REAL Trending Episode 85: Inventory Challenge, Sales Surge, and Crazy Valuations

Steve Murray:

From REAL Trends, the trusted source for real estate industry news, this is REAL Trending Episode 85. We’re analyzing the most important trends affecting brokerage companies and agents.

I’m Steve Murray, President of REAL Trends. And today we’re discussing the inventory challenge, the sources of the sales surge and crazy valuations. What are these trends mean? And how can brokers firms best deal with them? First, a quick message.

REAL Trend President, Steve Murray has been working with and interviewing real estate leaders for more than 30 years. He’s learned a few things along the way about running a successful company, being a solid leader, and more.

Find out his lessons learned in his video series, which offers short, insightful messages that shares inspiration and motivation from others in the real estate industry. Don’t miss a video. Go to the REAL trends YouTube channel to subscribe.

Steve Murray:

So the inventory challenge. At the end of August, we reached another milestone in our industry’s evolution. According to NAR at the end of August, there were 1.3 million listings on the marketplace compared to 1.4 million realtors, approximately.

So I may be wrong, but for the first time in history, on a national level, we have more realtors than homes for sale.

Steve Murray:

Now put aside what that means for an industry that has a surge of buyers, which we’re going to talk about in a moment. It also means based on our historical analysis of data, particularly the relationship between the number of realtors and the number of listings, the primary outcome of this in addition to obviously a slow down in sales, because we simply don’t have inventory to sell is significant downward pressure on commission rates.

Steve Murray:

In our data going back to 1991, we have shown a very direct negative relationship between the ratio of realtors to listings or listings to realtors if you were, and the national average commission rate to wit. The fewer listings, there are per realtor, the more competition there will be for those scarce listings, the more pressure there will be on commission rates.

The data proves that it has a profound effect upon the commission rate when we have scarce inventory, this kind of scarcity to the best of my knowledge, looking back 40 years, we have never seen such a thing as having fewer listings that realtors in the national marketplace.

Steve Murray:

One impact that brokers should be aware of is that agents are going to be competing more fiercely for scarce listings. And one of the ways they compete is by offering a lower commission rate to sellers. We expect this is not going to turn around in a hurry, home builders can’t possibly ramp up fast enough in a meaningful way, add to the inventory. And there are far more buyers than there are sellers right now. It’s creating real friction in the market.

People wanting to downsize can’t find what they want to downsize to because they’re competing for townhouses and smaller homes times with millennial and Gen X buyers who may be trying to buy their first home in that kind of a marketplace.

Steve Murray:

Secondly, you have the mismatch, which we’re starting to see evidence of, of people exiting major urban core areas for suburbs and exurbs, rural areas. Inventories are growing in some of the urban core centers, but obviously, inventory shrinking in the most attractive suburb and rural marketplaces.

We do not expect a quick change in this given the economy is still recovering, jobs are still recovering and mortgage rates remain at historic lows.

Steve Murray:

Second, the sources of this sales surge. Now we can say and have commented before that you took March, April and May demand and put it into June, July and August. And that by itself would have caused a surge in June, July, and August, and even September sales numbers.

Adding to that, we have this trend, which we don’t know how far it will extend of people moving out as we said earlier of major urban core areas for suburban and exurb and even rural areas. We’re seeing it anecdotally, we hear stories throughout the United States of this going on, but no documented numbers thus far as to just what percent of this excess purchasing is because of people leaving the cities.

Steve Murray:

Now, then the underlying question one must ask is what are the reasons people are moving out of the cities or relocating from high cost high tax states to lower costs, lower tax venues, or states or regions? No one can say for sure is it high cost, high tax people moving out? Is it civil unrest causing people to move out or buy second homes?

And/or is it people that realize they’re working for someone that will not require them to go to an office every day? And they may move simply because they can, 20 miles, 30 miles, 50 miles, a hundred miles from where they used to be to seek lower cost housing because they can now work primarily out of their home.

Steve Murray:

We have found no reliable data that tells us how much of this surge is based on people moving to escape urban core areas because of high cost and high taxes and high price of housing or moving because of civil unrest or moving because they no longer have to live where their work was, they can now shift and work where they live.

That last is a huge shift. Remember, almost all of American workers or the greater preponderance of them have always had to live where their work is. How profound, for how long is the shift to I get to work where I live? How much is that going to affect housing? How much is that going to affect the economics of the major cities of this country is still a big question mark.

But brokerage companies and agents are advised that it is a profound shift, it is not all temporary, and it creates new opportunities to serve people outside of your existing areas perhaps.

Steve Murray:

Lastly, recent stories about the valuation expectations of Opendoor, Compass and others, not to mention the existing valuations of people like Zillow, Redfin, and eXp, we receive dozens and dozens of emails here at REAL Trends about how can these things be worth this much?

And the truth is we have no good answer for anyone as to how companies can trade at 4.5 to 5.5 times revenues, not profit, not EBITDA, but 4.5 to 5 times revenues while they’re also losing money, while those more incumbent companies, Realty and Remax, for example, trade at more traditional earnings multiples against their enterprise values.

Steve Murray:

And the reality is there’s only really one answer. There’s still an infatuation by Wall Street and Silicon Valley with the possibility that a Zillow, a Redfin, an eXp, a Compass, even an Opendoor will be the Google of tomorrow, or will be the Amazon of tomorrow, or will be the Apple of tomorrow.

Trading at high multiples that will come to dominate an industry with a whole new business model, and that is it. There can be no other rational explanation other than Wall Street and Silicon Valley combined believe that companies like Zillow, Redfin, Compass, eXp, even Opendoor will one day be those kind of market leaders and that they’re going to fund the opportunity to see if that happens.

Steve Murray:

No one can say for sure what the future of two years, five years, or even 10 years looks like now in the residential real estate brokerage industry or housing sales or the economy of the United States. There isn’t a single person that knows for sure with any certainty what in any of those timeframes, what things look like.

Our advice to brokerage companies is it is not worth any time to spend time of your time worrying about the valuations of these companies, because it makes no rational sense in the way that we look at business in the brokerage industry, and maybe they’re wrong, maybe they’re right. We don’t know. We won’t know for years to come.

Steve Murray:

Learn more about industry trends and success tactics for brokerage firms, agents, and teams, as well as listen to past REAL Trending on Apple podcast, Spotify, Google Play and others. Visit This has been Steve Murray, until next time.

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