Real estate: Babes in bear land
Most Realtors haven't been in the business long enough to see anything but a boom market, and the current slump is new to all but a handful of industry veterans.
NEW YORK (CNNMoney.com) -- A financial planner who had never seen stock prices lose value probably isn't the best place to turn for investment advice. But many Americans are taking just that kind of a flyer when it comes to their most valuable investment - their home.
Just more than half of members of the National Association of Realtors (NAR) had four years or less of experience in a 2005 survey - which means they came into this year's real estate downturn knowing nothing but boom times.
Home sales set record after record from 2001 through 2005, as prices rose to record levels as well. But the pace of sales is off 14 percent so far this year and the year-over-year change in existing home prices has fallen in the past two monthly reports from NAR.
That's the first time there has been a decline in that key price measure in 11 years - not even one in three Realtors today was around back then.
Buyers and sellers are negotiating this rapidly changing market with the advice and guidance of agents who may not be terribly familiar with the current landscape.
"We've picked up 400,000 to 500,000 new agents, and having people in the field not used to cycles is not going to help smooth out this down cycle," said Nicolas Retsinas, director of Harvard's Joint Center for Housing Studies. "Is it the top of my worries about what's going on? No. But the point (about inexperience) is well taken."
Walter Molony, spokesman for NAR, said the number of Realtors with relatively short tenures likely overstates the percentage of sales that they're handling. Those new to the business might be involved in only a couple of sales a year, while the more veteran agents handle a much greater percentage of sales than their numbers would suggest.
For example, Molony said that while the trade group's survey shows 37 percent of Realtors having two years of experience or less, the median earnings for that group is only $13,000.
"The way people become successful is word of mouth referrals and repeat business," said Molony. "It's really tough, even in the boom market, to start out in this industry."
The number of those working in real estate has continued to grow this year. In its most recent reading, for September, the Labor Department said there were 1.5 million people in the business, down 0.4 percent from the record high in June but still 22,700 ahead of a year ago.
"We've found in the past there's about an 18-month lag until there's a downturn in membership," said Molony.
The roughly 50 percent increase in median home prices since 2000 makes the job much more attractive compared to other professions which have seen modest increases in compensation, said William Wheaton, director of the Massachusetts Institute of Technology's Center for Real Estate.
"If you're able to make $100,000 selling a house rather than $50,000 everyone and their cousin wants to be a broker," he said. "All that demand to be brokers is caused by the fact that the commission structure is fixed. Commissions should be plummeting from 6 to 4 to 2 percent because it's not."
But even without commissions falling, there is a squeeze on real estate firms' profits. Real estate brokerage holding company, Realogy (Charts), the firm whose brands include Century 21 and Coldwell Banker, reported last week that its third quarter earnings were down 42 percent before special items from a year earlier.
Still, despite the squeeze in real estate and the low pay for agents-come-lately, Wheaton and Retsinas said they don't think that inexperienced Realtors will cause prices to fall more sharply than they otherwise would. Retsinas said that home sellers might be reluctant to take an agent's suggestion to drop a price.
"There's a concept of sticky prices," he said. "People selling existing homes, unless they're forced to sell, are reluctant to lower the price below what they think is appropriate."
But Dean Baker, co-director of the Center for Economic and Policy Research and an economist who has long argued that current prices are overvalued and due for a severe correction, says that inexperienced agents could give bad advice to buyers, encouraging them to pay more than a property is worth in a market undergoing a correction or slump.
"From a seller side, you want a Realtor to get the best possible price, but most buyers also had a Realtor who helped to convince them it was a good deal," said Baker. "If you're led to believe housing prices are only going to be higher, you might be convinced to overpay."
Baker said there's an inherent conflict of interest that comes into play even more in a down real estate market between the buyer's agent and the buyer.
"And in the end, the (buyer's agent) wants a sale," he said. "Since they're paid on commission, they want you buy a place and pay as much as possible for it, not walk away because of a weakening market."
But Molony and Wheaton said to be successful, a real estate agent needs to have a realistic view of the market, and that helps to protect both the buyers and the sellers.
"Realtors are out there encouraging sellers to cut listing prices. It's apparent our members have been largely successful in this," said Molony.
"We don't have evidence that the more seasoned ones advise sellers differently than the less seasoned one," Wheaton added.
The slump in sales is also hitting major home builders, which have been reporting sharply reduced earnings and sales outlooks, as the number canceled orders for new homes rises. The latest builder to do so, Toll Brothers (Charts), warned Tuesday that there was no end in sight to the current housing downturn in sight. The two largest home builders, Pulte Home (Charts) and Centex (Charts), reported reduced earnings and guidance last month.