Matthew Ferrara, Philosopher
 

Unfamiliar Benchmarks Needed for a Housing Industry Recovery

Which is harder to spot: The Loch Ness Monster or the housing industry recovery? Given the number of false sightings for both, it’s not hard to imagine that we’ll ever see either. It seems that few people can tell if they’re looking at a recovery or not: Even the “Voice of Real Estate” changes its mind every month. Should we call a recovery just because downward trends are slowing, or do we have to wait for them to actually rise? Is a one-month rise sufficient, or should we wait for two quarters positive balance? Can housing recover if continue to spend less for homes (yes, by the way)? And how will and know they are heading into a recovery when the average commission is still going to be falling (with average home prices, for years to come). With all of these questions, is it possible to even define what a recovery would look like if it happened?

Believe it or not: Yes!

As faithful contrians, we at Matthew Ferrara & Company think the housing industry recovery isn’t going to be spotted by the usual stripes. That’s because there’s a big difference between an “industry recovery” and a market recovery. Realistically, there won’t be a market recovery – if it’s defined as a “return to high prices and commissions” – for decades, despite the Fed’s inflationary attempts at raising house prices through monetary policy. Remember that inflation may cause housing costs to go up, but spending power will go down; ¬†higher priced homes won’t yield higher commissions for the real estate industry when consumers don’t have the spending power to purchase them. But we think that’s still looking in the wrong direction for an indusdtry recovery.

The market will be whatever the market wants to be. The housing industry – REALTORS, builders and mortgage brokers – will not really have a say on whither the market. But they will have a say on whether they wither. And that’s the industry recovery we should be focused on.

For the industry to recover it must return to profitability. That means significant portions of the current industry “standards” must be discarded. Clearly, the “ways we’ve always done it” won’t work in an contingency-fee industry whose primary commodity value has already dropped 30% from the time when most of these “ways” were instituted. In other words, we can’t keep practicing like it’s 2003, or even 1993 (and for some, 1973) because the market won’t support such low standards of .

The numbers are well known: Seventy-five percent of REALTORS make less than $45,000 annually, with less benefits than a coffee barrista. Most brands are closing more brokers than adding new ones, and shot-gun weddings are the new M&A in the business. Recent surveys from Harris Interactive ranked real estate agents lower than accountants and stock brokers; A Chinese public survey ranked them even lower. It’s hard to believe that we still think there are ways to be profitable in an industry under such pressures.

Yet profitablity doesn’t necessarily require a growing marketplace; it simply requires a margin-making business plan, and operational practices that support it. That’s why we’re still able to see companies making money – yes, even today – in the real estate market. These companies have already mastered the benchmarks for real estate profitability. And when the rest of the industry does, we’ll be quite on our way to a housing industry recovery.

What are these benchmarks for a real estate revival? They are the performance metrics that we’ve all known all along: Of course, it takes industry gadflies to speak them out loud (so we shall here):

  1. High Per Person Productivity. It is productivity, not cost management, that is going to revive industry profits. Only significant, steady and sustainable can create a turn-around. This requires companies to adopt serious performance goals for their teams, and consistently reach them. From most data, it looks like agents must sustain 25 or more closed deals each annually. Dollar volume can fluctuate with market values, but a per-person productivity in units less than this simply costs too much to support (see #2). This means cutting the under-10-unit performers and consolidating their business into 2/3rds fewer performers in each office. Body count cannot compensate like it did in the old days.
  2. Lower Per Person Operational Costs. In the old days, we could “just add bodies” because per-person costs were low. Training was minimal, and per-person technology and management costs barely existed. Today, the basic entry costs per agent are reaching tens of thousands of dollars. Even “virtual” companies don’t save as much as they hoped, since space-off-setting technologies aren’t necessarily less expensive. Add in the cost for higher training, quality control and performance management (ie., a manager who manages) and companies will need to drive down per-person costs to be profitable. This means – to its horror – less per-agent advertising and more company-consolidated . Redundant costs – like “per-agent” activities – make little sense when most customers stick to whomever responds to them first, not necessarily whomever was best.
  3. Less inventory per day. This doesn’t mean less inventory as an industry or even less inventory per company. But it means that the average carrying-days per listing must be significantly reduced – perhaps by as much as fifty-percent. Better pricing, shorter listing contracts (ie., marketing cost obligations) and faster turn-around will not only produce more serious sellers, smarter pricing and faster cash flow, but it will be necessary to achieve #1 and #2 above.
  4. Taylorism. Or at the very least, some form of waste-management optimization for time. Most failing real estate agents spend too little time doing the right things; too much time doing nothing. Most productive agents still work far more hours per capita to comparable salary earners. Time – the scarcest of resources – is poorly managed in this business. The average time spent selling each unit of housing is far too long. Until the industry focuses on streamlining processes and applying comparative talent advantages on a company basis (not per agent basis) sales margins will remain too low to sustain any recovery.
  5. Decentralization. For nearly two decades, the industry has been consolidating. Even “independent” brokers are innovation-hampered by centralized decision making at local, state and national levels. Local MLS committees, statewide regulatory agencies and national brand systems have frequently imposed processes and requirements that merely pile on costs and constraints. Where most other industries have scaped off layers of bureaucracy, the real estate industry has spent twenty years substituting procedures for progress. Until companies understand that there are more ways to “get things done” than their REALTOR or company headquarters suggests, costs will rise (a la healthcare) while commodity costs fall.

Of course, what’s more interesting – to my mind – isn’t what’s in this list of housing industry recovery benchmarks, but what has been left out. Notice that recruiting isn’t mentioned – because adding more untrained, unsupervised, unproductive bodies isn’t a viable solution. Notice that more technology panaceas aren’t listed, because the technology tools most companies have today are so poorly administered and used by agents, managers and staff that adding more simply increases costs. And notice, too, that the usual does of “it’s the consumer’s fault!” does not appear, because the real estate industry isn’t suffering from too few opportunities; it’s suffering from too little productivity. Only one of these is really within its ability to control.

A housing industry recovery can occur, even during a sharp recession. Many top-quality, highly-profitable companies were started during economic declines within their industries. The benchmarks for performance won’t be what we’ve always done; but thankfully, they won’t give us what we’re currently getting, either.