With interest rates at about double what they were just a few months ago, home prices near an all-time high, and a dramatic slowdown in transaction volume, most experts agree that the real estate industry is in for some difficult times ahead, but real estate broker and investor Matthew Bell predicts it will be a lot worse than most people expect.
“It’s bigger than any one factor,” he says. “Interest rates and inflation are high, but they’ve been higher in the past. And transaction volume has been lower in the past as well. But with record high home prices, supply chain issues, and very little consumer confidence in our economy, the industry is facing a proverbial ‘perfect storm’ where all of these factors together are creating a massive and, in my opinion, unavoidable disruption that is going to rock our industry.”
Bell is the CEO of Apollo Property Group. He has identified five key factors that he believes will combine to cause massive disruption to the real estate industry.
By all objective measures, consumer confidence in our economy has dropped to a level that we haven’t seen in decades. Americans are worried about inflation, job security, supply chain issues, and a plethora of other challenges. They’re also worried about the direction of real estate prices, which have already started to decline.
Because of this, many have taken a “wait and see” approach, sitting on the sidelines, neither buying or selling because they’re worried about making the wrong decision right before a major change.
“No one wants to buy a property knowing that there’s a high likelihood that the value will drop soon afterwards,” Bell says. “And on the other side of that coin, many sellers are holding out as well, hoping to recover from recent price drops.”
This uncertainty is increasing the length of time homes sit unsold today. The median “days on market” statistic has more than doubled since last summer, from 31 days in May of 2022 to 67 as of December of 2022. Buyers and sellers need to be prepared for how this will affect the process, but agents will be impacted even more.
Bell says, “Because of how long it takes to close a transaction today, agents will need significantly more deals in their pipeline to make the same income they made just a few months ago.”
Mass exodus of Realtors
Bell says the coming disruption is not just about buyers and sellers—it will also have a huge impact on industry professionals.
“The entire real estate industry has been on easy street for years. Sellers knew that listing their home would typically lead to a bidding war where they would quickly rake in a hefty profit, and in that process, lots of agents made a pretty good living by simply showing up. Clients rushed to listing agents and deals were often closed with little effort. That’s already starting to change, though, and it’s going to get a lot worse,” he explained.
He says that many agents today aren’t effective at prospecting, marketing, or negotiating—all skills that are important in a normal real estate market and critical in a down market. Without those skills, many agents will be forced out of the industry when things get worse.
With 1.6 million Realtors holding active licenses, according to the National Association of Realtors, the number of agents is at an all-time high, but the Pareto principle is at play here, so a small percentage of those agents are responsible for a large percentage of all transactions. As things start to get worse, Bell says the agents who are unable to drum up clients and negotiate those tough transactions will starve, figuratively speaking.
This will affect all brokerages, but it will have the greatest impact on the smaller ones that don’t have as many active agents. These smaller brokerages don’t have the infrastructure and manpower to provide the training and support agents need to be successful. That means brokers will have fewer agents working for their firms, and once those agents are gone, they are unlikely to return because they will have taken and settled into new jobs long before the industry rebounds.
The agents who do stick around will face a significantly increased workload because less business means a smaller budget for support staff, like administrative assistants, marketing teams, and other roles. And since few agents have the skills to handle these tasks themselves, eventually, this issue will drive even more out of the industry.
The remaining agents will be forced to do more with less. They will have to learn new skills, leverage technology, build a personal brand, and become more intentional about nurturing relationships in their network in order to survive. They’ll also need to develop systems and processes to maximize efficiency. Bell says this is all doable—but only if an agent is willing to invest the time and energy necessary.
“If you want the business, you’re going to have to work harder and smarter than before.”
Smart agents will need to be proactive in addressing this increased workload to avoid mistakes and burnout, while smart brokers will need to be proactive in giving them the tools and support that enable them to do that. And the hidden benefit to this is reduced turnover, which helps brokers to run a more effective brokerage.
Supply chain challenges
During the pandemic, supply chain issues started to bud, and before long, they had fully bloomed into a disaster affecting all industries. As a result, construction costs have skyrocketed, and new construction has slowed to a snail’s pace because the increased cost isn’t in alignment with current levels of demand.
This means less new inventory is added to the market, which keeps prices artificially higher than they should be.
Unfortunately, even once these supply chain issues are resolved, it will still take time for prices to recover because this is a slow-moving industry with lots of moving parts. It’s a lot like trying to turn a battleship around.
Inflation has increased the prices of everything, and in an effort to fight this inflation, the Federal Reserve has increased interest rates, further driving up the cost of real estate significantly.
As a result, homes that have dropped in price by tens of thousands of dollars or more now come with mortgage payments that are the same as they were before the price drop because of interest rates that are roughly double what they were just a few months ago, making them significantly less attractive to buyers.
Real estate expert and YouTube host, Jason Hartman, summarizes this phenomenon perfectly by saying, “People buy the payment,” meaning that buyers will make a decision based more on the payment they can afford, which is a culmination of sale price and interest rate, rather than factors like sale price or interest rates in a vacuum.
Bell explains that with rising interest rates, payments are going up across the board, meaning many people will not be able to afford the homes they want, so many of them will simply put off buying until interest rates drop, driving payments back down to the point where they can afford what they truly want.
He says, “Real estate is driven by interest rates, so when inflation goes up driving interest rates up, so fewer people buy homes, and those who do, do so more slowly. Because of the size of a typical real estate transaction, the impact here is significant and creates a devastating domino effect.”