Editor’s note: How bad will the real estate market get before it gets better? Inman News compiles the facts and analysis in this five-part series. (Read Part 1, “The housing market: How bad will it get?” Part 3, “Market forces, regulators threaten credit crunch“; Part 4, “Investor worries rise“; and Part 5, “Diminished role for GSEs, FHA.”)

The impact of a housing slowdown extends well beyond the real estate agents, brokers and others who are at the core of the sale transactions.

Trade associations and multiple listing services can feel the weight of declining membership, and vendors and third-party companies may need to adjust their business focus to suit the changing market.

For WolfNet Technologies, a real estate technology company based in Minneapolis, the customer service demands have increased with the slowing market.

“Overall, we’ve had a much higher level of customer contact, especially by phone,” said Joel MacIntosh, WolfNet CEO. “We’ve been receiving more calls than ever from customers in search of suggestions and advice on how they can increase their Web site traffic and improve their lead capture rates.” Customers also are asking questions about search-engine placement and optimization, and online advertising campaigns, he said.

Louis Cammarosano, general manager for HomeGain, an online real estate marketing company, also noted that customer contact has increased. “Obviously when you’re in a market downturn you have to pay even more attention to customers. We have increased our client services to spend more time, more contact points with the agent. I think that’s helping customer retention,” he said.

Some real estate-related businesses are more resistant to the impact of a housing market slowdown than others, as some cater to buyers and may actually expand during a buyer’s market.

Also, there is an overarching trend in the movement of real estate advertising dollars online and the launch of new online venues for marketing real estate, and this shift appears to be continuing during the housing slowdown — especially as real estate professionals may be looking for cheaper alternatives to print advertising as home sales decline.

A report last year by research and consulting company Borrell Associates, for example, stated that online real estate advertising grew from a $1.2 billion market in 2004 to a $1.7 billion market in 2005 and is expected to grow to a $3.1 billion market by 2010.

Traditional media companies have been hurt by the real estate market downturn and the flight of real estate marketing dollars to online sites. Gannett Publishing Co. blamed the softening U.S. real estate market, in part, for an $11.8 million decline of its newspaper publishing revenues in the first quarter of the year compared to first-quarter 2006, for example.

McClatchy Co. reported that its real estate advertising revenues fell $9.1 million on a pro forma basis compared to the same period in 2006, and “the company has seen dramatic declines in California and Florida, where real estate values and thus advertising were exceptionally strong in 2006.” Also, McClatchy reported that it expects “declines in this revenue category to continue because of the difficult trends in these states.”

And Tribune Co. reported that classified advertising revenues decreased $41 million in the first quarter compared to first-quarter 2006, and real estate revenues fell 15 percent.

Meanwhile, Move Inc., which operates popular online real estate search and marketing sites Realtor.com and Move.com, has reported improved earnings. The company had net income of $163,000 in the first quarter compared with a net loss of $2.3 million in first-quarter 2006, for example. And net income for the full year in 2006 was $18.6 million, compared with $234,000 in 2005.

The migration of more real estate marketing dollars online has not guaranteed success for the growing field of Internet-based real estate-related companies during the housing slump, though.

HouseValues, which offers online marketing products and services for real estate professionals, in May reported a $1.2 million loss in the first quarter, compared with a $2 million profit in first-quarter 2006. The company also reported a 16 percent decline in average revenue per customer and a 9 percent decline in its average core customer base.

“We believe that slower existing-home sales are creating financial pressure on real estate agents that are reflected in the lower average revenue per customer and decreased customer base,” according to the earnings report. In January, HouseValues announced its exit from the mortgage lead-generation business to focus on its real estate agent customers, which led the company to cut 60 employees.

HomeGain, meanwhile, is growing its workforce, said Cammarosano. “We’re growing our employee base. We’re not downsizing in any way,” he said, adding, “I think the mix of employees is changing a bit. We’re focusing more on client services. The growth in employees is not because of the (market) downturn. It’s a natural outflow of growth in the company. We’re not saying the downturn is all good for us.”

The conversion rate for the leads HomeGain provides to real estate professionals is up, he said, while the volume of transactions has declined. “When there are fewer leads, (agents) pay more attention to leads,” he said. The churn rate, which relates to cancellations, has also increased. “It’s going to go up, because we’re increasing customers by a significant amount year-over-year.”

HomeGain has seen a rise in customers who are willing to pay the company a referral fee for a closed transaction from a lead if they can’t afford to pay up front for leads, Cammarosano said. “That has actually helped us in this market — it has helped us to gain customers.”

MacIntosh, of WolfNet, said one of the company’s first clues that the market was changing was in the form of increased data storage demands as the inventory of for-sale listings grew. “The total number of listings and related photos skyrocketed. We had to expand our storage capacity by adding a new storage area network, which came at a fairly significant expense,” he said.

MacIntosh said it’s important for technology companies to continue to invest in product research and development in a slowing market.

“Our philosophy is that when things aren’t good, you have to spend money to improve your position. When things are going really well, you have to keep spending money because that’s what you have to do to stay ahead of the game,” he said. “We have stepped up our research and development investments in our core systems because we know that our customers need a competitive edge now more than ever.”

A slowing market can be ripe for expansion, more product offerings and consolidations within the industry, he said.

Some multiple listing services have expanded functionality to allow members to share open-house data and past sales data with other members online, for example, MacIntosh said, and WolfNet has updated its interface to integrate users’ open house, past sales and active sales searches.

Condo.com, a condo listings site born out of development company Swerdlow Group, “has actually seen an increase in business as a result of the slowdown,” said Richard Swerdlow, Condo.com CEO. While condo sales have slowed and for-sale inventory has ramped up in some markets, condo developers and owners “are now figuring out how to spend (their) marketing dollars,” he said.

“We’re good in an up market — we’re really good in a down market,” he said. Originally launched as USCondex.com, the site re-branded this year as Condo.com. Swerdlow said that traffic to the Web site has been increasing. The company is developing an auction platform, he said, and there is an interest by condo developers in bulk sales of multiple units.

“We were formed out of a developer who understood (market cycles). We knew that there was a pending global overhang so we launched in anticipation of this,” he said.

A slow housing market typically translates to a smaller pool of investment money for startup companies in the real estate space, said Chuck A. DelGrande, managing director for the Corporate Advisory division at Presidio Merchant Partners LLC, a company that provides financial advisory services.

Companies need strong balance sheets to weather the market downturn, DelGrande said, and the nature of startups is that they don’t have strong balance sheets. While there may still be some interest by investors in supporting “‘A’ models run by ‘A’ teams,” DelGrande added, “If they’re anything less the chances are you will not get funding right now.”

During the real estate boom, investors were more willing to support a broader array of startups, he said. “Because residential real estate has been and will be a cyclical business, in general the universe of potential investors starts out small,” and contracts with a slowing market. Down cycles tend to be a ripe period for consolidations, he said.

Dominion Enterprises, a company with roots in real estate print publications, has acquired several real estate technology companies, including eNeighborhoods and Advanced Access, in the past year, for example.

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Send tips or a Letter to the Editor to glenn@inman.com, or call (510) 658-9252, ext. 137.

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