A mere six days ago, NAR’s Chief Economist (and my doppelganger) Lawrence Yun released this cheery video forecast on housing for the remainder of the year:
Lawrence is predicting a slight pickup for 2011 over 2010; he thinks the second half of this year will be better than the second half of last year. New home sales will still be hurting, he thinks, but existing home sales should improve.
He based this forecast on the idea that the employment picture was slowly improving, as seen in this video:
Lawrence says he thinks we’ll see 1.5 million new jobs in 2011, maybe a little less. But “at least we’re not losing jobs, and losing potential for housing demand”. He thinks we’re on the right track, albeit slowly.
So he’s thinking 1.5M new jobs this year, 2M next year.
Well, the latest job report is dismal, even grim. The official government report was that only 18,000 jobs were created in June, way, way below the expectations of economists of around 150,000. Furthermore, the news is even worse than it seems.
Ah, but there is a glimmer of hope, it seems… read on for more.
Recovery? What Recovery?
First, however, we must take a cold, steely look at the reality of the situation. The July jobs report is nothing short of catastrophic. But as noted above, it’s even worse than the topline numbers:
Now for the really bad news: that 18,000 gain announced by the government yesterday isn’t real.
For one thing, the number of jobs increased in June only because the Labor Department simultaneously revised downward the number of jobs that existed in this country during May. It’s like moving the fences at Citi Field so the Mets players can hit more home runs. It might make Jose Reyes feel better, but it doesn’t actually make him more powerful.
Without the fence-moving operation in the May employment report, the June number — yesterday’s number — would have shown a decline of 26,000 jobs.
Then there’s another problem with June’s employment report. Included in the 18,000 headline number is a guesstimate that 131,000 jobs were created by newly formed — and, therefore, invisible — companies.
If you want to send your resume to one of these companies, don’t bother. They probably don’t exist, and neither do the jobs the government thinks they are creating. These figments of the imagination of the Labor Department’s computers will probably disappear when the numbers are checked early next year.
Look even deeper in the June report and you’ll see something else you really don’t want to know. The more broadly defined U-6 unemployment rate, which includes people who are underemployed, went from 15.8 percent in May to 16.2 percent in June.
These are workers who want full-time jobs but can’t find them. And the U-6 figure doesn’t even include people who’ve given up looking for work because they believe it’s hopeless.
Read the whole thing. Yes, it’ll depress you, but you probably ought to know what you’re facing.
What is particularly odd is that real estate brokers and agents — and NAR itself — would not have guessed that the government job numbers are likely inflated. Why?
Because every single REALTOR is a small business owner; even if you “work” for a brokerage, you don’t get paid a salary. You’re responsible for most of your own expenses, and even if not, your split with the brokerage pays for those expenses. How many real estate agents are hiring these days?
As a matter of fact, Lawrence Yun said in the first video that because of “shrinkage” in the number of REALTOR members, most real estate agents should see greater income in 2011 over 2010. We’ll get to that more in a minute, but… shouldn’t someone be asking, “Hey, so… uh… shrinkage eh? If the market is recovering, albeit slowly, why are the numbers shrinking?”
Truth is, the economy sucks, the housing market sucks (and yes, yes, every market is local, and your market happens to be booming — congratulations), and it sure looks to me like we’re into the New Normal already.
Dr. Yun, please call your office. Revisions to the forecasts need to be made, pronto.
The glimmer of hope, it seems to me, is in shrinkage. This is the inevitable consequence of the Age of Less. As Lawrence suggested, those who stay in business throughout this shrinkage will likely improve their income, simply through shrinkage: other agents just leaving the business.
Foremost among them has to be NAR itself. Recall that the big push in 2011 so far was the REALTOR Party Political Survival Initiative (RPPSI). Remember all the sturm und drang surrounding that? It goes without saying that the extra $40 per member is not going to raise the expected amount if you have fewer members. But even more dangerous for NAR, its political power was always premised upon having a huge number of members throughout the United States to put grassroots pressure on the critters in Congress from their districts. It was never about outspending the banks and the unions; it was always about the number at the local level.
Shrinkage directly imperils that base of political power. And without sufficient political power, NAR can hardly hope to influence things like QRM, MID, and other goodies that our Lords and Ladies in Washington DC have in store for us.
Hey, suddenly, we have a feedback loop forming: shrinkage leads to loss of political power, which leads to rules and regulations that make housing even less attainable, which leads to loss of buyer demands, which leads to… more shrinkage!
The Centre Cannot Hold
This is not to say that people will simply stop buying and selling houses. Of course they will. But it does mean that the real estate industry will look very different from today within a fairly short period of time: I’d say three to five years at the maximum.
For one thing, the New Normal will feature the economic law of “He that hath, gets”. The top producers, those already in the top 5% or so, will see their businesses improve steadily. As the economy and the markets get worse, consumers will start to look for “The Best” more and more. Look, when the market was hotter than a Houston summer, most consumers figure that just about any old realtor can get the job done; after all, they don’t really think it takes that much to sell a house. As the market gets worse, those consumers will be disabused of such notions, and realize that if they want to have a chance at selling their house, they’d better find whoever it is in their market who is The Best.
Given the difficulty in finding out who The Best is for consumers, they’ll substitute things like production, volume, years in business, and of course, word of mouth reputation, to find people they think can get the job done.
This mechanism benefits the top producers. If you’re already number one in your market, expect to get a lot more phone calls. If you’re just starting out in the business… well, good luck to you.
At the other end of the spectrum, the bottom tier will feel little impact. They’re already not doing much business — perhaps one or two transactions a year. But they’re part-timers anyhow, doing real estate for a little extra spending money, while their spouses support the family with their fulltime jobs. Why would those people leave? If nothing else, they can refer some friend to a Top Producer and get a referral fee, for basically no work.
Those agents in the middle of the pack? The “average” REALTOR who does 7 transactions a year, thinks of herself as a professional, who goes to conferences, takes training courses, invests in websites, mobile apps, and such? They’re screwed. For them, it’s either Up or Out. Either join the ranks of the Elite somehow, or get your lunch eaten by them in the New Normal. You’ve got a $19.99/month website, and a Facebook page; the Elite have a $15,000 state-of-the-art website, a Marketing Coordinator, SEO consultants on speed-dial, and a team of buyer agents. How you gonna compete?
Say hello to shrinkage, ladies and gentlemen.
There are far, far more consequences to the industry as a result of this shrinkage, particularly in the vast middle of the pack. A real estate industry comprised of 5% Elites who do 95% of the deals looks very different from one where 20% do 80% of the deals. I’ll have some future thoughts on what that looks like, because The Age of Less is here to stay.
But what say you? Think I’m overreacting? What consequences do you see for your business, should the New Normal look like the national economy that eviscerates the middle?
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?