First off, let’s be clear about this so called recovery every talking head in the media keeps talking about – it’s not your parents or grandparents recovery. It might be your great-grandparents recovery though! No economic downturn has had such a damaging effect on American Home ownership since the 1930’s and that effect is not going to go away anytime soon. This has been different from the 1930’s in that in the 1930’s destruction of housing values was pretty much across the board from Rich to Poor; in the current event the damage was primarily at the bottom and middle with homes over $750,000 – $1,000,000 range actually increasing in price during the period of this downturn. Since the end of World War II housing downturns have been generally short lived, in the eighteen to twenty four month range, and primarily inventory adjustment events in this case which began in the third quarter of 2005, the downturn has been primarily a loss of confidence – a much harder basis to recover from in all cases.
Technology is likely to have a significant impact on the structure of the real estate industry in the coming recovery for a number of reasons. Real estate transactions have basically two related and separate parts: the seller side and the buyer side.
The Buyer Side will not be as greatly impacted by change as the seller side due to some factors which are basic to the process. The impact of technology on the buyer’s side will primarily be on the media not on agents and buyers. Most people who have been involved with the real estate industry over the last ten or fifteen years have known that print advertising has declined in efficacy dramatically. Virtually all buyers begin and continue their home searches on line. Brokers and real estate franchises that have been tracking the source of their business for many years have seen that buyer leads that came primarily from print advertising before the internet have seen the number of viable leads from print advertising drop to a very small number of viable buyer leads. The last and most effective use of print advertising has become open house events or very short term immediate demand sort of inventory like rentals. Buyers still however require the assistance of a licensed real estate agent to help them work their way through a real estate transaction and access and view properties as well as negotiate and consummate a real estate transaction. Fees for trained and competent Buyers Agents are likely to remain in the 2.5% to 3.5% of the transaction price that they have been in for many years due to the high time consumption and relatively high failure rate that Buyer Sides of transactions experience.
The Seller’s Side of real estate is likely to see the greatest changes. For a decade or more before the Great Recession large banks had been trying to repeal laws that barred them from providing real estate services such as listing and selling homes for their customers. Now as a result of the unprecedented number of foreclosures in the hands of banks they have become The Dominant Sellers of real estate in the United States. Fannie Mae and Freddie Mac established 6% as the official normal commission that they would accept on both short sales and foreclosures and required that commissions be spit equally between buyer’s side and seller’s side in a real estate transaction. Every real estate agent in the United States has been trained that establishment of “Normal” or “Set Fees” has an anti Trust violation since the late 1970’s, however the big banks and Fannie Mae and Freddie Mac have been seen as exempt from these laws. This has resulted in a situation where the majority of listings that sell are listed by Bank/Lenders that own them at a nominal rate of 6% with local real estate agents and agencies but using a conduit of third party companies, that collect hefty referral fees on their listings, leave the selling agencies to work with 1.5% to 2% of the actual sales price rather than the 3% to 4% that they have historically have had to work with since the end of World War II. These agents and agencies have been able to do this because of the downward changes in their cost structure do to the changes in technology.
It is unlikely that as non-institutional home sellers are able to re-enter the home selling market as prices stabilize, and even rise in the foreseeable future, that the advantage to both consumers and Realtors of lower fees on the listings side of real estate transactions will be lost, which have been made possible by the reduced operating costs possible for Realtors due to the changes in technology.
By Dick Thackston CRB, ABR, ABRM, Broker NH, MA & VT