The Evolving Landscape
In our last post, I discussed the current landscape compared to past economic crises, specifically the housing crash of 2008. Quick recap:
1- While inventory and transactions have recoiled, underlying home values have remained solid due to the guardrails that have been built around the housing industry, i.e. foreclosure moratoriums, relatively available forbearance (the ability to defer mortgage payments to a later time), and continued historically low mortgage rates.
2- As shelter in place mandates are relaxed and communities are allowed to return to work and earn, each market appears poised to positively uncoil, albeit at a slower rate and possibly over a longer time frame, depending on other market factors like unemployment, and more stringent mortgage underwriting criteria.
Since then new data has come out. I’ve selected 4 markets across the southeast to demonstrate the year over year declines from 2019 to 2020 for median list price, new listings, active listings, pending transactions.
|MSA||Median List Price Y:Y||New Listings Y:Y||Active Listings Y:Y||Pending Listings Y:Y|
As you can see, values are holding while new, active, and pending listings continue to drop precipitously. This is the case for almost every mid to major market across the country.
The National Association of Realtors reported that existing home sales are down 8.5% nationally, and moved their seasonally adjusted annual homes sales projections down to 4.74M from 5.16M, or 420,00 less.
Based on the leading numbers in the chart above, we can expect total home sales projections to continue to fall with no short term end in sight. New and existing supply is critically low and getting lower as sellers continue to remain on the sidelines despite persistent buyer demand.
These numbers are very problematic for real estate professionals who rely on transactions to make an income. They need (a lot) more sellers to enter the market, but it’s not likely to happen any time soon due to other economic factors:
Unemployment– 18% and rising, which is staggering. 30.3 million people have filed for unemployment in the past 6 weeks. No employment, no mortgage.
Forbearance- Depending on the source, ~10% of mortgages are in forbearance. That’s another 4.1M people. These folks would be headed straight to foreclosure without the protections initiated by the government to make forbearance a readily available option. As of May, Fannie Mae and Freddie Mac will permit borrowers who went into forbearance to buy a new home using a GSE backed mortgage as long as they have made three consecutive months of payments after forbearance ends. The previous requirement was 12 months. How non-Fannie and Freddie backed mortgages will be treated in this regard is unclear, as is how lenders who extend non-GSE backed mortgages will or won’t qualify consumers who are in forbearance.
Credit availability– While rates remain historically low, access to them has gotten a lot more difficult with lenders across the board raising minimum credit score requirements substantially. FHA mortgages that required a minimum 580 credit score now require a 680 or higher. Conventional mortgages require 700+ minimum scores. These requirements cut out a significant segment of potential home buyers.
Conflate these three factors and it’s hard to see where a market rebound measured by # of transactions is going to happen any time soon. Like, not in the next year or two or more. For real estate professionals and their businesses who already operate on thin margins, a 20-30% decrease in supply is not tenable unless additional market share can be gained. Getting a larger piece of a diminishing pie will be… challenging.
Putting the hard bite of reality aside for a minute, there is usually a few ways to convert problems into opportunities if you’re willing to open your context and accept business isn’t going to work like it used to. I’ve stated before that real estate is a commodity in the sense that everyone is essentially selling the same product as their competitor, followed by some examples of how you can market your services in ways that appeal to today’s consumer’s needs.
Technology-based solutions that have typically taken the real estate industry years, even decades, to adopt out of fear of disintermediation are being implemented in a matter of weeks out of sheer necessity. If you do not adapt right now any existing transaction pool gets even shallower.
In terms and times of unprecedented transactional scarcity, providing demonstrable efficiency and consumer choice becomes a competitive differentiator, especially if you’re an early adapter and adopter.
iTransactions for the purpose of this article are those transactions that happen outside of traditional processes and requirements to sell and buy real estate. Their existence is the result of massive capital and other resources being poured into solving the antiquated processes and requirements to facilitate and close a traditional real estate transaction. Yes, many iTransaction providers paused their purchasing operations when the pandemic hit, just like all buyers and sellers. Many are already back in the market or are about to be… and they’re not going anywhere, in fact, they’re well-positioned to grab market share due to how they operate.
First, let’s quickly define three primary categories of iTransaction providers:
Also known as instant offers, iBuyers buy homes for cash typically using institutional capital. Sellers pay a premium for efficiency, convenience, and certainty in selling to the iBuyer by typically accepting less than the full market rate for their home plus additional fees. The iBuyer will subsequently market and sell the home, sometimes independently, sometimes with the help of outside agents.
iFunders generally give home sellers the ability to access the equity in their current home to buy their next home. This eliminates financing-based contingencies for consumers who would otherwise have to sell their current home before purchasing their next home. Offers with contingencies are not competitive in a supply-constrained seller’s market compared to the certainty of a non-contingent offer and certainly a ‘cash offer’ equivalent that iFunders enable. They typically charge a convenience fee to the consumer for efficiency, convenience, and certainty compared to traditional transaction processes. This convenience fee can be recouped as home buyers with all cash offers can often negotiate a comparable discount on the sales price for the same reasons of convenience and certainty to the seller. Many iFunders gladly work with outside real estate professionals who may earn their typical commissions for procuring and working with a client.
These homeownership programs are an evolved version of rent-to-own models. Buyer identifies home, the iRenter buys the home with a ‘same as cash’ offer, and rents the home back to the buyer until they qualify to buy the home themselves. Each iRenter has unique qualification requirements that aren’t as stringent as qualified mortgages. They also offer varying levels of credit and down payment savings support for the consumer to ensure they qualify for homeownership within a finite period of time. Most iRenters will gladly work with outside real estate professionals who may earn their typical commissions for procuring the customer.
iTransaction providers are better equipped to grow and thrive across this new pandemic sensitive landscape. Their models quicken the pace and output capacity of transactions compared to their traditional transaction contemporaries by using tactics that foster efficiency and evoke emotions of certainty and safety. Virtual tours, no contact physical tours, and the adoption of smart devices to increase the marketability of a home have all been well implemented into their consumer experiences. They also do not require as much expensive and inefficient human capital. Increasing output capacity while reducing expense is a panacea for any business let alone the terribly inefficient world of a traditional real estate brokerage.
Prevailing real estate brokerages will look and act more and more like an iTransaction provider over the next 6-12 months compared to how they operated just 3 months ago.
Learn and Leverage, or Just Steal
As a real estate professional. it’s your fiduciary responsibility to present all options and offers available to your client and counsel them as to which is best suited to their wants and needs. Aligning yourself with one or many of these entities allows your business to best do just that… keeping you relevant and positioned to compete for business in these times of transactional scarcity.
In times of scarcity, you cannot operate with a scarcity mindset, it’s a vicious downward cycle. If working with another entity to deliver homeownership to consumers doesn’t allow you to capture your ‘full commission’, whatever that means, do not dismiss the opportunity. While you may make less per transaction, you have the ability to close more of them at less cost and requiring less effort compared to a typical transaction. That is incredibly valuable, possibly essential for survival, during these times of unprecedented supply constraints.
While home values are still holding right now, it’s not pretty or sustainable without the ability for consumers to transact safely, efficiently, and with certainty. Learn and leverage what iTransaction companies can do for you and your clients… just steal their value propositions, that’s what great artists do, right? 😉