What the second episode adds to the discussion: Watch the ebb and flow of real estate licensing, and understand the strategies brokers use to operate a successful brokerage office to mitigate the risk of claims by clients and others.
The prior episode of this series covers the enhanced learning environment that is uniquely made available by a recession.
The recovery phase
Heading into a period of real estate recovery begins the transition into the virtuous wealth-growth half of a business cycle. Members of the public quickly become aware real estate has the potential for being a lucrative occupation.
Motivated to switch professions as a source of greater earnings, aspiring agents pile into courses to obtain a license.
Of this optimistic cohort, approximately half complete their pre-licensing courses, pass the state exam and emerge as a licensed agent.
Eventually, the economic ripple effect of the wake created by the ever-greater pace of recovery turns into boomtime excesses. Then what takes place is, descriptively, a recession. Thus, the beginning of the first half cycle of real estate activity is introduced to the marketplace. It is then that the rush to enter the real estate profession peaks as enthusiasm for entering the profession quickly wanes.
The cycle of sales agent licensing
When the recession passes, a recovery begins — now likely around 2027, though recovery is mostly in the control of the ripple effects from the pandemic period and the US trade war. By then, the pace of new licensees will be about 40% of the peak experienced at the end of the pandemic period in early 2022. This economic process happens in every business cycle.
Consider the 2001 to 2003 recession period with its premature stimulus, fast ending that recession but bringing on a very weak recovery. Also, the 2007 to 2011 recession with its delayed and under-funded stimulus and how the economy slowly but extensively pulled out of that recession as rising mortgage rates and public caution set in after 2013.
Rather than just providing brokerage services to other individuals, the superfluous agents — active and inactive — often turn to speculating in real estate as principals or syndicators. Thus, the speculating licensees operate as insiders participating to locate property for family members, acquaintances, and to buy for their own account.
In a recessionary market, anticipate rapid price adjustment in property sales and rents which drives the return of core economic fundamentals and resets pricing, the intractable magnetic pull of long-term averages.
Consider the supply of inventory for sale or lease. Inventory increases when the market moves deeper into a period of recession. As jobs lost in a recession return in a recovery, foreclosures decline, buyer numbers increase and inventory begins to thin. Demand by end user-occupants puts an end to further inventory buildup.
Additionally, data indicating an end to a recession is evident when ratios for rent-to-income and mortgage-to-income return to the residential markets, no longer exceeding one-third of a household’s gross income.
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Using the yield spread to forecast recession and recovery conditions
Pandemic distortions
The 2020 through 2022 pandemic period created a seismic tsunami-style distortion, a three-year flood-and-drain event. The period’s monetary and fiscal forces hugely influenced real estate user demand, and in turn pricing. While COVID-19 triggered the pandemic, the market conditions driving the pandemic demand and pricing were:
- low inventory of owner-occupant property for sale or lease;
- a low level of residential construction starts;
- massive numbers of businesses closed, and jobs lost; and
- fiscal and monetary stimulus to offset lost income by businesses and individuals.
Riding the pandemic distortions, by the time we hit year-end for 2022, the active agent-to-broker ratio swelled to an average of 2.4 active agents for each active broker. This ratio had steadily climbed since bottoming in 2012 at 1.9 agents per broker.
In a stable market, a natural equilibrium develops between active real estate agents and brokers. This ratio has historically found balance at the level achieved in 2002: approximately 1.5 active agents for every active broker.
Going into a recessionary period, the volume of sales and leasing decline and the pricing of property and rents take an adverse hit. Then, expect the current flock of agents to become underemployed for the lack of need for their services resulting in reduced incomes.
Many newer agents become discouraged, dropping out of the active licensee population, no longer employed by a broker. Initially, they become non-productive agents, allowed to remain employed by inefficient brokers. Then when released by their broker, they become unemployed-inactive agents. Eventually, they let their license expire without renewing, an event in place for 2025 and 2026.
Though many agents and brokers appear active in DRE reports, a percentage exceeding 35% earn most or all their income other than with a broker office.
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Challenges for boomtime licensees
Most new sales agents enter the world of real estate sales, leasing and mortgage services with little knowledge and less understanding about real estate matters. They receive very limited training in agency conduct and practical aspects of real estate transactions, all of which are personal mega-dollar financial deals.
This lack of transactional understanding needed to comprehensively advise clients on real estate decisions has but one remedy. Agents as new licensees need further education and training beyond what is covered in the mandatory pre-licensing courses. This increased need for pragmatic training includes:
- property investigations and disclosure training to develop an understanding about the costs of owning property to advise clients what consequences a transaction they are contemplating will bring to bear [See RPI Form 306];
- training in financials, such as personal profit and loss statements and balance sheets;
- instructions on the economy of the real estate cycles and effects of property values and liquidity; and
- a two-year apprenticeship training as part of a team employed by the broker.
The DRE needs to consider implementing research for a study reporting on the type and duration of apprenticeship training needed to permit a licensee to operate on their own, separate from a team when dealing with clients. For the DRE, it is a matter of their consumer protection oversight, especially in homebuyer transactions hugely leveraged by funding from mortgage borrowing.
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Consequences of improper training
Over one million California families lost their homes in the Great Recession of 2008 period due simply to unsustainable mortgage debt for any level of an inevitable near-future recession. While brought on by financial deregulation, most all this mortgage debt was incurred in a transaction negotiated by a real estate agent.
During the Millennium Boom circa 2005, mortgage lenders became untethered from government regulations and originated improper mortgage financing. Mortgage lenders, as adversaries of homebuyers, are not advisors like a buyer agent. The involvement of a mortgage lender in no way replaces the duty an agent owes their buyer-client to advise about fully foreseeable financial risks.
Some 400,000 homes in California might well end up in a foreclosure sale, or forced to sell and recover some equity, or be pushed into an unconventional no-equity short sale by 2028. A negative equity sale will again become commonplace as occurred in the prior recession. This adverse equity condition seems destined to develop for mortgaged purchases made in the period of 2020 into 2025 due to excessively high prices paid and mortgage rates at the highest level in two decades.
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Reducing the risks
The risks causing client losses are generally controllable by brokers. Risks are best reduced by limiting the activities of agents to trouble-free conduct which, when relied on by clients, produces favorable results. Brokers who maintain a risk reduction program keep claims from clients and others under control.
Steps necessary to establish a risk reduction program include:
- identify activities exposing the broker to liability, listed based on whether the activity risks causing the client or others to be injured financially;
- break down each identified activity into the acts and events which comprise the activity for agents to eliminate or perform properly to avoid causing a loss;
- evaluate the types of loss a client, others or the broker might experience;
- choose brokerage activities, adopt oversight procedures and set parameters for the agent’s conduct, consistent with the broker’s comfort zone for risk tolerance; and
- track agent compliance, coupled with ongoing remedial training and internal dispute resolution conduct for claims made by clients and others.
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Further, an employing broker with five or more agents and broker-associates must annually provide at least two hours of sexual harassment prevention training to all supervisory employees and at least one hour of training to all nonsupervisory employees. Oh yes, agents are employees — and of the nonsupervisory variety.
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Protecting employees with training
The training a broker provides for their agents is carried out:
- with other training;
- in a group or individually; and
- in shorter segments, when the segments meet the time requirement.
The employing broker needs to provide compliance training to:
- seasonal employees;
- temporary employees; and
- employees hired to work for fewer than six months.
Training is to occur within 30 days of the employee’s hire date or within their first 100 hours worked, whichever comes first.
Employing brokers may also be responsible for any type of harassment activity by a client toward their employees.
To be held responsible, the employing broker needs to:
- have actual knowledge of or reasonable cause to know the harassment existed; and
- fail to take appropriate corrective action.
Brokers may not require an agent they employ to release a claim or right under the Fair Employment Housing Act (FEHA) as a condition for employment, a raise or bonus.
Also, a broker may not enforce or require an agent employee to sign a non-disparagement agreement which limits the rights of the agent to disclose unlawful acts in the workplace.
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Employer responsibilities to correct harassment in the workplace expanded
