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Phillip C. Querin, Partner
Partner - Portland, Oregon Office

philquerin@dwt.com
(503) 241-2300

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The State of the Realtor® Industry - 2006
[February 2006]

2005 was a watershed year. The business of real estate brokerage has been evolving from a traditional, homogenous, and relatively slow moving industry, to a fast-paced, cutting edge, and exciting profession. The operative word is “change,” which, for some, is viewed as good, and others as bad. But regardless of your opinion, it is indisputable that the landscape is changing and survival requires a full understanding of what these changes mean. There is both opportunity and danger. We are poised in 2006 for a year of transition – from old to new, from traditional to progressive.¹

The DOJ Lawsuit Against NAR. On September 8, 2005 the National Association of Realtors® was sued by the United States Department of Justice for alleged violations of the Sherman Antitrust Act. The lawsuit seeks to enjoin NAR from maintaining or enforcing policies that, according to the Amended Complaint filed on October 8, 2005, “…restrain competition from brokers who use the Internet to more efficiently and cost effectively serve home sellers and buyers...” The DOJ believes that the brokers targeted by NAR’s policies are primarily those who operate websites that enable their customers to search for and obtain listings over the Internet. It is these alternative web-savvy business models that the DOJ believes provide “…an important competitive alternative to traditional ‘brick-and-mortar’ business models.”

But is the Realtor® industry really “anti-competitive”? With all of the new business models, Internet companies, FSBO websites, lead generation companies, discounters, and affinity programs that have entered the national, regional and local scene in the last couple of years, it seems difficult to argue that competitors are being stifled from pursuing whatever business model they want. In fact, some might say that the biggest threat to the new business models may be from newer business models.

In 2006 we will see a certain amount of posturing by both sides of the DOJ vs. NAR litigation. But hopefully, it will end up in settlement – sooner rather than later. Each side will give up a little to get a little. The result will probably be some form of accommodation that will permit NAR to retain a certain amount of control over access to Internet listing data, though less than it has now. The alternative – grinding and costly litigation – is an unsatisfactory result for both sides. Settlement is not a sign of weakness, and done properly, will allow Realtors® to focus on the business of success. Until the case is resolved, the industry will continue to be on center stage, with the klieg lights on and the curtains up. In other words, everyone’s watching.

Banks and Real Estate. For the last several years, banks have lusted after the real estate brokerage business. Getting into the industry would allow them to be the first point of contact in the home-buying process, ahead of Realtors®. For several years, NAR has lobbied aggressively for legislation to permanently keep banks out of real estate. Each year, the legislation gets pared down to a one-year moratorium. On November 30, 2005 President Bush signed the Transportation, Treasury and HUD spending bill, which contains another one-year prohibition against the Federal Reserve Board/Treasury proposal that would have allowed banks to operate real estate brokerage, leasing and property management businesses. With the DOJ lawsuit winding its way through the courts, the banking industry is now arguing that it is precisely because of these alleged anti-competitive practices that they should be permitted entry, so the consumer will have more options. Until the DOJ lawsuit is resolved, it is unlikely in 2006 that even NAR, with its powerful lobby, will be able to convince Congress that banks should be permanently barred from the brokerage business.

The Marketplace. 2005 was a banner year for the Portland metropolitan area real estate market, as well as many other regions throughout the country. According to the RMLS™ Market Action Report, 2005 saw an increase of 13.1% in closed sales over 2004, with record volume of $10.6 billion, compared to 2004’s $8.1 billion – a 30.9% increase. The average and median sale price of homes increased 15% over the prior year: $282,900 (2005 average) compared to $246,000 (2004 average) and $237,500 (2005 median) compared to $204,500 (2004 median). The average price of condominiums in 2005 ($233,800) increased 27.2% over the prior year - and 2004 had already increased by 16% over 2003.

Like Mark Twain’s death, reports of the bursting real estate bubble have been greatly exaggerated. Although there are certain areas of the country, especially California, where some of the appreciation may have been artificial, that is not the case in the Portland metropolitan area. Prices are still appreciating, and inventory is still low (2.1 months for December 2005). With inventory low and prices stabilizing, the worst that can be said is that the marketplace is regaining some sanity – which is not all bad. With the frenzy of last year, sellers were changing their minds, buyers were suing sellers, and Realtors® were trying to learn how juggle multiple offers.

As long as interest rates remain relatively stable – and they are – real estate will remain attractive in 2006 for homeowners and investors. Although the stock market has improved somewhat, real estate is still an attractive form of investment diversification. To Californians, many looking to place 1031 money in other real estate, the Portland metropolitan area will continue to be an extremely attractive place to invest. With low interest rates permitting more first time buyers to purchase homes, more out-of-state investors looking for deals, and more boomers buying second or retirement homes, there is every reason to believe that 2006 will be another very good year.

The Disappearance of Traditional Business Models. Whether we know it or not, there will soon be no such thing as a “traditional” real estate brokerage company. The term “bricks and mortar” is passé. Over the past few years, the Internet has introduced a variety of new ways for entrepreneurs to do business. The result has been new ideas, new models, and new challenges. For those Realtors® interested in long-term survival, adaptation is essential. Adaptation in today’s marketplace means keeping an open mind about what works, experimenting, and discarding old methods that are no longer effective. As a result, we are seeing a blending of old and new. Some companies formerly regarded as “traditional” models now prefer the term “progressive.” And the companies that once were exclusively “bricks and mortar” are developing a major Internet presence.

Disintermediation. In the early days of the Internet, the buzz word was “disintermediation,” which meant the process of doing away with the middle-man. A classic example of disintermediation was what the Internet did to the travel industry. When was the last time you used a travel agent? Orbitz, Travelocity and Expedia have largely replaced them.

For several years, companies experimented with using the Internet to do away with the middle-man in a variety of industries. Some models worked, such as insurance and mortgage loans, and some didn’t, such as groceries. People predicted the disintermediation of the real estate agent. However, those who believe that one can sell and buy homes with nothing more than a good search engine and satellite technology are deceiving themselves. With the increasing complexity of real estate laws and the ubiquitous litigation that follows, there will always be a need for a safe harbor -where there is reliable information, personal help, and professional guidance. This is the value a good Realtor® brings to any transaction.

Real estate companies, large and small, are seeing and feeling the impact of the new innovators, who are younger, hungrier, more tech savvy, and less risk-averse. The larger companies have seen this first, since their success depends upon their brand, size and market share. They are being challenged to adapt and change. In most cases this means using the Internet in new and innovative ways. This is why the dominant players are now developing in-house lead generation programs, experimenting with a la carte services, and entering into cooperative advertising arrangements with large information portals such as Yahoo! If necessity is the mother of invention, what is happening in the real estate industry to the traditional brokerage model will be a sea change for 2006 and beyond.

The Internet – Online Advertising and Search Engines. The Internet is at the center of everything. It is where most consumers go as their primary source of information and it is where the ad dollars are going as well. Online advertising is taking market share from the traditional sources, i.e. newspapers, home magazines, and direct mail. Search engines such as Yahoo! and Google are now partnering with brokerage companies and lead generators to drive traffic to their sites on a pay-per-click basis. Borrell Associates Inc. estimates that online advertising will grow 55 percent in 2006 and will account for a 15.7 percent share of the $11.4 billion real estate advertising market.² These numbers were unheard of a few years ago.

In 2006, the successful real estate companies will be those that recognize and exploit the value of the Internet as an advertising tool. No specific model has succeeded over others. It will take time and innovation to win over the consumer. Many Internet business models will fail simply because they cannot capture the imagination of the consumer.

The Realtor® as Gatekeeper. Realtors® have always been in a unique position, since they are generally the first point of contact in the home buying and selling process. Additionally, a trusted Realtor® has the ability to control the referral of business to other settlement providers such as title companies, lenders, inspectors, contractors, and other vendors whose services are important to consumers in the transactional process. Others have recognized this, and they know that the Internet is the ideal place to procure and aggregate information about consumer needs – which they hope to then sell to Realtors® and others. We are seeing a fight to get to the front of the line in the home selling and purchasing process. While there is money in the brokerage business, there is a gold mine in the collection of data about consumers. The data has become a commodity in itself. If the Realtor® industry loses its position of prominence at the front of the line, it is at risk of becoming marginalized and “disintermediated.”

Residential real estate transactions are intensely personal. Most consumers rely upon their Realtors® not only as a transactional broker, connecting sellers with buyers, but also as a knowledge broker. The success of the industry depends upon the ability of the Realtor® to be perceived as being the one person who can meet the personal needs of the client from start to finish. While consumers can get raw information from the Internet, true knowledge will come from the Realtor®. Information obtained at 15,000 feet is not the same as knowledge gained on the ground. Search engines and satellites can go only so far. The task facing Realtors® is to learn how to convert raw information into true knowledge that consumers can use in the complex and very personal business of buying and selling homes. 2006 will be an exciting year.

FOOTNOTES

1 All opinions expressed in this article are mine alone. They do not necessarily represent the views of PMAR, the Realtor® industry, it’s associations, or members.
2 http://www.borrellassociates.com/report.cfm

© Copyright 2006. Phillip C. Querin, Davis Wright Tremaine. No part may be reproduced without the author’s express written consent.