A more immediate cause for concern is the current precipitous decline of approximately 1500 active real estate agents per month (a rate which forebodes a great total loss of agents yet to come). This decline coincides with the decline in real estate sales following the 2007 collapse of the real estate bubble.In early 2008, 7% (1 in 14) of all single family residences (SFRs) in California stood vacant, owned by speculators, buyers of second homes (which were acquired in large part due to speculative fervor), or as the REO property of lenders. Although the drop in home sales numbers has bottomed, and is now trending along a volatile trough which will remain generally stagnant to weak throughout 2011. Sales volume is forecast to rise measurably only after 2013. [For more on sales numbers statewide, see the first tuesday Chart, Home Sales Volume and Price Peaks.]

With the current batch of licensee entrants (2008-2011) embracing more sustainable, long-term real estate strategies, the “quick-buck” real estate agents are continuing to exit the stage swiftly and in large numbers. With them goes the artificial support they gave to sales numbers.There will no longer be the sort of high competition between agents that helped push up prices between 2003 and 2006. The return of fundamentals to lending and open market bond rates will set a slower pace in the real estate market than at any time during the last decade, except for 2008, and is predicted to keep prices of property in California at their 2011 levels well into 2014.Furthermore, agents accustomed to working with flippers (and earning two sets of brokerage fees in the process) are no longer around to load their friends, relatives, and social contacts with properties. All of these agent interactions contributed to the price “bubble.” The corresponding influx of excited purchasers who were neither experienced investors nor buyers prepared to own their principal residence was the result. Such purchasers, all too frequently, were nothing more than gamblers or long-term tenants at heart, not fit to be property owners.

Large SFR brokerage operations with branch offices have always depended upon a constant flood of newly-licensed agents to fill their cubbies. This practice was enabled in the past by a high agent turnover rate, as these freshly-minted agents burned through their family members and social contacts without working to develop a viable client base. Brokers and office managers were able to mitigate the eventual loss of sales production by aggressively soliciting new licensees to quickly bring in as replacements.

Real estate educators also got into this loop by placing new licensees with brokers. These list-and-run agents have nearly disappeared from the ranks of new agents, as the total number of new agents has dropped dramatically—from 5,000 monthly during the peak years of 2004–2007 to a nearly constant rate of 1,100 monthly since 2007. [For the annual number of newly licensed agents and brokers, see the first tuesday chart, Newly Licensed Sales and Broker Population.]

When viewed in the context of disappearing short-term agents, rather than vanishing home buyers (homebuyers have not disappeared, in spite of appearances, but have instead been edged aside by short-term speculators), it appears that economic reality is forcing brokers to:

• shutter their least productive branch offices;
• release the weakest office managers and under-performing agents; and
• attempt to relocate agents who generate business.

However, as in the wake of any crisis, many optimistic and innovative faces in brokerage have begun to figure out how a real estate brokerage business can be run to prosper during the recovery. [For more information on which major CA brokers have succeeded in the recession, and which have not, see first tuesday’s Market Chart, The Top 39 Brokers in CA by Number Employed.]

Even more troubling for large brokerage operations is the bickering arising over brokers’ fee-splitting arrangements with their agents. Agents are now making roughly half as many sales, at prices one-half of 2005 levels (or less). Earnings per active agent have more than halved since 2005.

In the meantime, employing brokers take in fewer dollars and shoulder the costs of overhead, promotion, and servicing excessive and unmarketable listings. Gradually, the younger and more aggressive agents employed by large brokerage offices will look to become brokers or team up with brokers and other agents relocating into smaller operations. Others will join “rent-a-desk” operations in order to reduce the fee percentage due the broker.

Agents jumping out on their own too often do not have the business acumen to set up and operate a broker office, even if it is their own one-man operation. They attempt to do so under the belief, right or wrong, that their current broker is getting too large a share of the fees.

The remaining agents must be trained to ‘fire’ those sellers who have listed with the broker but will not pay for reports needed by the agent and the broker to build a marketing package proper for the demanding inquiries of reluctant buyers. Also, sellers who continue to demand unreasonable prices (the sticky price phenomenon), or who involve themselves in other conduct which keeps the property from selling within a 30- to 60-day marketing period, need to have their listings cancelled and returned. All this conduct suggests that fewer agents are needed by brokerage offices to service the needs of the public. [For more on increasing efficiency in the new real estate paradigm, see the May 2010 article, Looking through the window toward recovery.]

Blasphemous talk? Not at all if an efficient brokerage operation is what it takes to get into the fully recovery stage without going broke. Brokers who advertise property that looks good from the curb, and set listing prices appropriate to the property (prices which are likely to generate a sale within a 30-day period) will get an offer within 30 days. Such conduct will provide for the survival and success of the rational seller, the broker and his agents.

In a recessionary market and during the early stages of recovery, time lost hurts everyone, a lesson the intermeddling lawmakers – both state and federal – are beginning to learn from the totally ineffective “extend and pretend” loan modification fiasco and lenders’ cannibalism of federal homebuyer subsidies. [For a snapshot of the continuing failure of loan modification efforts, see the April 2011 article, Government mortgage modifications provide no remedy.]

Brokers who learn to cut overhead and eliminate operating inefficiencies while beefing up their staff of licensees during the next few years will be in the best position for the up-tick in the annual sales volume likely to begin by 2014. Employing brokers still operating in 2014 will be defined by their ability to plan ahead. They will have to be well prepared if they are to get in on the action when the federal government and Wall Street return to easy lending standards in a time of newly lucrative home sales.

Looking ahead for smaller brokerages

In the near future, small brokerage offices with fewer than 16 agents will probably continue to recruit agents as they always have. Large brokerages typically use mail-blitzing campaigns and seminars to entice newly licensed agents into their offices.

Conversely, smaller offices traditionally recruit from local word-of-mouth contacts. Brokers maintaining a single office with a staff of agents tend to have several different types of business clientele and are not focused on just the listing and marketing of SFR properties. These brokerage offices may well attract the more thoughtful entrants into real estate looking for the long-term advantages of being around others who work income property, land, and property management.

Others affected

The boom during the mid-2000s saw five times as many individuals enrolled with real estate schools in licensing courses as compared to the late 90s. That licensing revenue is all but gone, and has been reduced to 15-20% of its peak four-year run.

If that is not bad enough for real estate educators, the license renewal rates among brokers and sales agents (especially those hit-and-run agents who arrived during the past six years) dropped to unprecedented percentage levels by 2011, and are not yet beginning to rise. Renewal rates in January 2011 remained at 59% for sales agents, and 68% for brokers: a human resources tragedy.

Little change in the rate of renewal for those agents will be seen until 2014 when the balance of the excess boom time licenses will have expired, unrenewed for lack of sufficient reason to keep it after a couple of renewals. Many are letting their licenses expire, then waiting to see if the real estate market picks up during their two-year grace period for late renewal. Most will be disappointed, since some time still remains before the next boom arrives around 2017.