Trends in Residential Brokerage

A Presentation to ARELLO

October 19, 2008

Trends

Trends in residential brokerage point towards a more competitive industry than has been the case since 2000;

Trends Consolidation

Outsourcing of realty functions

Focus on consumers

Democratization of listings on the Internet

Trends

More price competition among realty service providers

Core services

Consolidation

As in previous downturns there is massive consolidation underway in terms of the numbers of sales professionals, realty firms and all forms of real estate industry professionals (title, mortgage, etc)

Consolidation

The number of real estate professionals has already declined by over 150,000: we expect it will decline another 100-150,000 in the next two years

Consolidation

The market share of leading regional and national brokerage firms, even with a decline in their sales, increased to a record level in 2007:

And was the single biggest yearly increase in the last 15 years

Consolidation

The level of sales in 2005: 8.3 million

The level of sales in 2008 5.5 million

The level of sales projected in in 20106.1 million

Consolidation

The level of sales will not soon again even reach 7 million

The fight for lower levels of business will drive competition to stronger levels

Some will chose not to play

Outsourcing of realty functions

With revenues down and the pressure to compete increasing realty firms and sales professionals are increasingly outsourcing many parts of their businesses

Outsourcing

Technology outsourcingLead management Transaction managementWeb hosting and designEmailLead generationAccounting and financial systems

Outsourcing

Marketing outsourcing

Printing and Direct mail services Custom design Online Graphics Sales professional branding programs TV and video production

Outsourcing

Other areas

Education and training Finance and accounting Recruiting Management development

Outsourcing

Few realty firms or sales professionals can afford the fixed cost of full time service/product suppliers in-house

In the new competitive environment, for most realty firms, the lowest cost provider will have a significant advantage

Outsourcing

A growing number of leading brokerage firms are also reducing onsite brokerage management and centralizing deal documentation and review.

Less review in field with more consistent processing by full time staff

Focus on Consumers

The Internet and generational changes have brought about the early stages of the age of the consumer in residential real estate services

Consumers If it can be known, it will be known

If it can be rated, it will be rated

If it can be shared, it will be shared

Rich Barton, Chairman and CEO, Zillow

Consumers and ratings

Real estate professionals are wary of online rating platforms but many are already working and more are coming

State and local associations are working to grab this space and assure professionals that it is done professionally and with some guidelines

Consumers

The impact of the age of the Internet in our business can be most acutely identified by looking at how much consumers believe Realtor® assurances that “now is a great time to buy” versus how much they believe their online valuation tools and other networked advisors

Consumers

According to the Houston Association of Realtors and other leading sites, the percentage of consumers going online to check the valuations of property now exceeds that of those looking at listings Fall 2007

Consumers

REAL Trends/HarrisInteractive housing consumer studies done since 2002 show the following:

The younger the consumer the less they plan to use traditional full service real estate professionals and the more they trust the Internet

Consumers

Housing consumers are starting the process of searching for answers to a purchase or sale 12-18 months ahead of the actual decision time

While real estate professionals are still geared to tackle only those who are deciding right now

Democratization of listings

The listing is a perishable asset

Leave it on the shelf long enough and its value declines

Democratization of listings

Leading firms of all brands, sizes and structure are finding that a broad based listing distribution strategy works well

Although several firms have discovered that the most effective way to market a listing is to advertise it under your own brand (RE/MAX, Real Estate One, etc)

Democratization of listings

Those realty firms and real estate professionals who defy open sharing will lose ground to those who share

Refraining from using addresses Refraining from having a valuation tool Requiring online registration

Democratization of listings

It is not that your listings have to be everywhere all the time

It is that they should be where most real estate consumers are searching with superb content

Democratization of listings

It is also an attitudinal issue

If you view sharing information as negative you will have a negative view of the new housing consumer

If you have a positive view and do not fear openness, then you have the chance to succeed

Democratization of listings

Recent settlements between NAR and DOJ and others between Realtor® groups and FTC are creating a more uniform world for professionals and housing consumers alike

The settlements mostly ended the dispute between lower cost alternative real estate service suppliers and traditional brokerage.

Competition It was competition for listings among

traditional sales professionals that brought down commission levels in the 1995-2005 period:

1991 National average 6.1% 2005 National average 5.0%

Source REAL Trends, Inc

Competition

It was competition among real estate brokerage firms that increased the average commission sharing between realty firm and sales professional

1995 68.0% 2007 74.8%

Competition

PS

That 5% swing from 1995 to 2005 for realty firms was equal to 75% of their profit from 1995

Core Services

Housing consumers have increased their use of realty firms and sales professionals who offer a full package of services

NAR study on One Stop Shopping, May 2008

Core Services

Housing consumers continue to seek real estate firms and real estate sales professionals who provide “full service” more than any other segment of service providers (73%, 2006)

REAL Trends/HarrisInteractive

Core Services

Recent court actions are threatening the ability of brokerage firms to engage in one stop shopping (Minnesota, Colorado, etc)

Also court cases in Alabama and other jurisdictions are threatening pricing decisions by brokerage firms when packaging or bundling services

Conclusion

The industry will be made of fewer and larger real estate enterprises in the years ahead even if the number of sales professionals does not decline substantially

Conclusion Battles between regulators and the real

estate industry have created a competitive environment on the use of the Internet

There will be more, not less, information available to consumers on the Web in the years ahead than has been available in the past…..including sales professional and brokerage firm ratings by consumers.