Management consultant Rob Hahn goes by the street name of Notorious ROB, and for good reason. He’s notorious for not sugar-coating his views on the current state of the real-estate industry. If you want hand-holding or a shoulder to cry on, go Google someone else. But if you need some tough love, and a clear-eyed and rational view of real estate’s troubled future, read on.
In this candid and not-exactly-rosy interview, Hahn voices his concern over the shortage of answers and solutions being sought by the real-estate industry, and how Foreclosuregate and lack of vision is James Deaning us all down a slippery slope.
So what is your take on the current state of the real estate industry?
The industry is so focused on the top of the funnel that they almost never do enough thinking about actual profitability or operations. All they think about is how to get more leads in the door.
There is really very little focus on profit, which is just amazing. I heard something about four years ago, and now it is probably worse: that in the average real estate brokerage, the profit margin is less than three per cent. With the downturn, owners are just losing money every day for their business. The biggest reason for it is that they are giving so much of it away, on commissions, or they take on overhead. It’s almost as if when they made those decisions, they never thought about them. It’s actually kind of amazing.
Hey, getting leads in the door is one thing, but what are you doing for conversion? What are you doing for long-term marketing? What are you doing for maximizing your profit? At the end of the day, if you don’t have that, you have nothing to reinvest and you are not taking any money home. Then why are you in business? You may as well just take all that money and put it into treasury bonds. I mean, you’ll get better than three per cent from those.
I’ve had a lot of these conversations, and many brokers don’t want to talk about it, because they’re not that proud of their financial performance. So much of it has been placed on ego and appearances as opposed to actually making money. It’s actually amazing.
What other trouble spots are you seeing?
The focus on the industry now is all on lead-generation on line, but this is an industry that is in crisis, and it’s going under really major transformation.
There are two [components at]the base of the real estate industry: the Multiple Listing Service [MLS] and finance. Without Fanny, Freddie and the modern mortgage system, the real estate of America does not exist as it is today. It simply can’t. The flip side of it is, without the Multiple Listings System, without their data, real estate just doesn’t exist as it is.
But both of those things are really in trouble right now. I don’t know that the industry really knows what to do about them. So instead, we spend a lot of our time talking about things like social media, which is wonderful, but it doesn’t address either of the transformations that are happening underneath.
In the next two or three years, we’re really going to see what’s going to happen in the residential real estate industry. I’m hopeful in part, but on the other hand, I’m not necessarily hopeful. We’ll see what happens. [We need] some strong leadership from people who really know, who have a vision for things. We’ll see if the industry adapts. If not, I think things are going to really be pretty ugly, in two or three years.
What is the crisis on the MLS side?
The industry has spent all of its time making the data not worthless but worth less than it was before. It’s done in the name of being consumer friendly or benefiting the consumer, and they’re all very good things and very well intentioned, but the trouble is, I don’t think anybody thought through the question of ‘once we do this, what exactly is the role of the professional?’
All of this data comes off the Multiple Listing Service. The nature of the MLS right now is that they are kind of an adjunct of the Realtor Association. And I don’t know if the industry has really grappled with some of the issues that are going to happen when this data goes from a ‘professionals only’ to something that is really going to be used to market and promote properties to consumer marketing. I don’t know if they really grappled with some of those implications.
At the same time, because they are adjuncts or sort of add-on’s to the Realtor Association, the downturn, quite frankly, is going to put a huge strain on the MLS’s, their ability to serve its customers.
What is the crisis on the finance side?
At the same time, on the finance side, with the bubble bursting, private finance has basically disappeared. The US Treasury is essentially sustaining the real estate market right now. That’s probably not going to last. We have a Republican Congress, and not just that, but a tea party Congress. They are not going to continue to prop up the housing market using the Treasury.
At the same time, Foreclosuregate happened. So I feel like this is sort of the mother-of-all-bad things coming together at the same time.
If you think about it, for the last two or three years, the residential real estate market, which is essentially without FHA, without government money, does not exist. There are no mortgages. That’s probably going to come to an end in a relatively short period of time, because of the elections.
At the same time, I think what everybody was hoping was, once we get past this hump, private money will start to flow back in. The notion is that we just have to get over this crisis, and then mortgages will become more available again and things will get better.
As we’re facing the prospect of public money essentially being cut off, Foreclosuregate happens. I don’t see how the private mortgage market develops or comes back or functions until that stuff gets cleared up. As of yet, I don’t know if there is anyone who is thinking, ‘what do we do if this goes on?’ Except me.
You’re predicting the end of the American homeownership society?
If you look at what the Obama administration has been doing, if you look at what a lot of the intellectuals, think tanks, academics and people who have a lot of influence over Federal policy are thinking, the American housing system is fundamentally flawed and we need to get away from this taxpayer subsidy and support of housing.
The Obama administration talks about things like sustainable housing. So I think this is the beginning of the end of this notion that America is a homeownership society and that it’s the Federal government’s interest to encourage home ownership. I think we are moving more toward a Canadian type model. So that will have consequences.
Describe your theory of The Age of Less
We have less money available for buyers, and that means less demand. We’re going to have a double-dip in housing, so prices and transactions will both drop. So there simply is going to be no need for a million Realtors.
If you look at the long-term average membership of The National Association of Realtors [NAR], it’s about seven or eight-hundred thousand. The peak was 2 million, but now we’re sitting at 1.2. The way I look at it is, if housing prices are going to drop another 20 or 30 per cent, a lot of these real estate agents are simply not going to be able to make a living, and they’ll leave. So the actual number of people selling real estate is going to decrease significantly. And I’m saying this as a rule of thumb, call it 30%, which puts us at about that 800,000 mark.
The interesting thing about The Age of Less is, if you look at the business models in the industry, whether it is the association, the MLS, Zillow, even brokerages, it’s all about a large number of real estate agents; subscription models or what have you. So when you have to deal with a real estate agent, you are just going to make less money. Those companies simply can’t sustain the type of revenues that they have right now, because the model that they have depends on a large number of real estate agents. And the one thing that none of these guys can do is create real estate agents. An individual says, ‘hey I think I’m going to pursue a career in real estate, or I’m not.’ So I think there is going to be a lot of stress and pressure on [real estate companies], and it will be interesting to see what these companies do to deal with this Age of Less.
I think 2011 is when the industry will wake up to some of these big, fundamental issues, but I don’t know if they will actually be able to react and solve it in 2011.
You also predict the return of the broker. How exactly do you mean?
Brokerage models are simply broken and not functioning or generating any profit. One of the big problems in the industry is that after ReMax, the broker essentially stepped back and became a recruiting-and-retention agent. In other words, these are business-to-business companies now. They are not business-to-consumer.
Within the industry, I think there are a few small companies that have started to come around and say, ‘this doesn’t work.’ Some brokers and agents now really want to change how they go about serving their customers. We’ll see if that’s successful, but I think that this is what will be happening starting in 2011. Because of The Age of Less, because of some of these pressures, and with a broker’s model that is recruiting two to three-hundred agents a year, I don’t see how they survive. Nobody’s joining the industry. How do they survive? I don’t know how their financial models work.
The ones who can survive, I think, are some of these smaller shops and even larger shops where they are able to charge a lot more for the agent: fifty-fifty splits and things of that nature. This is in exchange for a lot more service and a lot more control. This allows them to establish a brand and some sort of operational excellence which is extended to the consumers. That’s the way I think the broker and the brokerage business model will return, starting in 2011.
How can technology play a role in solutions to the industry’s woes?
I really don’t see what’s out there that is really going to make a difference to any of us. A lot of folks are talking about things like location-based services and how perfect it is for real estate. I don’t know. I just don’t buy it.
Social media is really played out at this point. There is nothing new, if you will, to discover there.
Mobile, I guess. But it’s already ‘been there, done that.’ I don’t think it changed or transformed the industry in any significant way.
So I really don’t see what’s going to happen that’s going to really change the industry the way that putting listings on line really changed the industry.
How do you see the current commercial real estate market?
From the perspective of what a real estate broker could do, if you’re not investigating and investing in renters, I don’t know what your business is going to look like in a couple of years.
I have a feeling that Foreclosuregate is not going to be as big a problem on the commercial side. Just based on people I have spoken to in finance, they think that these problems happen on the residential side more simply because of volume. The commercial side has been pretty moribund. There has not been a lot of action. But what action that there is, it’s a lot cleaner.
Commercial real estate, as far as I’m concerned, is all about the economy. As long as employment continues to be this weak, I just don’t know what’s really going to happen to commercial. I suspect it’s going to remain weak for quite some time, except for the multi-family housing sector. I think that’s really the real growth sector for commercial.
The bottom line is that people are not going to get mortgages. We’re already seeing signs that multi-family REITs are really hot. I think the Federal government will do something to really encourage multi-family development. So if you are in commercial real estate, get out of office, get out of industrial, and go into multi-family.
Can you throw us any optimistic news at all?
I suppose there are a number of things, if they came about the right way. It looks like the economy might be finally turning the corner. Unemployment numbers are down. Maybe companies are getting back into investing. Maybe.
Yet having said that, I think that so many things have to first come through. For example, Foreclosuregate can’t have systemic risks. It has to be something relatively minor, and by minor I mean, for example, title insurance companies will go out of business. That to me is minor.
I have to hope that whether it’s Congress or the Supreme Court or somebody else, somebody is going to step in and ensure that there is no major systemic risk problem. If that happens and in conjunction with it, our policy makers don’t do anything stupid to destroy the very, very small recovery, and homeowners get realistic about pricing, and brokers step up their game and start servicing their clients, I guess I can see some kind of reason for hope.
But not really.
To follow Hahn’s blog, go to http://www.notorious-rob.com.
Photo: Dale Chumbley