The “State of the Union” Address on the Real Estate Market

Before you read this article, you should understand that I’m an optimist and I do see the glass as half-full! However, I have learned to try and think accurately in my optimism. I have also learned to look for opportunity in adversity. In this article, I share what I believe to be the reality we face as real estate agents over the next few years. Hopefully, I’m wrong.

A few weeks ago, I received a new issue of the “The Campbell Real Estate Timing Letter.” It’s a great newsletter that studies the economy and the real estate market pinpointing when an investor should be buying or selling real estate. This newsletter is definitely worth subscribing to and studying. You can find out more at RealEstateTiming.com. (Full Disclosure: I’m not an affiliate and do not earn a penny for the recommendation.)

Robert Campbell tracks five “Vital Signs” for 17 housing markets. These vital signs are:

1.   Existing home sales
2.   New home building permits
3.   Notice of Defaults
4.   Foreclosure Sales
5.   30-Year Fixed Mortgage Rates

By studying these five “Vital Signs” for each market, Campbell is able to spot trends that can be used as a guide for when to buy or sell real estate. He has been publishing this newsletter for many years and accurately predicted the housing bust and his “Vital Signs” screamed sell back in 2006 and 2007.

His recent newsletter hammered home the message that our real estate market is poised for another drop. And sadly, I agree with his findings. I do not believe our market is going to rebound quickly, like many in our industry hope. And in fact, I believe it’s only going to get worse.

I realize gurus are only supposed to focus on positive, uplifting news with the “Go Get ‘Em, Tiger” mind-set. “You can do it, if you just put your mind to it!” All you have to do is dial for dollars. Unfortunately, this rah-rah attitude isn’t practical and can actually be dangerous for your business.

It’s critically important to think accurately about the state of the economy and the real estate market.

There are several reasons why Robert Campbell believes the real estate market is going to struggle going forward. However, the two main reasons are the persistent high unemployment rate and  the unusually high level of debt carried by the average household.

In fact, he wrote:

“With the U.S. unemployment rising to a totally unacceptable rate of 9.6% in August – it was 9.5% in July – the recession is not over, nor has the recovery started.”

The U.S. unemployment rate remained at 9.6% in September highlighting that fact that things are not getting better. This seems to conflict with a recently released report in the media, which stated that the recession was over.

Does the recession feel like it’s over to you? Do things feel like they are getting better or worse?

Christina Romer, chairwoman of the president’s Council of Economic Advisors said, “odds are high that even if we can somehow avoid recession, we’re facing a no growth/low growth economy – and this means the U.S. jobless rate will go even higher in the next 2 to 4 coming quarters.

This simply means we have a few years before things get better. Here’s an interesting quote from Campbell’s newsletter:

“How can you expect to have a legitimate recovery in real estate when the unemployment rate is likely to rise from elevated levels that are already near double digits? I’m talking, of course, about a genuine real estate recovery – one that is driven by true organic demand rather than by demand that is artificially created by $8,000 homebuyer tax credits, artificially low interest rates, and government intervention polices that keep the supply side of the equation artificially low as well.”

The most important part of this quote are the words “true organic demand.” Our real estate market will not recover until buyers really want to buy. This isn’t happening now and will not happen for some time. The second major problem plaguing the economy is the astronomical level of debt. Campbell wrote:

“Household (and non-profit) debt, which includes mortgages, credit card debt, auto loans, and student loans, peaked at $13.8 trillion in 2008. After two years of de-levering, however, the balance has only been brought down to $13.5 trillion.”

He goes on to argue that we need to get rid of another $3 to $4 trillion in debt before things really become stable. This additional de-levering of debt will take a number of years.

This has many implications for your real estate sales business.

Every single real estate agent in the states has already suffered many losses. The number of homes we sell on a consistent basis has dropped significantly. Even worse, our commissions on homes sold have dropped along with home prices. We now have to work a lot harder for a lot less money.

If Campbell is right, this trend is  going to force additional losses to your business, UNLESS you take action now. You cannot continue to focus on commission income from home sales as the main source of income for your business.  You must proactively diversify your income away from home sales. In a recent article titled, “4 Ways You Can Make More Money“, I highlighted a few ideas on how you can diversify your income.

One of the ideas presented was to consider starting property management services, because you’d set yourself up to earn recurring monthly revenue. More importantly, once you have a new property under management, it usually stays under management providing long-term revenue. This revenue can be used to support your business, if things do get worse as predicted.

In the next week or two, I’ll be releasing a new program that will help you start property management in your real estate business. This will include everything you’ll need to get started including how to get property management clients, property management agreements we use in our business, and how to automate property management without hiring any employees. Because this is a new program, I’ll only be releasing 100 copies and it will only be available on a first come, first served basis. If you’d like to receive early notification of when this new program is going to be released and have priority access, join the early notification list now at:

http://www.NotificationList.com

4 Comments

  • John

    Reply Reply November 1, 2010

    I’m a licensed real estate broker in Illinois. Only licensed individuals can act as real property agents in this state. The only exceptions are if you work for government and are marketing property as part of your employment, that you own the property, or that you are marketing the property for your private employer as part of your employment. Property management is a distinct discipline in real estate. Practitioners should first work for a property management firm to acquire expertise and professionalism. One of the problems we saw in this latest real estate debacle was people who were licensed to make a buck without consideration for the good of the client. This is unethical conduct. As a member of the NAR, IAR and NICAR, I am expected to keep the welfare of my client first and foremost in any transaction, without regard to personal gain. If you wish to be a property manager you should become certified as a Certified Property Manager through IREM: http://www.irem.org/. (No, I am not a member of IREM). Real estate is hard work. It is not a ticket to immediate riches for most people. If you can sell and have good organizational skills you can make a decent living. But it takes time, dedication and education.

  • Marianne Nelsen

    Reply Reply October 27, 2010

    Hey Rob, I enjoy your information even though I’m not actively selling real estate right now. I put my license on hold 2 years ago after 19 years in sellin R.E.
    I wanted to let you know I am doing well investing in foreign country real estate. I still have buildings here in the US but renting out a unit in my duplex may get me $800 a month, my condo in Mexico gets me $850 per week. And the investment was lower and the tennants don’t tear up my place, always pay ahead and the quality of people is way better. I now have 3 properties in Mexico and plan on getting a few more in Costa Rica and Belize or Nickaragua, if I can sell my US properties. How does the multi family market look?
    Thanks for all you interesting stuff – Marianne

  • Todd Miller

    Reply Reply October 26, 2010

    Good information here Rob. Unfortunately the gov’t is also talking about doing away with the mortgage interest deduction which will significantly hurt the organic sales growth as well that you talked about.

  • Todd

    Reply Reply October 26, 2010

    Rob,

    Don’t you need to be lisenced to do property managment?

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