I got this question in my in-box from a market rep the other day.

Hey Dan,
I am just trying to figure out here who is the enemy here.The recession or to much free media for the realtors ?
While other busineses are fighting the recession only, and will come back. We are fighting free platforms all over the place. What say you ??

Here’s my answer.

Charles,

I’m sorry for being so slow in getting back to you on this. I’ve been swamped and then lost track of the e-mail.  I apologize.

We’re fighting heavy headwinds and they are coming from multiple directions.  It’s frustrating.

The proliferation of free web listings makes it easier for agents/brokers to say that they don’t have to do any paid advertising.  That works for them when they aren’t making any real money from commissions.

But it doesn’t help them stand out.  It just gets the listings out there, into a bunch of different searchable database, just like every other listing in the market.

When I search the homes for sale in my home town, more than 100 are returned in just one price bracket.

How do I pick the agent?  What makes them stand out?  Do I want to spend all that time researching 100 homes?

There’s still a place for marketing solutions that help agents stand out so that they get more than their fair share of the business.  That’s what The Real Estate Book offers.

Our challenge today is that agents aren’t seeing their incomes rise.  So they don’t want to spend for high-visibility, quality advertising.  As a result, a lot of people are saying there’s no need for that kind of advertising.  Those people are being self-serving.

There’s a need.  There just isn’t enough business to justify it.

When the market turns, we’ll see our fortunes turn.  That will be a good thing.

Dan

The challenge is being able to wait through the downturn.

The headlines announcing that Bank of America has stopped processing foreclosures in order to assess their internal controls are difficult to process.  On one hand, this sound like a good thing, because if the pace of foreclosures slows it will diminish the number of families under stress and lighten the overhang of foreclosed properties on the housing market.  On the other hand, you don’t get foreclosed on until you’ve stopped paying your mortgage, right?  So what’s the big deal.

To sort it out, I recommend you follow the five-part series that kicked off today at Barry Ritholtz’ The Big Picture.  The post is authored by Mike Konczal, a fellow at The Roosevelt Institute.

The big question at play isn’t just whether the mortgage processors have been playing fair with homeowners.  It’s whether the financial institutions actually know where the original mortgage documentation is.   Can they produce the piece of paper they need to have to demonstrate the lien on the property?

The issue is captured neatly in a two-part graphic, reproduced below.

As the post points out, the issue of whether or not the mortgages can be found has significant implications for the financial players.

So keep these frameworks in mind when you see the debate unfold in the next weeks. It is a problem of systemic risk, and it is a problem for the currently cratered securitization market. It will need to be addressed, the sooner the better.  But how?

What should we all make of this?  Consider it a last, bad joke on the part of the financial services industry.  This new “foreclosure crisis” has nothing to do with home values or the ability of home owners to make payments of mortgages.  But, it has a lot of potential to slow down the housing market, at a point that the market doesn’t need any more headwinds.

I’ve been preparing for a conference this week held by the investment bank DeSilva & Phillips. The concept is intriguing: the principals, Reed Phillips and Roland DeSilva, have invited eight CEOs of mid-market media companies to talk about the transformations in their business to an audience of about 100 members of the private equity and media banking community.

Ironically, the context for transformation is crisis, as the publishing segment of the media sector has been under extreme duress during the recession. While this duress has taken a toll on the capital structure of media companies, it has also forced business to focus, identify where their customers are and develop more flexible and web-centered business practices.

In preparing for my presentation, I’m forced to answer two basic questions: what is attractive about our company, Network Communications, Inc., and what is attractive about our market.

When you are positioned squarely against the housing market it’s easy to fall in to the trap that your market is a problem.

Perhaps the best way to disabuse people of that notion is to show them two charts.

The first looks at home prices since 1970. It is the simplest way of capturing the impact of the housing bubble. For a short period of time,home prices soared irrationally. What we know now is that the loans made against those soaring house prices helped fuel a fever in lending to the entire building market — resale, new homes, multi-family and commercial — that created an unimaginable glut of capacity just when demand was going to decline.

When we take a long view of prices, it is easy to conclude that the market has fallen back close to the norm, and that with a little more correction, the housing market will be where it need to be.

The drama of the price drop over-simplifies the dynamic impact the housing market has on the economy. The best way to measure that impact is to look at the effect of housing on Gross Domestic Product over time.

The second chart captures all components of housing as a percentage of GDP since 1970 and plots the ratio against the logarithmic trend. This analysis shows that housing as a percentage of GDP is significantly below its trend over the past couple of years.

Closer analysis of the number shows that the driver for reduced production in the housing sector is the overhang of excess capacity, coupled with conservatism in the lending markets.

The most volatile component of the housing sector is residential fixed investment, which includes the cost of building new homes and multi-family units, improving existing homes and paying commissions on the sales of homes.

From 1995 to 2005, residential fixed investment increased $319 billion to more than $700 billion.

Between 2005 and 2010, residential fixed investment declined $424 billion.

Historically, residential fixed investment has been about 5% of GDP. Currently it is at 2.7%. At the normalized rate, residential fixed investment would be around $650 billion, or 85% higher than current levels and 15-20% below the peak.

Has anything happened to change the long-term structural dynamics around residential investment? Not really. There are more efficient building techniques, and the overall size of structures is likely to diminish, but the demand for residential fixed investment is driven by the population’s housing need. Population grows, existing housing stock ages, bylining costs come down, and new capital pours in as part of a virtuous cycle.

The current challenge of the housing market is that the alignment between supply and demand still is not set. Demand is suppressed because of the weak employment market and frozen lending channels; supply is too strong because of the overhang of building during the housing boom.

Each quarter the housing market regulates a little bit more, and a recovery in the housing market is not that far away.

At that point, it will be clear that housing is a good market opportunity, with steady growth characteristics that will distinguish it during a particularly challenging decade for our transforming economy.

I found myself wondering the other day about the economic impact of the decline in the real estate market on agents.

The reason for my curiosity is pretty clear: The Real Estate Book business depends on the income of real estate agents. The agents who are going to invest in high-visibility, high-impact marketing tools like The Real Estate Book are going to be among the high-earners. Over the past three years, the scale of our business has dropped dramatically and rapidly. How much is a decline in income driving that decline, I wanted to know.
A lot.

Fortunately, the National Association of Realtors is exceptional at gathering a lot of information consistently. The association does several different annual surveys and is smart to keep their questions consistent, so that you can compare trends over time. While their Survey of Home Buyers gets a lot of attention, they also do an annual survey of realtors that has a lot of rich detail on how realtors are managing their business.

So I dug into the NAR data to try to scale the market. There were three clear conclusions: Commission income has dropped dramatically; the number of high-earning agents has dropped just as dramatically; and marketing spending has dropped dramatically.

First, commission income. To extrapolate trends in commission income, I took the average home price and total number of transactions from 1996 to 2009. I then applied a uniform commission rate over the series. (One could argue that average commissions are down the past two years because of the influx of bank-owned properties in the market.)

Using this formula, commission income peaked in 2005 and dropped like a stone to 2009. About 10 years of commission growth was lost in the 24-month period.

Commission income should be roughly flat in 2010, based on NAR home sales projections and a 15% drop in average price. The good news for top earners is that there should be fewer agents competing for the commission dollars, and that consumers are likely to gravitate to agents who have reliable track records and are clearly in the business full-time.

How many agents is that, I wondered? That led me to create another extrapolation to estimate the number of high-earning realtors. To calculate this number, I used the percentage breakouts from NAR’s realtor survey and applied them to the total number of realtors in each year, according to NAR.

According to this approach, the number of high-earning realtors has declined by more than 40% from the peak of the real estate market. All told, there are about 178,000 agents that make over $100,000 per years, compared to 312,000 in 2006.

This is an incredible loss of earning power. The drop in commission revenue has been accompanied by a drop in marketing spend. All told, the number of realtors that spend more than $2500 a year on marketing and advertising has declined 45% to about 200,000.

A couple of interesting trends surfaced when I dug into the distribution of annual marketing spend over the past few years, according to the NAR survey.

First, the median marketing spend was down 31%, less than the drop in commission income over the same period. This is a byproduct of realtors trying to keep up a subsinence level of marketing. The larger marketers cut their spending by 50%.

Second, realtors have not expanded their investment in online media, keeping it at about 10% of overall advertising and marketing spend.

I’m a glass-half-full kind of guy, so when I look at these figures, I’m struck by the opportunity for higher-earning realtors to increase their investment in marketing in order to increase their share of the market. But, by any account, the contraction in marketing spending by real estate agents over the past two years is difficult to process, it is so large, pervasive and complete.

In the 455 posts since I launched ViralHousingFix on January 4, 2009, there hasn’t been a longer gap than the one between Post 454 and this post, number 455:  11 days.

The workbook I use for my professional notes is chock full from the past two weeks, and the program I store interesting snippets in has a long backlog, but there haven’t been any posts.

Being busy with a lot of exciting developments at NCI is part of the explanation.  Getting engaged in a personal writing project is another.  But there are a couple of other reasons for the fallow spell that I think might be interesting to those of you who follow this blog regularly.

The first is that I’ve stepped back for a bit to see how things are going to turn out.  Over the past 16 months, I’ve written and shared a lot of analysis of the economy and the housing market.  The two big questions were exactly what the composition of the recession was and what the beginning of the recovery would look like.

Right now, we’re in the recovery and it’s a choppy and uncertain time.  The macro trends have been positive, as a fairly random selection of charts picked from the blog Carpe Diem shows.  Our business at NCI is hyper-local and consumer-driven, and our experience is showing us that while the recovery has settled people’s nerves, it is neither expansive or extended enough to dramatically shift consumer sentiment to the degree that households are getting reformed and the consumer’s near term outlook is upbeat.

That sense of stasis has diminished my urgency to write about economic trends.  I don’t feel like there’s anyway to really project when consumers are going to have a baseline change in outlook.  It’s going to happen.  When it happens we’ll be happy about it, and a little surprised that we didn’t see it happening at the outset.

In a New York Times column, Jack Stack, CEO of SRC Holdings, Inc., summed up the current zeitgeist:

The funny thing is that despite their recent success, most of these folks seem reluctant to acknowledge that things have gotten better. Why? Well, I have two theories about that: one, people feel so burned by the last few years that they still fear a double dip — and they’re still waiting for another shoe to drop.

I think that’s a pretty good characterization.

A second reason for the dry spell on the blog is that I’ve been digging in on the learnings that we’ve developed around our DigitalSherpa social media marketing service over the past year.  It’s been pretty rich and exciting, and part of an overall organization audit and assessment that we’re doing across the service.

I haven’t written about the things I’ve learned because there’s a lot to synthesize:  the outcomes and experiences of more than 1000 client engagements.  We’ve essentially got thousands and thousands of proof points around the power of content marketing on social platforms, the relative value of different types of engagement, and the impact that a consistent content marketing plan has on search traffic and referrals.

Some of the facts are fun for their sheer scale.  For instance, we’ve generated more than 1 million social interactions for our clients in the multi-family space since launching CommunitySherpa last summer.  Some of the facts are engaging for their business impact:  one client has been able to cut more than $200,000 of search marketing spend because of the impact of the content marketing program that we’ve executed.  (That $200,000+ savings is net of the cost of the program, by the way.)

When you man a blog single-handedly, you’re going to experience ebbs and flows.  What you were writing about isn’t always what you are going to be writing about, and when you get to a juncture where you see a new avenue to explore, sometimes you just need to set back and sift through facts for a while.

The last three weeks have been partly busy and partly sifting time.  Thanks for your patience.  The one thing that has really impressed me is how strong the traffic to the blog has stayed.  That’s because of the way that all of you have used the content — the sharing, the commenting and the reading.  I appreciate it.

Harvard professor Mark Perry has been one observer who has consistently chronicled the silver lining in the recovery, sharing discrete pieces of data that show the economic engine gearing smartly back up.

Last Friday, he shared another in a series of posts that have looked at the recovery in local real estate markets. The subject of this post: Minneapolis.

I’m struck by the impact on the economic vitality of real estate agents. Commission income has bounced back to where it was in 2008. With fewer agents in the market, that should mean the opportunity for agents to boost earnings is significant.

Agents will play a big factor in the continued recovery of the resale home market: the more confident and upbeat they are, the more excited home buyers and sellers will be.

With our two oldest children at college age, Tami and I decided this Spring to put our house on the market and explore downsizing into a home that more neatly fits a family of 5.

Our house has a distinctive story, even in an upscale market like Greenwich. We did a gut renovation of the home in 2005 — such a gut renovation that the home is really a 2005 replica of an 1840′s farmhouse that was expanded into a family mansion in 1900.

Unlike most of the recent new homes in Greenwich, we didn’t do a tear-down and build-back. When we designed the renovation, we wanted to keep the original proportions of the rooms, which were uncharacteristically large and distinguished. We also wanted to respect the way that the house was situated on the property; it had once been the main house for a 250+ acre working farm, and the way that the house looks out to the west is really special.

The interest has prompted a number of different news stories. The most fun for Tami and I was a short feature that ran this weekend on the LX.TV show Open House.

Here it is:

The housing market is recovering. At least, 1 million people think so.

That’s the number of people who bought homes in the first three months of 2010. And that’s more people than have bought homes in the first three months of the last two years.

Let’s throw out caveats and the concerns and step back for a moment. It’s easy to point to a lot of different reasons why the home sales figures are inflated, or why home prices continue to have risk.

The two charts below show the sustained trend in recovering home sales over the past two years.

The first chart plots the number of homes sold in the first quarter over the past decade.

The 1 million home buyers in the first quarter don’t measure up to the levels of the real estate boom. But that’s not what a recovery means.

A recovery does mean changes in momentum. The second chart looks at how the market pacing has looked at the start of each of the last four years. This first quarter of this year was up 12% in sales versus the year before, breaking a decline that started in 2006.

The resale market is clouded by a lot of external factors that are driving price and inventory, but the actual number of homes sold show that there is an underlying increase in demand. From it we can infer that consumers feel good about buying homes. And that’s what the recovery will look like.

The U.S. economy lost more than 1 million households during the recession, even as the population grew more than 3.5 million, driving down home ownership and increasing rental vacancies at a rate that hasn’t been experienced in more than a generation.

Just as economic distress reduced households, economic recovery will increase households, concludes USC professor Gary Painter in a paper sponsored by the Research Institute for Housing America, a mortgage industry-backed think-tank.

As you read through What Happens to Household Formation in a Recession?, it becomes clear that the rebound in household formation will greatly benefit the rental market, while the impact to the residential real estate market will be more muted.

Finally, it will be important to observe a turnaround in home ownership rates before the housing market is likely to stabilize. This is because increases in initial household formation will disproportionately come from renters, which may cause home ownership to fall further. In addition, former homeowners who lost their homes due to foreclosure have had their credit damaged and will likely take time to repair their scores and secure a down payment. Once both of these classes of renters make the transition to home ownership then we would expect the housing market to stabilize.

Painter provides one of the most complete analyses of available data to capture what happens to households during changes in the economy. The graphic below illustrates the dynamic of households. During periods of economic stress and increased unemployment, more people combine households and fewer people leave existing households.

Declines in employment and increases in the unemployment rate during periods of recession reduce household formation rates. Specifically, a national recession suppresses the formation of new renter households, while higher unemployment rates suppress the formation of both new renter and owner households.

The remarkable thing is how much those numbers add up: in all, a net decrease of 1.2 million households during the recession, Painter estimates.

The model…using data covering 6 recessions, predicts that rental household formation likely fell by 2–4 percentage points due to the current recession and that the formation of owner households likely fell by about 1 percentage point. Confirming these predictions, data from the ACS shows that formation of native-born households in a sample of 80 of the largest metropolitan areas has fallen by about 3 percentage points overall and by nearly 4 percentage points in the largest immigrant gateway metropolitan areas. This translates into a reduction of nearly 1.2 million households nationwide during a period where the population in these metropolitans grew by 3.4 million.

These figures help to explain the significant pressure on the residential home market and on the rental market.

As the table below demonstrates, the drop in home ownership that began in 2004 was accompanied by a sharp increase in vacant homes.

At the same time, occupancy of rental units has decreased to generational lows, leaving one to wonder, Where have all these people gone?

Last month, Pew Research Center released data showing that multi-generational households — two or more generations sharing a home — had increased to 16% of the population during the recession. In raw numbers, this means that 7 million more people were living in multi-generational households in 2008 than were in 2000.

That creates a depression of demand. Add in the glut of inventory that was created to satisfy the temporary demand of the housing bubble, and you’ve got the kind of discontinuity that drives down prices and disrupts the orderly progression of markets.

Interestingly, Painter shows that the elimination of households was disproportionately concentrated among native-born Americans, and particularly among households that had moved in during the recession.

The good news in Painter’s analysis is that the signs of a rebound in household formation are apparent in his model.

The model suggests household formation should increase by about 2 percentage points from current levels by 2012, as people find jobs and recession-induced anxieties abate. That would imply that by 2012, normal rates of household formation should reappear (roughly 1–1.5 million new households per year), but it will take even longer before the U.S. completely recovers from the deficit in household formation caused by the severe recession.

As noted above, the first market to benefit from the gain will be rentals. The residential home market should recover more slowly, Painter argues.

To the degree that the economy rebounds more strongly, the recovery will be more rapid. The mystery of increased demand isn’t unsolvable: the dynamics that drive household formation need to reassert themselves, and the core drivers are jobs and incomes.

You can find the full report available for download here.