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Realogy: Market ‘difficult to predict’

Company reports signs of improvement in hard-hit markets

Real estate brokerage and franchise company Realogy has consolidated about 70 company-owned offices this year and most of its consolidations have concluded, the company announced during an earnings call on Thursday.

Those consolidations are expected to reduce operating costs by $15 million on an annualized basis, the company reported.

Richard Smith, company president and CEO, also said during the second-quarter earnings call that the housing market "has proven exceedingly difficult to predict," and this month markets the 37th consecutive month "in which our industry and our business have been under considerable downward pressure."

The company had a net loss of $27 million in the second quarter, with company-owned offices reporting an 8 percent year-over-year decline in the average home prices in the second quarter and franchisees reporting a 5 percent year-over-year decline during the quarter.

Home prices, said Smith, "continue to be negatively impacted by high inventory levels, foreclosures, a challenging financing environment at the higher home-price levels and other market pressures. The uncertainty about price declines seems to be driving the headlines and that has definitely had an affect on consumer confidence as well."

He also said, "Clearly, the timing of a housing recovery remains the greatest variable and challenge facing the industry today."

The company reported signs of improvement in its company-owned operations in Florida, with unit sales up 1 percent for the three-month period ended June 30 compared to the same period last year. Hard-hit markets in California, too, are showing sins of improvement, Smith reported, with unit sales up 9 percent in San Diego and 29 percent in Sacramento year-over-year in the second quarter.

"Most of this unit sale increase is from increased foreclosed home sales activity," the company reported, with the average sales price in falling 21 percent year-over-year in San Diego and 30 percent year-over-year in Sacramento in the second quarter.

Other markets showing signs of improvement for Realogy’s company-owned offices include Dallas, San Francisco, Minneapolis and Washington, D.C., according to the earnings announcement.

In New York City, the company’s Corcoran operations have fallen from record levels in second-quarter 2007 but the "super-luxury market," which the company defines as sales above $10 million, "remains resilient."

The company reports "impact from the sagging financial services sector" at the lower-end of the housing market in Manhattan, Connecticut, Westchester and New Jersey. "The Hamptons is also showing weakness, although the rental market over the summer remains buoyant," Smith stated.

Arizona, Utah and Atlanta are among the "most-challenged markets" for Realogy’s company-owned operations, as well as Baltimore and Boston, "which both performed fairly well for most of 2008 but in the last two months have weakened considerably."

Among the company’s franchise operations, the Western region franchisees recorded the best performance in the second quarter with sales unit declines of 16 percent – California had sales unit increases of 2 percent but price declines of about 19 percent, the company reported.

Washington state, meanwhile, had declines in unit sales of about 35 percent in the quarter and price declines of 8 percent, while the Northeast region had sales volume declines of 28 percent and New York, New Jersey and Pennsylvania had volume declines from 27 percent to 30 percent.

Realogy added $1.1 billion worth of gross commission income in the past 12 months through new franchise sales and renewals, compare to $288 million in gross commission income that was either terminated by the company or not renewed by the broker.

The average broker commission rate was 2.52 percent within Realogy’s franchise group in the second quarter, which represents a slight rise compared to the same quarter last year, and the average broker commission rate for company-owned offices held at 2.48 percent year-over-year in the second quarter.

Smith reported that commissions could improve if the average home price continues to fall. "We believe higher commission rates are a function of lower average sales price. And to the extent that average price continues to fall, we would expect the average broker commission rate to remain steady or slightly improve."

A team created by Realogy to "identify and assist brokers who have been adversely affected by the housing downturn" at franchise offices has retained about $108 million in gross commission income across the company’s brands since the team launched in mid-2007, according to the report, though a combination of mergers, acquisitions and other strategies.

Smith reported that the "U.S. government’s direct involvement" in attempting to shore up the damage from the credit crunch should have a positive impact on the housing market.

"We believe there are very early signs of a developing bottom. The issue, of course, is exactly when. We do think it is sooner rather than later, but of course we can’t know for certain," Smith said during the conference call.


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