This article provides tips for building your brokerage practice and creating personal wealth during real estate’s enduring bumpy plateau recovery.
Why it’s still considered tough out there
Uncertain about the future of California real estate? It’s no wonder. Bipolar reports from industry pundits proclaim a recovery in one month, and in the next the feared double-dip — with little guidance to distinguish the two myopic extremes. [For an example of these contrasting reports, contrast the July 2011 UCLA Anderson Forecast with the September 2011 UCLA Anderson Forecast.]
A large reason for the uncertainty out there is the still-present confusion between the recent Great Recession (which has passed) and financial crisis (which has not passed) and the recessions of decades past. The causes behind this current real estate crisis are more fundamentally devastating than those of a simple Federal Reserve (Fed)-engineered recessionary market slowdown.
In truth, what real estate (and the national economy as a whole) is experiencing is closer to a Lesser Depression, replete with joblessness. Without jobs to fuel recovery, it will take more than the typical hunker-down-and-ride-out-the-recession mentality to survive while the real estate market gets back on its feet. [For a more in-depth look at the difference between the source of this real estate crisis and past recessions, see the July 2011 first tuesday article, The rocky roads: recession and financial crisis.]
Whether we Californians want to admit it or not, the U.S. has effectively opted for a long, drawn-out recovery similar to those experienced by Japan and Mexico following their respective financial crises some two decades ago. The Fed, being unable to marshal other assistance from a highly-factionalized Congress, has been the sole source of assistance to an ailing housing market via its use of monetary policy – printing a trillion mortgage dollars – to induce spending and borrowing. This is the closest we’ll get to a housing bailout – and it is performed through the most unwilling of proxies: big lenders. [For more information about the Japanese and Mexican “recoveries,” see the October 2010 first tuesday article, Deflation’s push on the real estate recovery.]
On the one hand, the lure of low (nominal) interest rates and low asset prices has its takers (bargain-hunters don’t pass up sales!). On the other hand, as soon as these market improvements in fundamentals occurs, they are hampered by insufficient job growth and lack of demographic demand which ushers in the next month’s receding numbers and prices.
It’s not the tidy relief we’re all looking for, but the pattern revealed in these past three years of constant ups and downs does provide certainty: it’s going to be a bumpy plateau recovery on through 2016. [For more information on the shape of the economic recovery, see the November 2009 first tuesday article, Divining the future: the letters game.]
Count on more ups, and more downs. Also count on one of these downs to likely be formally characterized as the double-dip recession that has been wildly bandied about in the press, sometimes pictured as a dead cat bounce. We’ll just tell you up front now: it’s already happened in California housing prices. Prices took a brief skip upwards from 2008 lows, and back down at the end of 2010 into mid-2011.
Expect prices to remain at or slightly lower than their 2011 levels through the next few years as the larger economy continues to meander through its troubles, poorly guided by short-sighted political squabbling and shadowed by increasing economic tensions abroad. [For more information about trends in home sales and volume, see the first tuesday Market Chart California tiered home pricing.]
California’s real estate market is due for at least one interim recession in the coming years before it fully emerges from the effects of the financial crisis. To survive, real estate brokers and agents must figure out how to make a living with this economic certainty in mind. Guidance on how to do so is scarce.
The blind optimism and aimless social networking prescribed by the real estate trade union fills time making one look busy, but effects nothing while the seed corn of personal savings held by agents is being consumed. Political bodies sparring for rank will make noise about economic recovery, but election-year bombast rarely translates into results until things get really bad (for the constituency, anyway).
To those real estate professionals who wish to stay in the market as a career, it’s time to circle the wagons and wrestle up your gumption. Here are a few practical tips to build up your business while the real estate market slouches towards recovery.
A checklist for doing well in the recovery
1. Build up cash reserves. Don’t get caught up in the commodity hoopla — commodities are good for protecting value when there is danger of inflation, but inflation is never the battle we fight in a financial crisis. Core inflation has been hovering steady around 2% or lower for the last several years, and though it will be allowed to go up once a sustainable recovery is in process, the Fed will hardly allow inflation to become an issue after having resuscitating the economy at such great cost to our population in lost earnings, opportunities and wealth.
Inflation hawks wage a continuous war against the 14% inflation of the ‘79-’80 recession, falling under the same misconception that many misguided financial prognosticators do in thinking the dangers of this Lesser Depression are the same as those posed by a recession. It bears repeating: we are in a financial crisis, not a recession which long ago ended. Thus, the current conditions are closer to the ’36-’38 conditions following the Great Depression, in which jobs were scarce and cash was scarcer, commanding the market.
2. Cut expenses. Go over your business (and personal!) expenses carefully. Cut what you don’t need, and pare down what you do need to the bare minimum to conserve your cash. Get what you can for free — the rules governing the old real estate supply-side paradigm don’t apply during a buyer’s market (get more listings), so try breaking them and give alternatives a try. Build a contingency budget as Plan B at 20% less than you spent this past year. [For more information about free alternatives to the trade union forms, see the May 2011 first tuesday article, first tuesday Forms-on-CD Version 4.3 — your professional toolbox; for free marketing materials, see the first tuesday FARM Letters.]
This is advice to give, as well as practice. Counsel negative equity homeowner-clients to exercise their put options and abandon their underwater properties, called black-hole assets. Not only is this sound advice for your clients, but it also clears the path for real estate transactions in the future when those same clients have passed their no-borrowing “penalty” periods. This counseling sets client interim conduct and future expectations, when properly managed. [For an analysis of strategic default, see the September 2011 first tuesday article, First-time homeowners stuck and agents derailed.]
3. Know your area. Which areas have the best schools and what civic and community amenities are available to the residents? Are medical, banking, civic and cultural facilities available? Back up your deals with facts about your area of influence – use online resources to map the amenities. Plan your business in these core areas away from the periphery — bedroom communities far from the desired conveniences atrophy more quickly during times of economic turbulence. [For more information about the attraction of the urban core, see the July 2011 first tuesday article, The fate of suburbia.]
4. Know your clients. Find out which demographics drive your market. Are your clients likely to be Baby Boomers looking to relocate to senior communities, or newly-formed Generation Y (Gen Y) households looking to rent, or ready to become first-time homebuyers? Is the trend in your region for the population to get older or younger? Gathering this information ahead of time will give you an advantage when you spot these demographics finally hitting the market. [For more information about the demographics which will usher in the real estate recovery, see the July 2011 first tuesday article, From city to suburbia then back; for advice on attracting Gen Y tenants and buyers, see the February 2011 first tuesday article, New tactics for competitive landlording and the February 2011 first tuesday article, The generations have spoken, who will listen?; for commentary on attracting Baby Boomer clientele, see the September 2011 first tuesday article, Aging generation, budding market.]
5. Jobs, jobs, jobs. If you represent commercial clients, do your homework. Look at the labor pool available in the area. Does your region have the type and quantity of workers to provide a company with the working force it needs? What industries are prevalent in your community, and are they experiencing growth, or declining? Even if you’re in single family residence (SFR) sales or residential property management, bone up on what’s going on in the commercial real estate market around you — knowing what industries will be laying roots gives you a heads up to who you will be catering to in the future. Introduce yourself to human resources department personnel. [For more information on California employment, see the first tuesday Market Chart, Jobs move real estate.]
6. Stay active in the local government. Local governments committed to business-friendly practices and real estate development reap long-term benefits for brokers and builders. Communities do not stand still; they change or decline. Attracting commercial enterprises creates jobs, which is crucial to how quickly a community enters and moves beyond a real estate recovery. Lobbying councilmen for business incentives may require a short-term sacrifice, but it builds community hubs in which workers – and thus, homeowners and brokers who work in SFR and commercial real estate – can thrive. No community today exists without there having first been a visionary — a developer and his builders. [For a digest on the benefits of business-friendly cities, see the August 2011 first tuesday article, Dear travelers, California businesses want you!]
7. Keep a high profile. Use the lull in the market to make changes for the future by pushing for laws to stabilize facets of the real estate industry that cause trouble – mortgage lender resistance to carryback financing, subject-to sales and not-in-my-backyard groups (NIMBYs) fighting innovation and construction and other marketplace conservatives. Keep your name in the mind of clients by holding events and canvassing for their business. Practice your actual social networking skills with potential clients to forge relationships with influential families and businesses and keep your ear to the ground for sounds of possible deals. [For more commentary about how you can shape the real estate market for a better future result, see the first tuesday Feature, Change the Law and the November 2010 first tuesday article, Entrepreneurs may “start-up” the recovery.]
8. Learn how to invest in real estate. Market real estate investments to all your moneyed clients, and acquire real estate interests and trust deed notes yourself to make money as a principal when investors shift from the stock market to real estate. It will happen after a financial crisis, just as it did after our last one ended in 1944. Invest for five years or more starting now, and advise others to do the same. Make sure you have ownership experience and know how to market a potential income property to attract investors. Think real estate syndication, options to buy, carryback sales transactions; get out of the all-cash-and-no-carry box the past decades have put you in. [For more information on real estate as a means of building wealth during the real estate recovery, see the September 2011 first tuesday article, Boomers bust open doors to real estate investment era and the April 2011 first tuesday article, Income property analysis for investor review.]
9. Talk up interest rates and low prices. Homebuyers may be skittish when it comes to “timing the market” as their default mentality is to wait for the herd to move, but income investors are out there taking tentative steps as they look into building their real estate portfolios. Nominal interest rates may even fall further in the next few years as the Fed continues to push the 10-year Treasury downwards to tease out growth in the economy; either way, the next few years will be ripe for investors to come in and take advantage of historically-low nominal interest rates and prices.
These two economic conditions will not coexist for long. Distinguish with your clients and your fellow agents that while a market may be bad for one side — the sellers— there are deals to be had on the other side — the buyers. Present the data you’ve accumulated in researching your area (see tips above) and make a pitch for certain areas and properties; the more centrally-located, the better the results. Think offers and proximity to City Hall.
10. Are you a sales agent? Look into becoming a broker. This investment in yourself reaps you more of the fees you generate, greater independence and better personal marketability. Try saying, “I’m a broker!”[For more information about broker licensing requirements, see the first tuesday Broker Licensing page.]
What are you doing to position yourself for the real estate recovery – let us know!