasn’t exactly shown signs of improvement. On January 27th, the Federal Reserve reconfirmed its intention to discontinue buying distressed mortgage-backed securities at the end of the first quarter. It had been buying about $21 billion worth weekly, and has already cut back to purchasing half that amount now. What interest rates will do once they stop completely isn’t hard to guess – history tells us to expect rates to rise fast and far. Consider what a single point increase to 30 year mortgages would to to a market that – at the same time – no longer has $8,000 worth of free money to make down payments.

But wait. There’s more.

Leading research and indicators tell us there’s a perfect storm brewing:

  • John K. McIlwain, senior resident fellow at the Urban Land Institute, expects home prices to fall another additional 10% this year. That could push foreclosures and underwater mortgages over 21 million by December 2010.
  • Home sales inventories are falling. Contrary to popular belief, this isn’t good news for sellers, because higher prices (and even bidding wars) increase costs for buyers, who are too smart (and too worried about unemployment) to be burned by bidding wars again this time. Sales will fall as they return to the sidelines.
  • Of course any sales depend upon employment, which stands at 10% nationally, and is higher in 16 states, including disastrous markets (DC, FL, CA) and states where the market was considered “balanced.” Job losses mean more foreclosures and less purchases.

Suffice it to say, on the Day After, it won’t just be bad because the free money will expire, or FHA standards will rise or the Fed won’t be able to hold down interest rates. It will be bad because we’ll finally be feeling the real sting of a recession. So it’s simply going to be bad.

But not impossible.

That’s what real estate professionals have to decide for themselves, however. Even after moving up one (maybe two) quarters of sales into the first quarter of the year, it’s possible to have a very successful spring and summer. It won’t be easy because many of the mid-year sales will already have been consumed. Yet recessions are still opportunities if managed properly. Most of all, however, creating success will depend upon taking some very uncomfortable actions today, if REALTORS want to stay in business for the rest of the year. And the most uncomfortable of things that REALTORS must do are things they don’t want to do:

Exactly the opposite of everything they are doing now.

Since there isn’t any time left to waste, let’s list those opposite things now. Remember, they won’t be pretty. But neither is the prospect of meltdown on the Day After.

  1. Stop recruiting. Every additional agent in the office dilutes the sustaining income of the current sales force. Traditional thinking says more bodies equals more sales. Nothing is further from the truth. More bodies only guarantee more expenses in technology, association fees, marketing, training and management effort. But more sales? In a downturn? Ridiculous. At best, “lucky” new agents who have never sold a thing in their lives will bring in a distressed listing and be stuck with it for months – consuming marketing dollars. At worst, a new agent will pick up the potential deal that would have gone to an existing agent who is struggling to keep their career going in the downturn. The commission will be misdirected and wasted. The new agent is 65% likely not to last their first year anyway. By mis-allocating the sale away from the experienced agent, you’ve increased the chance of losing both.
  2. Stop over-listing. The average brokerage has too many listings of the same shape, size, features and price. They are working against themselves trying to sell similar commodities, which drives up expenses and down prices. Companies are competing against themselves. Conventional wisdom says that another listing brokerage would simply pick up the listing anyway, so why not control it in-house? Contrarian logic remembers things like expenses, marketing advantages and even fiduciary responsibility to existing sellers not to dilute their potential sales price – at least not in-house. You can’t control what the rest of the market does, but you can at least do the right thing for your current clients.
  3. Stop over-listing (2): On the same issue of managing inventory, housing experts could help their local marketplace by properly advising potential sellers to simply keep their property off a saturated market. Companies could create better returns for current and future sellers by advising unnecessary sellers to keep off the market for a few months or years. Imagine how non-listing as a strategy could rescue the market! Stabilizing inventory will not only stabilize prices but revenues in the commission-based business. Likewise, stable inventory – not gluts and shortages – creates buyer activity. Gluts cause buyers to wait on the sidelines for bottoms; Shortages drive them away with bidding wars. Only sensible control over inventory flow will create market stability and consumer confidence. And confidence is vital when other economic indicators are wildly fluctuating.
  4. Find better sellers. Three strikes and sellers are out of this market. That should be the listing attitude of smart this year. If you didn’t put any money down last time, if you haven’t paid anything but interest since then, then strike three is trying to over-price it in the recession. need to start targeting owners with equity. Look at property sales records for pre-2005 purchases to target sellers with equity and real-scale appreciation. Remember that 50% of all home owners in America have no mortgage. Many of them are potential up-sizers looking for a bargain in the recession, or down-sizers who planned to move anyway and can get a great deal by pulling out their equity.
  5. Make up with lenders. After a decade bad-mouthing and politically hampering banks from actively playing in the business, real estate professionals find themselves in desperate need of banking friends. Some companies smartly created their own lending sources, but most real estate agents don’t have that luxury. But they cannot leave the buyer on their own to navigate the process of more complex and demanding lending process. REALTORS will need strong relationships with bankers big and small. And that’s going to take a big “mea culpa” from agents and their Associations to rebuild bridges they spent a decade burning.
  6. Find buyers with cash. When rates soar and lending tightens, cash will be king. After spending a year putting ten-times as many people in homes with only 3% down than normal, real estate agents have only laid a new foundation for Q2 foreclosures. FHA numbers prove it, with 15% of all FHA backed loans delinquent after only 1 payment. This has to stop, if the real estate industry wants to plant the seeds of long-term growth. Better buyer qualification will help, but improved marketing practices must find and target the “smart money” hiding out there. Generating new business has to shift from “anybody who can qualify” to “those who can create equity” and form the foundation of a long-term viable marketplace.
  7. Stop throwing away business. Last year, studies continued to show that 9 out of 10 leads generated by brokers and handed to agents were thrown away in less than a week. More than 77% of those were abandoned without the agent actually having a conversation with the potential customer: Voice mail and emailed responses aren’t sales activities. There is simply too much business being flushed down the drain of neglect. Why bother marketing – there’s another expense to cut this year – if that’s how your company is going to treat new business opportunities?
  8. Stop thinking locally. Many markets – especially distressed ones like California, Nevada and Florida – are attracting foreign dollars. It’s a global market, and even in a recession, America’s private property laws are the best in the world. With prices on clearance, it’s a prime opportunity to find out-of-town buyers half-a-world away. Even for small towns.
  9. Stop wasting money. If the recession hasn’t caused agents and brokers to stop their insane wasting of money by now, then the Day After will. This means finally being done with postcards, newspaper ads, newsletter mailings and refrigerator magnets. And while we’re at it, agent websites. With the exception of agents in the 100% clubs, and the absolute top 5% of the business, every other agent in the business is never going to be found in a search engine. Save the money and work the leads generated by the major listing portals, your company and (where applicable) your national brand. Even the top agents need to wise up: Nobody is building shrines to you with magnets and postcards featuring your face. Get a Facebook page instead (65% of REALTORS still don’t have a social networking presence). It will save costs and generate referrals and repeat business –  the two largest sources of new business today.
  10. Show up and do the work. There’s a huge difference between going to the office and going to work. Did you make 25 prospecting attempts today? Did you catch up with five people in your sphere of influence? Did you ask for three referrals from your family and friends? Then just what are you doing in the office? When asked what activities they are doing every day that are not generating business, too many agents name them and blame them: floor duty (where they wait to receive calls); open houses (where they get upset that the nosy neighbor shows up); door knocking (as if they are really doing it). But they’ll sit in class after class on short sales or Feng Shui. Come on – do the work! That goes for managers, too. Make meetings count: Teach something helpful and useful. Don’t waste the time announcing new listings that could be done in a memo. Sit down with every agent and make them write two clear goals and the names of 100 prospects. Go with them to listings and showings and then coach them on ways to improve.

Most of these ideas will probably make REALTORS uncomfortable. Many of them will be counter-intuitive and contrary to the traditional wisdom. Yet it’s fairly clear that such wisdom isn’t turning around the market either. It’s time for REALTORS to think smarter, work smarter, and try doing something other than what they have always done.

Because on the Day After, Uncle Sam is going to stop doing it for you.

  • Matthew, you hit it directly on the head. “Show up and do the work” Does that ever hit home. And your comment under stop wasting money. Another bullseye!

  • Matthew, you hit it directly on the head. “Show up and do the work” Does that ever hit home. And your comment under stop wasting money. Another bullseye!

  • Matthew Ferrara

    Thanks, Bob! Sometimes, you just have to SAY these things to create some momentum on them… Brought to you by your resident GadFly, Ferrara! :>

  • Matthew Ferrara

    Thanks, Bob! Sometimes, you just have to SAY these things to create some momentum on them… Brought to you by your resident GadFly, Ferrara! :>

  • You forgot one – Stop Wasting Time!! – Focus more of the actions that lead to sales, on income generating activities and delegate the rest.

  • You forgot one – Stop Wasting Time!! – Focus more of the actions that lead to sales, on income generating activities and delegate the rest.

  • This is absolutely the best article you have written (and I have read nearly everything you have written). At our company we are starting to work on some of activities you have listed. A hard job just got harder, it is back to work and we will see in the next few months who is willing to do just that.

  • This is absolutely the best article you have written (and I have read nearly everything you have written). At our company we are starting to work on some of activities you have listed. A hard job just got harder, it is back to work and we will see in the next few months who is willing to do just that.

  • Matthew Ferrara

    Sharon: Thank you very, very much! Your comment made my day!

  • Matthew Ferrara

    Michelle: Right on! But if you do #10, you’ll stop wasting time, right! Let’s hope!

  • Matthew Ferrara

    Sharon: Thank you very, very much! Your comment made my day!

  • Matthew Ferrara

    Michelle: Right on! But if you do #10, you’ll stop wasting time, right! Let’s hope!

  • Matthew, I had to summons up the nerve to read Day 2. After reading Day 1 I found myself slipping into a funk and it took two days to shake it off….It did cause me to re-evaluate a couple of things I have been doing and make some adjustments…Day 2 gives a great blueprint for survival…Thanks for your Kafakesque view….it might just be the direction we take.

  • Matthew, I had to summons up the nerve to read Day 2. After reading Day 1 I found myself slipping into a funk and it took two days to shake it off….It did cause me to re-evaluate a couple of things I have been doing and make some adjustments…Day 2 gives a great blueprint for survival…Thanks for your Kafakesque view….it might just be the direction we take.

  • Matthew Ferrara

    Paul: I must be honest; It was hard to write these two articles because the conclusions DO seem scary. I actually considered using a picture of “The Scream” by Munch for the images on the first one. Alas, I felt the best thing I could do for my clients, however, was to write them – AND write part 2 which hopefully you felt had some solutions for survival. I wish it were not the case that the market is likely to fall again, but as I wrote the articles this week and the stock market kept falling, I felt I was a tiny bit justified in pointing out that “reality takes no day off.” The best thing we can do is look it squarely in the eye and work through it. Too bad we didn’t do this three years ago, instead; we could have been so much further along clearing out the foreclosures and working with a more sound financial basis for real estate’s future. Wishing you all the best, Paul (and all readers) and hoping I have helped you on that path, too :>

  • Matthew Ferrara

    Paul: I must be honest; It was hard to write these two articles because the conclusions DO seem scary. I actually considered using a picture of “The Scream” by Munch for the images on the first one. Alas, I felt the best thing I could do for my clients, however, was to write them – AND write part 2 which hopefully you felt had some solutions for survival. I wish it were not the case that the market is likely to fall again, but as I wrote the articles this week and the stock market kept falling, I felt I was a tiny bit justified in pointing out that “reality takes no day off.” The best thing we can do is look it squarely in the eye and work through it. Too bad we didn’t do this three years ago, instead; we could have been so much further along clearing out the foreclosures and working with a more sound financial basis for real estate’s future. Wishing you all the best, Paul (and all readers) and hoping I have helped you on that path, too :>

  • Matt – I always get a chill on my spine when I hear people say “it’s time to get back to the basics.” I just want to shake them and scream “If the basics work so well, why do we ever have to get back to them? We never should have stopped doing them in the first place.”

    Like Ron Willingham said in the Integrity Selling curriculum, “it worked so well we quit doing it.”

    I have always been a huge proponent of agents focusing on setting appointments – aiming for one per day but settling for a minimum of three per week. Hard to believe that if you got three appointments per week and were able to convert those 12 per month into 2 new clients (buyer or seller) and get just 60% of those (14) to the closing table each year that you would be doubling the production of the average agent (7 transactions per agent according to the 2009 NAR Member Profile). That seems almost too easy, huh?

  • Matt – I always get a chill on my spine when I hear people say “it’s time to get back to the basics.” I just want to shake them and scream “If the basics work so well, why do we ever have to get back to them? We never should have stopped doing them in the first place.”

    Like Ron Willingham said in the Integrity Selling curriculum, “it worked so well we quit doing it.”

    I have always been a huge proponent of agents focusing on setting appointments – aiming for one per day but settling for a minimum of three per week. Hard to believe that if you got three appointments per week and were able to convert those 12 per month into 2 new clients (buyer or seller) and get just 60% of those (14) to the closing table each year that you would be doubling the production of the average agent (7 transactions per agent according to the 2009 NAR Member Profile). That seems almost too easy, huh?

  • Matthew Ferrara

    Sean:
    I completely agree! In fact, I’d go so far as to say “going BACK” to the basics is a misnomer because most agents never DID the basics in the first place! But then again, I’m a pest… :>

  • Matthew Ferrara

    Sean:
    I completely agree! In fact, I’d go so far as to say “going BACK” to the basics is a misnomer because most agents never DID the basics in the first place! But then again, I’m a pest… :>

  • So where are we now on the “W”, and where will we be at summer’s end?

  • So where are we now on the “W”, and where will we be at summer’s end?

  • Matthew Ferrara

    I think we’re on the second down-stroke of the W, and we’ll be on that down-stroke through summer and fall for a number of reasons:
    – Unemployment will continue at 10% or higher through 2010.
    – Tax credits for housing will expire in May; Tax cuts for income are on track to expire for 2011. Both will stall big ticket purchases by consumers.
    – The Fed will stop purchasing failed mortgages. FHA is already at 9% defaults. Fannie and Freddie will need a couple-dozen billion more in rescue money. This will all spook the markets.
    – A housing bubble in Canada and Great Britain will keep buyers on the “unaffordable” sidelines without “free” mortgage money this time.

    There will continue to be pockets of housing sanity in America, but it will likely be in the sub $200k markets who neither floated big bubbles nor suffered big collapses. But the 25 largest cities in America, which likewise contain the largest REALTOR populations, are in for another big slide. I’d say at least 15% across the boards (units and values).

    The good news is that there is plenty of smart money out there: Homes with equity and no mortgages to sell, with sellers looking to take advantage of the low prices to move up. Lots of cash sitting around, getting hammered in the stock market, and certainly no returns on Treasury bills, so real estate as a long term investment will look good. And investors, landlords and property developers should start buying foreclosures in batches – good news for mopping up excess reserve, but usually they don’t need a REALTOR to do so, which isn’t great news for the brokerage industry.

    My suggestions: Clean up your inventory, your agent population and your expenses today. Doing it on May 1 after things start expiring will be too late. :>

  • Matthew Ferrara

    I think we’re on the second down-stroke of the W, and we’ll be on that down-stroke through summer and fall for a number of reasons:
    – Unemployment will continue at 10% or higher through 2010.
    – Tax credits for housing will expire in May; Tax cuts for income are on track to expire for 2011. Both will stall big ticket purchases by consumers.
    – The Fed will stop purchasing failed mortgages. FHA is already at 9% defaults. Fannie and Freddie will need a couple-dozen billion more in rescue money. This will all spook the markets.
    – A housing bubble in Canada and Great Britain will keep buyers on the “unaffordable” sidelines without “free” mortgage money this time.

    There will continue to be pockets of housing sanity in America, but it will likely be in the sub $200k markets who neither floated big bubbles nor suffered big collapses. But the 25 largest cities in America, which likewise contain the largest REALTOR populations, are in for another big slide. I’d say at least 15% across the boards (units and values).

    The good news is that there is plenty of smart money out there: Homes with equity and no mortgages to sell, with sellers looking to take advantage of the low prices to move up. Lots of cash sitting around, getting hammered in the stock market, and certainly no returns on Treasury bills, so real estate as a long term investment will look good. And investors, landlords and property developers should start buying foreclosures in batches – good news for mopping up excess reserve, but usually they don’t need a REALTOR to do so, which isn’t great news for the brokerage industry.

    My suggestions: Clean up your inventory, your agent population and your expenses today. Doing it on May 1 after things start expiring will be too late. :>