In California:
- 180,700 CalBRE sales agents are employed by a broker; and
- 101,000 CalBRE brokers are using their licenses.
Together, these agents and brokers make up the active real estate population, which totals 281,700 active licensees as of July 2015. The remaining population of licensed agents and brokers don’t currently practice, but for various reasons choose to hold on to their licenses.
Active agents and brokers rely on closing real estate related deals of one sort or another to support their livelihood. However, with just 415,300 homes sold in California in 2014, the average number of transactions per active licensee is a depressing 1.5 homes sold per agent or broker. Yes, large segments of the active licensee population are engaged in property management/leasing, commercial property sales or mortgage originations. But these areas too are running on far less than optimum transaction volumes.
Unless a licensee specializes in multi-million dollar property sales, leasing or mortgages, 1.5 transactions per year aren’t going to come even close to providing a living for most agents and brokers. However, it’s helpful to think of this figure as an index of sorts on the number of transactions active, practicing agents are completing annually.
Part-time agents and those listed as active but not practicing regularly drag down the transactions-per-agent figure. Therefore, the actual number of transactions each regular active licensee completes is somewhat higher than 1.5, although today’s figure as an index is still low from a historic perspective.
Imbalanced real estate incomes
In California, the annual average wage as of mid-2014 was:
- $58,180 for real estate agents; and
- $89,210 for real estate brokers, according to the Bureau of Labor Statistics.
However, the income range for agents and brokers is extremely wide, with the top income-earners making five times plus over what the bottom earners make. In contrast, top earners of other industries typically make two-to-four times as much as bottom earners in the same industry (high profile CEOs running some 20 times more).
Why the income disparity among real estate licensees? Two reasons:
First, unlike most other jobs, a new real estate agent doesn’t automatically start earning an hourly wage. Instead, they need to grow their network of contacts and leads, and gradually they begin to make a living as they find their niche. In the meantime, less connected agents struggle to get by, many taking other jobs to supplement their income.
Second, even well connected real estate agents may struggle compared to other agents who complete the same number of transactions each year. Why? Real estate fees are based on a percentage of the home sale price. Thus, an agent representing a million-dollar home makes five times more than an agent representing a $200,000 home, despite the similar number of hours and effort put into listing and selling the property. Hence the wide difference in income amongst real estate licensees.
Home sales volume needs to rise — agents need to decrease
Depending on where a licensee practices real estate, making a living may mean closing five sales a year (of the million dollar plus variety) or 25 sales a year (of the low-tier variety).
But even considering these differences, today’s real estate market pace of 1.5 transactions per licensee remains well below what is needed to support active licensees.
As a population, licensees are underemployed and thus many are underpaid. To fix this imbalance, either the licensee population needs to decrease, or home sales need to rise. Which will it be?
To answer this riddle, glance back to the good old days. During California’s Millennium Boom peak, 753,900 homes sold in 2005. At the time, there were 242,300 active agents and 90,400 active brokers, for a total of 332,700 licensees. At the annual sales rate of 753,900, active licensees averaged 2.3 home sales transactions per year.
To return to that rate of market momentum, it will take a combination of decreased licensees and increased home sales volume. first tuesday forecasts home sales volume will return to pre-recession levels around 2020-2021. That period will coincide with the Great Confluence of home sales as retiring Baby Boomers relocate en masse and members of Generation Y finally gain the income needed to become first-time homebuyers.
In the meantime, real estate licensee numbers won’t swell to the overinflated numbers of the Millennium Boom. The agent and broker population will most likely continue their licensing pattern of the last few years, and gradually rise and fall with the tides of sales volume in the housing market. Real estate still carries a stigma of unpredictability with it today, and it won’t be forgotten until we experience another boom in home prices and volume to create new expectations.
Thus, expect the number of transactions per agent to gradually return to acceptable levels, peaking around 2020. By then, the real estate population will swell once again, as it did in 2006 at the tail end of the Millennium Boom in housing. New agents will be eager to make a quick buck, but most will drop out of the profession once the next boom is over. Such is the real estate cycle of boom and bust – as it is managed by excesses.
Those licensees with the skills to remain profitable at both ends of the cycle are the ones who put in the hours each day to continually grow their network and better serve their block of clients. Therefore, while transactions per licensee will fall towards the end of this decade once the licensee population takes off, agents who have put in their time up until that point will continue to be successful over the long run.
Transactions per agent means literally NOTHING! I was at a Joe Stump seminar once and he got a young sales gal to come up to the front of the room and asked her to get real excited and yell out how many deals she was going to close this year. She got all wound up and yelled out 3! She was an agent from a major franchise and her broker was sitting near her. She slumped down in her chair! But that’s ALWAYS been the way of “independent contractors” and the industry. Here at KW we have 1/4, 1/2 and full “cappers” or those agents who produce to the office their company dollar. Our cap is $28,000. Once you get to that you are at 100% commission. So do the math. We don’t have THAT many “Cappers”! If we were employee based and had to pay salaries to our agents believe you me we’d see widespread thinning of our real estate ranks!!
This article is very timely. Real estate has become so technical and litigious that most licensees are incapable for actually performing the function required of them in today’s environment. As a result, the real estate licensee pool must and will shrink as more and more transactions are consolidated in the small percentage of competent and professional agents who can actually handle the technical aspects required in the business.
Likewise, the trend toward large regional real estate offices of 100 agents or more will become a thing of the past. The real estate office of the future will be smaller with more private and semi-private offices and fewer work stations. The bulk of real estate sales will be handled by smaller, elite, highly trained, professional sales teams. The industry is changing at quantum speed and will continue to do so under the pressure of increased expectations, regulations and litigation.
This process would be accelerate if the state of California made license requirements that are commensurate with the performance expectations required of licensees. Currently, that is not the case. Given the level of expectation in this industry, license requirements must be dramatically increased to ensure the public is served professionally.
The fact is that there are too many agents and most of them, spend the majority of their time looking for work, not working. If listing commissions decrease to let’s say, 1% of sales price and there are 1/3 as many agents servicing them, the whole thing becomes more positive. Too many agents looking for work, shaking hands, passing out cards, on bended knees asking for work. That’s not working. How about the days when we did 5-10 transactions per month and had no time to “network”, only time to actually follow up on our transactions and start new ones. That’s what the new model needs to be.