Realty Wars

Implications: The subject article is written to convey an implicated and narrow point of view that the State of Arizona is once again rising to protect Mom & Pop as they meet their need for roof and shelter for the stressed family.In fact, the source material is the now visible pebble which tops one of the biggest economic boulders in the country.New technology is causing disruptive change to one of the biggest businesses in the country – residential real estate.In particular here, free data assembled from public records perfects the market.A perfected market is difficult to extract profit from as professional services are not valuable when the point of the professional service is to charge for assembling information difficult to obtain free.Previously expensive services now have no economic value as the result is free online.To say that paint colors and barking dogs require an expensive professional to compile an opinion for consumers to make sense of it all doesn’t make sense.



Analysis:

There are now about 1.3 million real estate agents in the country according to the National Association of Realtors.Let’s say there is one additional service provider for every agent in the country seeking to participate in resale transactions.Multiply the expanded effect of these jobs by say a factor of 4 and a number of over 10 million jobs pops up.This seems to be light to me in that many real estate practitioners are not active in residential real estate re-sales.We can build a case for 20 million jobs in a nano.All this in a country of 300 million young and old.That’s some possible boulder.

Digging further as my mind races and rambles on about conspiracy theories and the dark side, I see some vested interests who are going to have a difficult and declining economic future.These vestees include not only real estate appraisers and agents, but legal professionals, accountants on and on. The real profiteers from providing real estate transaction services are the top 5% of the industry.Take Arizona, for example.Of the 1.3 million agents nationally, 95, 000 are in Arizona.That’s say 12.5 % of the total national agents in a State where the 5.5 million population is say 1.5% of the nation’s inhabitants.There are about 50,000 homes listed now – a 6 month supply at recent sales rates.That math leads us to a market which totals on the average about 1 listing annually for every agent to sell. The average sale is now about $ 250,000 at generously a 5 % commission.That’s $ 12,500 to split between broker, agent and interlopers for every agent in the state.This is big aggregate market but slim pickings for the average and majority.So what happens is that about 10 % of the agents compete successfully in the market to make an upper middle class living with a few achieving wealth.

The 10 % tend to be hyper alert folks conscious that a misstep may lead to the poorhouse.They see Zillow as the visible pebble which will obviate their business model.Zillow’s data is good enough at this early stage to indicate that tweaking may make the data base statistical model very good.Zillow is still in Beta and its income model is not yet completely rolled out to the public eye.But the sponsors did it to the travel industry with Expedia and they are competitive, capable folks with a big dollar investment in place here.Not only that, but Zillow has taken the time to obtain a real estate license in Arizona and, I believe, most other states in the country.They’re up to no good when it comes to leaving the status quo in place.

My darkest soul then sees the wolf in the hen house here.I think what will happen is that the realty business will reduce drastically to relatively fewer brokers/agents with administrative transaction teams whose primary job is to process sales competently, advise as to pitfalls and show homes to buyers pre-qualified to borrow and signed on to tighter buyer/broker agreements than is presently the case.The wary consumer will do well to scope one of these teams out to ensure the services received are state of the art.

Remember we said that there are 95,000 agents in Arizona.The number of brokers with ten or more agents in the whole state is about 700.Of those, maybe 20 % are really in business on a going operation daily business model capable of being sustained in the future market.That’s 140 ownership and broker/team leader interests at the heart of the interest in keeping the status quo plus their supporting professionals and services.

What do the other brokers do to sustain their interest in continuing the enterprise?Here’s how a large percentage of their income is generated by these firms.The 95,000 agents are not a static population.Rather the number fluctuates daily as some enter and some leave the industry.As we might imagine, the majority of entrants are not successful enough to sustain their economic interest and leave.At the same time, the 140 are actively recruiting continuously as one of the primary legs of their business model, always looking for the 10%.This is illustrated by the fact that the real estate schools are running full tilt even now training new agents seeking licensure.For the majority of new agents, sometime during the first six months of their employment, the 140 broker will explain that it cannot justify holding a seat for the new licensee.The displaced now not so new licensee will now seek a new real estate home.They will find it at the remaining 560 brokers who will employ them on a 100% of income model and provide broker services for their mostly non-existent transactions for a monthly fee.This cycle goes on endlessly as the old are succeeded by the new.For low overhead brokerages, this can be lucrative even if not productive of real estate transactions.The loser is the non-productive agent who is left out in the cold without economic value for his/her time and money investment.

So let’s suppose now that the number of agent transactions remains constant but that Zillow and other interlopers reduce the total compensation to brokers/agents.Sooner or later, you would think, the to-be-agents pool would be alert to the economic risks and the number of applicants as well as the income of the brokers would drop.That is the underlying fear of the vested interests across the competitive table from Zillow.But they are not going to announce their concerns since they are an unpopular breed like many consumer service providers and muddy water is a better condition.Hence the article, I believe.