The National Association of Realtors (NAR) study on the competitiveness of the real estate industry that we discussed recently contained so many little nuggets of information about the industry and its players that we thought we would summarize them briefly in a third article.
For example, if you think that every other person you know is a real estate
agent, you could be right. According to NAR, 2.5 million people are licensed
agents in this country and 1.2 million of these are associated with NAR as Realtors.
There is no indication as to whether non-Realtor agents are actually actively
working in the field, but since any office that affiliates with NAR must assure
that all its agents are also Realtors, it is probable that many of the non-Realtors
hold licenses but are not using them at present.
Agents are entering the business in large numbers. NAR reports that 253,167 real estate agents joined NAR in 2004, a number that does not necessarily coincide with the record numbers that have become newly licensed. However, 127,877 Realtors dropped their NAR membership in that same year. Being a Realtor is an expensive proposition since it usually involves joining the state and local real estate boards as well as the national organization. $300 to $400 is probably about an average yearly fee, steep if one is not actively engaged in the trade - or making money at it.
NAR quotes the Association of Real Estate License Law Officials (ARELLO) as counting 98,000 real estate firms in the country. NAR, however, puts the total at 236,000 locally owned real estate brokerage offices and branches of those firms. The NAR report makes no attempt to explain the discrepancy, but the key may lie in the word "branches". ARELLO may only count the managing broker - the person who owns or administers the company - and ignore any additional locations.
One of NAR's main arguments in an attempt to demonstrate industry competitiveness was the lack of concentration in the real estate market. Surprisingly, given the growth of the big national firms and some dramatic mergers and acquisitions, the majority of agents are still affiliated with independent, non-franchised offices. The report states that the consolidations among large real estate companies have not deterred individuals from starting small brokerages - a tribute to the entrepreneurial spirit of most agents.
The top 10 firms in the country actually claim only a total of 9.1 percent of the country's real estate market share; the top 20 firms have a 10.9 percent share, and the top 100 firms hold 17 percent NRT, when it was the largest firm in the country, still accounted for only 4.1 percent of the market.
The "fierce competition" NAR sees at play in the industry results in some pretty low profit margins for firms and constrains the income of many agents.
The typical firm earned profits of just 2.3 percent of its gross revenue in 1996 - the last year that such data was collected by NAR. The report states that there has probably not been a significant shift in the profit margin since then as commission splits have tended to move more in favor of agents. In a 2003 survey, only 60 percent of respondent firms reported any increase in profitability during the previous year while 24 percent reported lower profits; this in a year in which home sales rose by 9.8 percent and dollar sales volume increased by 17.6 percent.
While absolute numbers are hard to come by, commission rates appeared to have decreased 16 percent from 1991 to 2004. In spite of improving splits from their offices, agents are faced with a rising numbers of referral fees, affinity fees, or the necessity to pay for benefits such as home warranties or closing costs. The typical income of Realtors (sales associates and brokers) fell from $52,000 in 2002 to 49,300 in 2004. The income of sales associates alone decreased from $41,600 to $38,300. During that two year period NAR experienced a membership gain of 26 percent which probably goes a long way toward explaining the drop in individual average income.
The salaries of the typical Realtor in 2004 were less than $50,000. Compare this, if you will, with the following average incomes:
Engineer $ 70,300
Financial services/sales $ 62,000
Real estate sales $ 49,300
Auto sales $ 47,670
Elementary school teacher $ 40,300
Nurse $ 43,661
Incidentally, the latest NAR survey indicates that 54 percent of all Realtors are female.
And how do the small companies fare when up against the big boys? The NAR report cites an earlier study by Leonard Zumpano in The Journal of Real Estate Literature that found only small economies of scale in the real estate industry. Large real estate brokerages do not hold any competitive advantages over smaller firms when it comes to unit costs. "If anything, very large brokerages are less efficient than their smaller competitors".
The largest unit of operating costs is the commission paid to the salesperson which accounts for over 60 percent of total expenditures and this figure remains fairly constant even when sales increase. The Zumpano study found that firms, both large and small, were operating close to maximum efficiency in managing resources such as offices and administrative support. Another measure of efficiency, the "survivor technique" weighs the ability of a firm to survive over time. Survival, in and of itself, can be viewed as evidence of a firms efficiency. For example, if firms of a certain size continue to operate while others lose market share, the size of the surviving firms can be considered optimal. However, if the firms that survive are the ones that grow while smaller firms decline, then economies of sale are probably present.
Analysis of industry trends in the last 20 years, however, suggests that the industry does not have significant economies of scale. The size distribution of brokerages has remained relatively constant since the early 1980s. Offices with a sales force of five or fewer hold 60 percent of the real estate market as compared with 55 percent in 1983. Brokerages with more than 50 agents, however, have yet to reach even a five-percent market share.
It would be interesting if NAR did a follow-up report expanding on the factual parts of its competitiveness study. For example, how many hours per week does an agent work for that average $49,300 per year? Are there differences in income between female agents and male? How many new offices are created each year and how many disappear through retirement, failure, acquisitions, etc.? How many firms in the country have elected to franchise? How many years has the average agent plied his/her trade and how does that correlate with income?
Our curiosity knows no bounds.