The world is shifting under the feet of the real estate industry and it's my contention that very soon, traditional real estate consumers will have a hard time recognizing anything about an industry that seemed to not evolve much at all for decades on end.
With barely 1,100 active listings on the market in the Denver metro area as of the writing of this article, the number of active listings in Denver is down 83% from two years ago. Current inventory is 73% below the pre-pandemic all-time low of 4,203 active listings, set in December of 2017.
Nationally, the statistics are not quite as bleak, but they're close. According to Federal Reserve research data, in December of 2019 there were 1.125 million active listings on the market in the United States. At the end of 2021, that number was 483,000, a decline of 57%.
Very soon, the end of buyer agents, data aggregators and perhaps the MLS system altogether.
Let me explain.
In most markets, it is customary for a real estate brokerage to charge a "gross commission", usually between 5.5% and 6.0%, to market and sell a home. Historically, about half of this amount has been offered to buyer agents as "co-op", or cooperating compensation, while the listing brokerage retains the other portion.
In the environment that has been created in the past two years, with record low inventory caused by record low rates and little hope for a return to anything resembling the "pre-pandemic" market (since almost all homeowners have refinanced into 3% mortgages, which they will likely never give up), the inventory is not coming back.
And that means we are now in a perpetual low inventory environment, which supports prices but also exposes the fact that there are far, far too many real estate brokers in pursuit of what will be a very limited pool of sales for many years to come.
How bad is it?
There were approximately 6.2 million completed home sales in the US in 2021. Assuming 80% of those ended up in the MLS, that's about five million transactions. With 1.6 million licensed NAR member nationally, that's about three sales per agent per year.
Clearly, we have too many agents by orders of magnitude.
This is not news. Having too many agents in the ecosystem has been a fact of life forever. The difference is that Fed's economic response to the pandemic (cut rates to zero, set off a frenzy in the housing market like we have never seen before) took something that was hidden and put it out in the open.
Professor Darwin now has his opening. We will never again have enough sales to justify the existence of 1.6 million agents.
The point of this post, and the reason I'm writing about this, is because in a world where buyers are a dime a dozen and buyers' agents are up against near-hopeless odds for success, the value of a buyer's agent becomes... almost zero.
Truth is, in this environment, listing agents hold all of the cards.
Yet, under the antiquated MLS rules, sellers are being asked to pay between 5.5% and 6.0% to list their homes, with the very low-value buyer's agent taking half or more of that commission.
That is where the change is coming.
In most of Europe, there is no MLS. Sellers hire brokerages to sell their homes, and the brokerage is expected to find the buyer.
With no separate buyer's agent to pay, commissions are lower.
And so you can clearly see here, in our current low-inventory environment which will likely become endemic because of the Fed's extended low-rate policies, sellers should question why there are paying buyer agents anything at all.
Realogy, the holding company which owns Century 21, Coldwell Banker, LIV Sotheby's and other prominent real estate brands, recently filed a court brief challenging NAR's so-called Clear Cooperation Policy, which requires compensation for buyer agents on homes listed for sale in the MLS.
Sooner than you think, just as with the European brokerage models, homes likely won't even be listed in a regional MLS system. Instead, sellers will choose a major brokerage - like Compass or RE/MAX - to sell their home. Those sellers will likely pay smaller commissions - say between 4% and 5% - and they won't care where the buyer comes from.
Those major brokerages will control all marketing, exposure, contract solicitation and negotiations in house, usually at a much lower fee than what sellers are paying today to outside third party brokerages through MLS compensation rules.
And so soon - and I'm talking months, not years - you will see the rise of models where Zillow and MLS systems become irrelevant as consumers focus on in-house listings of the largest brokerages, going direct to the seller's agent or an in-house buyer's agent being fed leads by the company at a reduced commission rate.
It will be more efficient for the seller, more profitable for the brokerage, and it will spell the end of half or more of the real estate brokerages in America.
I'm not saying I'm in favor of it, or opposed to it.
But if you're 27 years old and trying to decide if a career in real estate is right for you, chances are it's not. Because very soon, listing agents (who are generally more experienced with deeper databases of past clients) and large brokerages will run everything, and sellers won't be paying the freight for rookie agents just starting out with random buyers they met at an open house, at church or in a checkout line at King Soopers.
The real estate world is about to get very small, very fast. It won't be the welcoming haven it has been for newcomers or those going through a mid-life career crisis. It will be a cutthroat, closed industry with smaller commissions, fewer participants and a very different fee structure than the one we know today.
If inventory levels are never going back to pre-pandemic levels, thanks to everyone refinancing into 3% mortgages, then it's time to discuss what that means for the real estate industry. Cross-brokerage cooperation, buyer agency and MLS systems were built for the old world, where selling listings was hard and you needed the help of outside brokers.
In the new world, the survival of brokerages will depend on doing it all in-house, exclusively, with thinner margins and no outside help. Which means 50% or more of agents are in their final act, whether they know it or not.
