Tough Market Puts Players in Buy Mode
By James Sanna | Originally published by Banker & Tradesman on December 11,
2022
It’s a tough time to be a Massachusetts residential real
estate brokerage right now. Revenue is falling along with numbers
of home sales, raising the prospect that not every firm will
survive next year.
“At a time like this, you have to eat more pie. You have to
figure out how to get more business,” said
Larry Rideout, chairman and co-owner of Gibson Sotheby’s
International Realty.
At its heart, the cause of the pinch is simple: The runaway real
estate market of the last two years has come back to bite the
industry, starving brokerages of both commission revenue and income
from ancillary business like title services and mortgage
referrals.
Rising mortgage interest rates have finally proved too much for
Massachusetts after the pandemic buying spree pushed median home
sale prices up by double-digit percentages from October 2019 to
October 2022 – 33 percent in the case of single-families and
30 percent in the case of condominiums, according to The Warren
Group, publisher of Banker & Tradesman. Single-family and condo
sales combined were down 20 percent year-over-year in October, and
by roughly the same margin over October 2019.
Leading indicators are similarly concerning.
Home showing foot traffic was off 58 percent year-over-year in the
Northeast in October, the National Association of Realtors said.
Pending sales of single-family homes were off 10.2 percent in
October year-over-year, and pending condo sales were off 14.3
percent, the Massachusetts Association of Realtors reported.
Numbers of new single-family listings were down 17.1 percent and
numbers of new condo listings were down 19.3 percent on the same
basis.
Economists at brokerage and listings portal Redfin said last week
they expect 16 percent fewer home listings next year
nation-wide.
“There has to be some hunkering down,” said Anthony
Lamacchia, broker-owner of Lamacchia Realty.
“Everybody’s got to expect there’s going to be
less sales, period.”
Eat or Be Eaten
These choppy waters came as the real estate market entered its
normal seasonal slowdown, further restricting brokerages’
cashflow.
“The first quarter is going to be a challenge for everybody.
Expenses still come in,” Rideout said. “Generally, in
the fourth quarter, people move [on offers to buy their
businesses], but we’re seeing a lot more right
now.”
Bigger referral networks commanded by large brokerages like Gibson
Sotheby’s, Rideout said, can offer a compelling argument to
agents and brokerages at a time when sales leads are
scarce.
These financial realities have some of the state’s larger
brokerages on the hunt for acquisitions – provided the
cultural fit is right.
“There are a lot of brokerages that are new and haven’t
had a chance to build up a war chest yet,” said Charles Hunt,
COO, Hunt Real Estate Corp., the parent company of
Whitinsville-based ERA Key Realty Services.
And the median age of a residential real estate broker is 55, said
Bernice Ross, a nationally syndicated real estate columnist,
trainer and consultant, and more than a few Baby Boomer brokers may
not be interested in slogging through another downturn.
Buying a new brokerage, particularly one with an office close
enough to an existing one that they can be combined into one, often
called a “walk-over,” is ideal, Hunt said. More gross
commission dollars can be generated in the same market,
without a substantial increase in overhead. Some brokerages might
instead be looking to add an experienced independent broker to
their leadership team by acquiring the latter’s business.
Smaller operations also have the option of affiliating their
brokerage with a larger, national brand, Ross said, or merging into
a team to lower their overhead.
“So many team leaders want their brand and their own place
but they don’t want to worry about the back end. They
don’t want to deal with [errors and omissions] insurance,
they don’t want to have to deal with paying people, but they
still want to brand themselves and have their own bricks and
mortar,” said Leading Edge Real Estate CEO Lisa
O’Koniewski.
In response, Leading Edge spun up an affiliate program aimed at
teams and small independent brokerages in early 2021, promising a
“brokerage in a box” and the same custom marketing,
technology and coaching that ordinary Leading Edge agents receive.
The nine-office firm now boasts three additional affiliate offices
in Winchester, Beverly and Yarmouth Port.
A Spring Savior?
But some brokers are still having trouble adjusting to the
market’s new direction.
“We’re very much looking to acquire, but a lot of
brokerages still think it’s a year ago,” Lamacchia
said, explaining that some have asked for valuations based on their
performance during the pandemic home-sale boom instead of looking
at their performance across three or four years.
And despite gloomy predictions coming from industry leaders, some
are holding out hope for a robust spring.
“Inventory is at a point where it’s going to pick up
dramatically in the early spring market because folks are worried
they’ve missed the bus,” said Kyle Seyboth, founder of
The Seyboth Team at Century 21.
Zillow senior economist Orphe Divounguy is skeptical of that
possibility.
“There have been some recent signs that mortgage rates could
be headed down as inflation cools, but it’s nearly impossible
to predict the path forward, and any scenario in which rates fall
back near 3% is very unlikely. Without a large income shock,
I’m doubtful we’ll see a flood of sellers since the
cost of a new mortgage will remain higher than one secured or
refinanced when rates were much lower,” he said in an email
to Banker & Tradesman.
Another possible scenario, said Guaranteed Rate loan originator
Shant Banosian, is that a moderate decline in mortgage interest
rates driven by the ongoing, slow decline in inflation could
“create more excitement in the market.”
Many sellers are distracted by end-of-year holidays right now, he
explained, and may have tuned out of real estate news when rates
passed 7 percent in early November and could have missed subsequent
declines.
“Bottom line: Life keeps going on,” he said. “At
some point there’s pent-up demand in terms of needs [from
births, deaths, divorces and job transitions] that you just
can’t wait around for,” Banosian said.
“It comes back down to one thing only: How profitable are
you, and do you have the cashflow to survive the downturn?”
said Ross.