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The real estate pendulum swings again

By Rick Ellis | August 8, 2022
  • Galileo was inside the Pisa cathedral in Tuscany, Italy in the early 17th century when he observed the regular back and forth movement of a lamp hanging from the ceiling. Watching the swinging, he noticed the movement was constant and predictable, ultimately leading to his law of the pendulum. That constant swinging back and forth between opposite extremes describes today’s real estate market.

    After a historic two-year seller’s market run, the housing market is in a pendulum moment — swinging into a slowdown which in theory should be more favorable to buyers. However, that’s not necessarily the case. 

    With factors such as inflation at a 40-year high, economic and recession fears, spiking interest rates, housing affordability at a 32-year low, and continued inventory shortages, buyers are not exactly celebrating. Neither are many brokers and agents. 

    This spring typically would have been a very busy season for home sellers, but not this year with interest rates almost doubling and inventory hard to come by. According to NAR, pending home sales were down nearly 20% in June compared to a year earlier. Existing home sales are trending below 2019 levels, price growth has slowed, and mortgage applications have fallen to a 22-year low.

    The biggest enemy of the housing market typically is uncertainty and these days there’s plenty to go around. There is fear and uncertainty in the market with real estate-related layoffs, cutbacks, economic woes, political turmoil, and many with a “wait and see“ attitude.

    Most brokers have been through this many times and are not particularly surprised. Since second quarter of 2020, the median price of U.S. homes climbed nearly 40% and most knew that wasn’t sustainable. In addition, the number of REALTORS® has ballooned with more licensed agents in America than ever -1.57 million- which is 13% more than in 2006 when the housing bubble was at its peak. There are more agents today than listings which means somebody is missing out - a lot of somebodies are missing out. Interestingly, the vast majority of agents are newer with more than 80% have never seen sustained interest rates above 5%. 

    Don’t be surprised to see many agents and companies exiting. There have been a lot of recent entrants into the market with agents and new brokerages who got in with the idea of quickly getting rich. Most have only known a seller’s market, and their world is changing. 

    I’ve talked to hundreds of brokers this year and many assume they’ll sell their companies for millions of dollars and be set for life. Yes - M&A is hot and companies are paying premiums, but not for companies with short track records and profits based on the two best years in the industry’s history.

    The reality is the market is in a hiccup and is now establishing a new normal.

    The reality is the market is in a hiccup and is now establishing a new normal. 

    We will undoubtedly see it drop back to 2017 and 2018 levels and that’s okay. 

    Currently, some sectors, particularly in the luxury market, are seeing an uptick. This is partially driven by well-heeled buyers moving money from the stock market and looking at real estate opportunities now that the market is slowing. The higher-end of the market is typically not impacted by rising interest rates. However, for most brokers and agents, breaking into the luxury segment is not going to be easy.

    There is tremendous opportunity right now for brokers who become aggressive in grabbing market share, recruiting top agents and teams, and especially in growing by acquiring companies. I have had more conversations over the past 90-days than in the previous five years with brokers who have done well, and banked big money but are now thinking that perhaps it’s time to hand the operational reigns over to someone else. For many growth-focused brokers, it’s time to double down to pursue potential opportunities.

    As the pendulum continues to swing, one thing I’m personally looking forward to is watching a lot fewer agents posting brag videos of themselves all over social media doing the “happy dance” because their listing sold in twenty minutes at 100% above the asking price with twenty-seven offers. They’ll find their world is becoming a very different place.

    Rick Ellis is a 30+ year veteran of real estate brokerage ownership, mergers & acquisitions, and franchising, As VP with The Corcoran Group, he directs real estate firms with their growth strategies and increasing their market share, profits, business value and exit strategies.
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