So Who Will Be Exiting Real Estate?

Following up on my post on NAR 800K, I found this article on Inman News about a survey it conducted of its readers (subscription required). Apparently, most of the respondents agree with yours truly in thinking that at least another 20% of agents need to exit the industry before we can have recovery. But here’s the interesting point — the Inman readers think that part-time agents are the most threatened:

Part-time agents were viewed as the most likely to leave the field, with 46.8 percent of those surveyed identifying them as the most threatened by the market shakeout. That compares with 33.5 percent who said full-time agents were most threatened, and 32.4 percent who identified brokers.

Let’s assume that I’m correct about NAR 800K. Well, that might be a very good thing indeed. However, whether losing 20% is a good or a bad thing depends in part on who it is that will be leaving and who will be staying behind.

I differ with the Inman readers, because I don’t believe that the 20% drop will come from part-timers. I think they will come from the ranks of full-time agents, particularly those in the critical first and second quintiles. Allow me to explain.

Quintiles

I’m choosing quintiles because of the widely held belief about the 80/20 rule: that 80% of the business is done by 20% of the agents. So if we divide the agent population (roughly 1 million today) into equal fifths, some interesting facts emerge. (Before we start, I have to confess that I do not have the 2010 NAR Member Profile report, so I’m going off of the 2009 report. There may be some inaccuracies as a result. Now, if you think I should have a copy of the 2010 report, well, I’m not going to look a gift horse in the mouth….)

First, we know that roughly half of all REALTORS are part-timers. 14% of Agents work 20 or fewer hours per week; another 35% work between 20 and 39 hours. 39% work 40-59 hours, and 12% work 60+ hours per week. (Exh. 2-17) But what’s interesting is that among Sales Agents, only 56% of those working 40+ hours say that real estate is the primary source of income for the household. (Exh. 5-16)

Second, we know what the gross annual income is for Sales Agents (Exh. 3-14):

Here’s roughly how it breaks out. The top earners, the top 20%, are basically those making $75,000 or more — take those five together and you get 18%. The next group, those making from $35,000 to $74,999 comprise 25% of the total. The bottom three, making less than $10,000 per year up to $34,999 make up 58% of the total, with 28% making less than $10,000 per year.

So if you create a very rough quintile you get something like:

Top - $75K plus
Second - $35K to $70K
Third - $20K to $35K
Fourth - $10k to $20K
Fifth - Less than $10K

Now, the 2009 poverty line for a family of four was $22,050. Minimum wage is currently $7.25 per hour, which comes to $14,500 per year.

Third, we know what the gross income is by hours worked as well:

What this table tells me is that of the 12% of all REALTORS who work 60+ hours, only 49% are in that Top Quintile of $75K plus earners. Of the 39% who work 40 to 59 hours, of them, only 32% make up the Top Quintile. Assuming a total REALTOR population of 1,000,000, that means of the 510,000 agents who work at least 40 hours per week, only 183,600 of them are in the top 20% who do all the business. What’s more, of that 510,000, about a fifth — 107,700 — fall into the bottom two quintiles.

And look at the overall distribution of income among the full-timers. It isn’t as if the majority are getting rich on real estate. Only a small percentage can be said to be making a very good living from this business.

Fourth, we know that 56% of Sales Agents working 40 or more hours per week rely on real estate as the primary source of income for the household (Exh. 5.16). So some 285,600 REALTORS are supporting their families with their real estate practice. In contrast, only 18% of those who work fewer than 40 hours per week rely on real estate as the primary income source.

Fifth, we know that the median age of a Sales Agent is 52 (Exh. 5-5) and that 66% of them are women (Exh. 5-3).

Reasoning

Given the above numbers, I think it is very difficult to reach the conclusion that it will be the part-timers who will be exiting the business.

Why would a real estate agent leave the business, once she has taken the test and gotten the license? She could get bored of it, I suppose. Or she could get an amazing opportunity to do something else. But chances are, she would quit doing real estate for financial reasons.

But given that 82% of part-timers are not relying on real estate as primary income — which implies that their spouses are the primary breadwinners, and the real estate income is either extra cash, or an interesting job that allows for great flexibility, especially for parents who are raising children. Hasn’t this been one of the top reasons why people, particularly women, particularly after they have started a family, come into real estate?

After all, it is not a particularly onerous burden to maintain a license, to stay in a MLS, and to remain active as a REALTOR. And if you work one buyer, or get a friend to list her house with you, you’re looking at a pretty nice payday at the end of the transaction.

Since the Inman readers and I are both projecting that the main reason for the decrease in agent count will be the declining housing market, I cannot imagine why someone who isn’t doing real estate full-time as the primary source of household income would leave the business.

On the other hand, those who are working full-time — the 510,000 — have every reason to be sensitive to the changes in the market. Suppose that home values drop another 20% from 2011 levels — as quite a few economists believe needs to happen. The part-timers aren’t likely to care all that much, since they weren’t relying on it. Even out of the full-timers, the 44% who aren’t relying on real estate for primary income won’t be that dramatically affected.

The 6% of full-timers who are making over $200,000 per year might have to skip that extra ski vacation to Vail from losing 20% in gross income, but I suspect they can get by on $160,000 a year instead of $200,000.

I have no real data to back this up, but I suspect that the 21% of full-timers who are in the bottom two quintiles are all in that 44% who aren’t relying on real estate income. I further suspect that significant portions of even the third quintile (roughly $20 – 35K a year) aren’t raising families on that and saving up for college; not when the poverty line is $22K a year.

But the 30% of full-timers in that second and low top quintile, making between $50K and $100K per year, would find any further downturns devastating. Going from 100K to 80K a year might mean not making mortgage payments, or being unable to save up for retirement. And given the inherent uncertainty of a business where you don’t get paid until the deal is closed, quite a few of those agents could and would make the rational decision that it’s time to look for a steady job. That’s about 150,000 REALTORS in that group. I can easily see half of the 20% drop coming from these people.

This is not an uncommon story in the industry today, from what I can tell by talking to my friends who are REALTORS. They tell me time and again that someone they know quit real estate to take a job, because their local market was terrible. In every case, that someone was a full-time agent, with years of experience, who they thought was a competent agent well-versed in getting transactions done and providing excellent client service.

That is a loss, and not one we all should be welcoming.

Conclusion?

I’m not entirely satisfied with the data I had to work with, so it’s difficult to draw any real conclusions. But it is definitely not the case that the full-time agents are doing fine, making money, and driving the part-timers out of real estate. If anything, any further downturns in the housing market will force the full-time agents to make difficult choices, rather than the part-time agents who could make do without the extra income from real estate.

If my predictions of NAR 800K does come true, I suspect that we will see a significant bifurcation of the agents between the Elites and the Amateurs. The “middle class” of agents, if you will, disappears. The median numbers may stay roughly the same, but the impact on the industry of a few top agents who do 30, 50, 100 transactions a year dominating their local markets with large teams and support staff beneath them, leveraging the latest in technology since they can afford to pay for those, and everyone else being part-time hobbyists doing two deals a year, is as yet unknown.

But for some reason, I can’t imagine that situation turning out all that well for consumers.

What say you? Who will stay and who will go? What might be the impact on the industry? Am I missing something crucial in this?

-rsh