Friday, August 18, 2006

Los Angeles Business Journal: Offices Shutting Down as Home Sales Plunge

This August 21 article in the Los Angeles Business Journal (login or subscription may be required) should really come as no surprise to us. We know that median home prices have not "officially" declined year over year, so homesellers who sell now are still making a good profit. But we also know that number of sales are down dramatically, and, we know that real estate dollar volume is down (we measure that here every month), which means that those in the industry could be seeing declines in their net income. It may be getting tough to be a residential realtor. And the commercial real estate we are seeing emptying out first is - no surprise here - real estate office space.

Apparently a glut of new realtors has hit the industry here the same way that gluts of new condos have hit the housing market. On a rather amusing related note, a prominent and hugely successful brokerage in the south bay area notes that a "former top fashion model" has joined its brokerage team, along with a veteran agent "who goes by only her first name". If open houses this year have had to use Easter egg hunts, fake families, string quartets, gourmet chefs, and celebrity book signings just to get people to show up I don't know if adding glamor and mystique to the local realtor's office is going to help. (By the way, those string quartets, gourmet chefs, and celebrity book signings were for open houses back east, I don't think those gimmicks have hit California markets quite yet.

But let's get back to the L.A. Business Journal article:

Offices Shutting Down as Home Sales Plunge

By HOWARD FINE
Los Angeles Business Journal Staff

A shakeout has begun to hit the local residential real estate sales industry.

As home sales have plummeted throughout the region, a host of local and national
residential sales offices have closed recently amid a wave of branch consolidations.

The Business Journal has confirmed that in the last 60 days at least six residential
brokerage branch offices have closed or are in the process of doing so, most on the 
Westside or in the San Fernando Valley. Hundreds of brokers have been consolidated to 
other offices, and some have left the industry.

Several said the consolidation wave has just begun.

“I’m seeing closings going on all over Southern California,” said Syd Leibovitch, 
president and owner of Beverly Hills-based Rodeo Realty, an independent residential 
brokerage.

The main culprit: a precipitous drop in home sales as interest rates have gone up. In 
July alone, the number of home sales in Los Angeles County plunged 34 percent to 
6,146 compared to last year, according to HomeData Corp., which compiles home sales 
data for the Business Journal.

July’s drop follows six consecutive months of lower home sale volumes compared to 
last year’s historic high levels. That has lengthened the average time a home stays 
on the market to 36 days from 22 days a year ago, according to the California 
Association of Realtors.

Home prices are still rising – albeit at a much slower 7 percent annual clip instead 
of the 20 percent plus jumps of recent years – sales volume is much more important 
than price for residential brokerages. With fewer homes changing hands each month, 
commissions and revenues are down at brokerage offices.

“If you’re not making enough in the office, you have to close it down,” Leibovitch 
said.

The situation has been compounded by an influx of newly minted agents hoping to make 
a quick buck in the recent overheated housing market.

In the last five years, the number of licensed Realtors in California has roughly 
doubled to 504,000, according to the California Association of Realtors. As a result, 
agents on average are handling five transactions each year from a high of 11 in 2000.

“Any time you get under six transaction sides represented in a year, a drop in our 
membership rolls soon follows,” said Robert Kleinhenz, deputy chief economist with 
CAR, which now comprises over 200,000 members.

The actual number of branch closures is difficult to pin down, but several in the 
industry said it’s clear that few if any offices are opening and several have closed 
or will close. Some believe the number of closings could be big. 

“I believe you will see 20 to 25 percent of brokerage offices closing in the next 18 
months,” said Jimmy LaPeter, a Century 21 franchise owner.

That in turn would likely lead to thousands of residential real estate agents being 
laid off or leaving the industry voluntarily. In the slowdown of the early 1980s, 
roughly 30 percent of agents left the industry; closer to 40 percent left following 
the real estate crash in the early 1990s, according to the California Association of 
Realtors.

Sotheby’s closure
One of the biggest offices to close lately is in the heart of Beverly Hills: 
Sotheby’s International, a unit of real estate brokerage giant Realogy Corp., is 
closing its Rodeo Drive office and relocating most of its 150 brokers to other 
offices.

One broker who recently left the Beverly Hills office of Sotheby’s rather than be 
relocated said the market has definitely turned.

“It’s gone from being overheated to more normal very quickly and that’s meant 
downsizing,” said Philip Buck, who just joined the Beverly Hills office of Rodeo 
Realty.

Earlier this year, Sotheby’s cut agents’ commissions as the company attempted to 
collect more money to cover fixed overhead costs. Then, in late June, word got out 
that offices in Beverly Hills and Palm Springs would be shuttered by the end of 
August.

Another agent, who asked that her identity not be revealed, said business got so slow 
at the Beverly Hills office that it became a joking matter when the former office 
manager asked agents if they had a sale in escrow.

“It used to be half the office would raise their hands and recently it’s just been a 
few,” she said. “(The office manager) would jokingly say, ‘Well, we can always start 
an ice cream parlor in back.’”

Sotheby’s declined to comment for this story.

But some brokerages see the slowdown as an opportunity. Rodeo Realty is trying to 
capitalize on the industry downsizing by snapping up talented brokers from closed 
offices.

To that end, Leibovitch is hosting a “recruiting party” this week at the Beverly 
Hills Hotel, with the express aim of trying to get some of these displaced brokers on 
his team.

Another player trying to capitalize on the downturn is LaPeter, who owns 10 Century 
21 franchises throughout Southern California. LaPeter is looking to acquire up to 
dozen additional Century 21 franchises; if the deals are completed, he said 
consolidations might follow.

“With the market changing, it’s going to be tough for a lot of brokers to stick it 
out,” said LaPeter, adding he may consolidate his own offices in West Covina and West 
Hills, though a final decision has not been made.

Also closing offices in the region is Coldwell Banker, another unit of Realogy Corp. 
Coldwell has already closed offices in Agoura Hills and Burbank.

“We didn’t lose anybody; we just consolidated,” said Jann Berman, spokeswoman for 
Coldwell Banker Residential Brokerages in Los Angeles and Orange County. “We are 
always looking to make sure we are making economic sense and our strategy is to be 
smart about our operating costs.”

Corporate, independent closures
These closures, along with those at Sotheby’s, are taking place against the backdrop 
of a nationwide consolidation by joint parent company, Realogy Corp., which just this 
month was spun off from Cendant Corp. Realogy also is the parent company of NRT Inc., 
the largest owner and operator of residential real estate brokerages in the U.S.

In a conference call on Aug. 10 in conjunction with the release of second quarter 
results for both Cendant and Realogy, Cendant President and Chief Financial Officer 
Ron Nelson said the slowdown in the California and Florida real estate markets were 
largely driving the consolidations.

“Realogy has worked to rationalize NRT’s fixed costs through office consolidation, 
headcount reduction and other moves,” Nelson said.

In many instances, the consolidations are working in reverse of the brokerage 
acquisitions that Cendant undertook in the 1990s. Those offices that were acquired 
latest, such as the Sotheby’s office in Beverly Hills, are the first to close.

Big brokerages are not the only ones to consolidate offices.

“Independents are also vulnerable; they may not have the deep pockets to get through 
a prolonged slowdown,” Leibovitch said.

In Los Angeles, Boardwalk Properties, recently closed its Santa Monica office and 
consolidated the agents there to nearby offices. Steve Aguilar, Boardwalk’s 
president, said that the immediate trigger for the closing was a buyout offer for the 
office space from the landlord, but he admitted that the home sales slowdown was a 
factor.

“It definitely played into our decision. The timing of the closure couldn’t have been 
better,” Aguilar said.

Another independent brokerage, Troop Real Estate Inc., has closed its Agoura Hills 
office, consolidating the brokers into its Westlake Village branch.

Currently, membership in the local chapters of the Realtors’ association continues to 
rise, Kleinhenz said. But he said he expects that to reverse next year. Indeed, the 
mindset has already changed among agents from the “hop-on-the-bandwagon” mentality of 
just a year ago.

“Right now, I’m seeing disillusionment from agents, who are now realizing that this 
is the normal market and you just have to work a little harder,” said Bill Toth, 
owner of Windermere Real Estate in Burbank.

Toth said he is already seeing some agents – the “Johnny-come-latelys” as he calls 
them – leaving the industry. “These are the people who were seeking to make a quick 
buck. Those who will be left will be those who make a living and depend on it and 
have built up relationships, clientele and trust over time.”

Staff Reporter Daniel Miller also contributed to this story.

5 Comments:

Blogger GarbageInn said...

Hmmm, this is kind of like a "tracking stock".

8:59 PM, August 18, 2006  
Blogger Wannabuy said...

Bearmaster

Thanks again for another great link. :)

I cannot wait to see the August charts.

As a result,
agents on average are handling five transactions each year from a high of 11 in 2000.

“Any time you get under six transaction sides represented in a year, a drop in our
membership rolls soon follows,” said Robert Kleinhenz, deputy chief economist with
CAR, which now comprises over 200,000 members.


Wow...

Lets see
Sales_agent=5

....
Do while (recession)

If Sales_agent<6 agents*=.95
Home_sales=Home_sales*.7
Sales_agent=Home_sales/agents
end while

Pardon the geeky humor... but we're in a downward spin cycle.

Neil

9:11 PM, August 18, 2006  
Blogger bearmaster said...

When the housing bears say "The parrot is dead!" The econo-bubbleheads and the realto-bubbleheads still insist, "Oh no, he's just resting!" There are more and more signs he ain't just resting.

7:02 AM, August 19, 2006  
Blogger bearmaster said...

GarbageInn,

Thanks for visiting. That's a good observation - "the tracking stock".

One of the things I hear that I get real tired of hearing is that "It's different this time, the real estate is not stocks!" But there are many similarities between the two markets, chief among them being that they are driven by mass psychology.

The key difference between the two, and one that is going to work to the real estate market's disadvantage as it spirals down, is that real estate is not liquid the way that stocks are. Even when somebody is down 25% in a stock, or 50% in a stock, at some point the person can panic and dump it. Not so with a house.

And when you've got an "unresolved" issue like an unsold house hanging over you like a ton of bricks, you are bound to not be in a good mood. In fact, I blogged about this back when this blog was still a baby:

Will the Housing Bubble Lead to Social Problems? (Prechter's background is in mass psychology.)

We have not really seen the dour mood show up yet. Or the anger. This downtrend is still very very young.

7:19 AM, August 19, 2006  
Blogger judicious1 said...

Bearmaster -

Did you see Thursday's Daily Breeze front page article "South Bay's Housing Market Losing Steam"? A big difference from the 2005 headlines, eh? What so you suppose the headlines will read in the summer of 2007? 2008? Only fools and those in denial are failing to read the writing on the wall for the SoCal housing market.

11:19 AM, August 19, 2006  

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