The following is an Inman News Q&A with Patrick F. Stone, chairman of The Stone Group:

Q: Will the housing market contract or expand in 2009?

A: Existing-home sales will probably decline, or at best be near 2008 levels. New-home sales will remain morbid, in the 600,000-to-800,000 range.

Sales of bank-owned (REO) homes will accelerate dramatically

Editor’s note: Inman News is seeking input for our Roadmap to Recovery editorial project, which focuses on the future of the real estate industry. This article features responses by industry veteran Patrick F. Stone to a set of forward-thinking questions. You can view this list of questions at: Inman.com/Reinventing — if we publish your responses you win a free pass to the upcoming Real Estate Connect conference (for new registrants only).

The following is an Inman News Q&A with Patrick F. Stone, chairman of The Stone Group:

Q: Will the housing market contract or expand in 2009?

A: Existing-home sales will probably decline, or at best be near 2008 levels. New-home sales will remain morbid, in the 600,000-to-800,000 range.

Sales of bank-owned (REO) homes will accelerate dramatically, as funds, investor groups and individuals purchase pools and properties at extreme discounts to current market values.

The agencies, and large lenders, realize that disposing of REO properties will require aggressive pricing that facilitates investor participation.

Doing so will move a large amount of homes but will also result in more investor-owned homes being offered at a profit to the investor but below the asking price of the traditional resale market.

Q: What will drive the expansion or contraction?

A: Interest rates, the traditional arbiter of market velocity, will remain attractive in 2009. Unfortunately, the other historic determinant — employment — is declining at a frightening pace. It is quite probable that unemployment will exceed 8 percent or even 9 percent, and in doing so will cause consumer confidence to remain low and home-buying decisions to be postponed. Couple that with a continuing downward spiral in home prices due to REO sales, and it is hard to predict stabilization in the residential real estate market until 2010.

As mentioned earlier, the severe decrease in new-home construction will help reduce the inventory of unsold homes and somewhat mitigate the flood of REO properties. Assuming that we build 1.2 million to 1.5 million fewer homes than in 2005, for the next two years, we might see some equilibrium and normalcy return in 2011.

As always, it is good to remember that real estate is local in nature, and many parts of the country will not be as adversely affected as California, Florida, Las Vegas and other locations. Nonetheless, because of economic deterioration and the constant reporting of price declines, the national perception will be negative for a couple of years.

Q: Will home prices increase, decrease or remain stable in 2009 and 2010?

A: Prices will continue downward until the foreclosure and REO process is finished. Again, this is somewhat self-fulfilling, as price declines lead to foreclosures, which result in REO properties being marketed at below-market prices, which cause additional price declines …

This is a bit of a death spiral, amplified by a declining economy, and until a loan modification program that is comprehensive and acceptable is enacted, or until we exhaust the population of homeowners with no equity, there is little relief in sight. Some industry experts feel that up to 50 percent of all foreclosures are on properties where the borrower is able to make the payment, but has no incentive to feed a mortgage that may exceed the current property value by 25 percent or more.

Ironically, the return to more rational lending processes that requires down payments and a demonstrable ability to make future payments is exacerbating the problem. Absent some aggressive and comprehensive government intervention in the foreclosure and loan mod process, toughened lending standards, the bad economy, a growing glut of REOs and low consumer confidence will extend the negative market cycle for at least two more years.

Q: How will the real estate industry change?

A: A necessary and positive reaction to market stress is increased efficiency.

The real estate industry enjoyed a prolonged period of high transaction volume and property appreciation. That environment did little to spur innovation or increase efficiency. One aspect of the industry that cries out for change is transaction costs.

Nationally, the cost of transferring residential real estate runs from 7 percent to 10 percent of the cost of the home. As a percentage of the asset, this far exceeds almost any other transaction cost, most of which are less than 1 percent (securities), or perhaps up to 2 percent (high-end automobile). Fine art, from 10 percent to 15 percent, exceeds residential real estate, but it is hard to think of many others.

Transaction costs include the real estate agent and broker commissions, the mortgage lenders’ "points," credit checks, appraisals, title policies, escrow fees, recording fees, transfer fees, etc.

The process of transferring real estate requires the participation or at least the functionality of all current participants, but current market conditions will place pressure immediately in at least three distinct areas: sales commissions and incentives; bricks and motor locations; and data-entry and rekeying.

While it is hard to postulate as to who, what and where there will be change, the home seller and/or buyer will want to know what he or she is paying for, the individual costs of all services, and the alternatives. The last will generate innovation and new solutions.

Count on it.

Q: Will the industry be regulated differently?

A: Yes, but this is hard to anticipate. First, the change in Washington, D.C., will foretell a change in regulatory philosophy. Currently, financial services are regulated by at least eight different national agencies and probably more than 100 state-based organizations. With specific reference to residential real estate, participants would greatly benefit from some consolidation and clarity. It is hard to imagine that it is necessary to have more people or money involved in regulation, but we certainly could use some clarity.

Q: What technology trends will change the industry?

A: The continued emergence of the Internet in real estate marketing is a foregone conclusion. The emergence of national databases for information research and valuation is becoming universally accepted. What continued economic stress might bring is conjecture, but one fascinating possibility is the reemergence of transaction management.

While we all wish we had the amount of money that was spent in pursuit of a platform that connected all participants, and while previous solutions did not gain traction, it is not unthinkable that potential efficiencies might prompt us to revisit this technology. The need to share data, lower costs, increase clarity and streamline the process argues in favor of connecting all participants online.

Q: How will business processes change?

A: For years, many participants have wanted industry consolidation, vertical and horizontal integration, repeal of restrictive licensing requirements, and in general the ability to aggregate players under one corporate entity. The driving force was additional profits to be realized through the increased efficiency of integrated business process.

A few large players have acquired many transaction pieces, but the lines defining sales, lending and closing have for the most part remained in place. It is safe to assume that business processes will be improved and become less manual in all phases of real estate due to cost pressures.

What is uncertain is the degree to which business process can be altered to improve data transfer and file sharing between Realtors, lenders and closing agents. As previously mentioned, prolonged recession resulting in a severely constricted real estate market may provide the impetus to reexamine sales and commissions.

If you consider each sale to be only one transaction, why is it that there are commissions paid to four to six people in many cases, including real estate agents and brokers, the loan originators, the title representatives, etc.?

Q: How will real estate marketing change in the future, and what skills will the real estate agent need?

A: While this is not my area of expertise, like most people I wonder to what degree the Internet will end up facilitating the for-sale-by-owner market.

The ubiquitous nature of online real estate information has certainly led to growing confidence in the American consumer. Concerns about market knowledge are declining as most buyers and sellers are self-proclaimed experts on sales trends and home prices. Where a professional Realtor’s relevance is unchallenged lies in transaction management and process knowledge.

Buying and selling real estate is a complex process requiring a professional hand. While many consumers may think they know the right price, in a declining market a real estate professional can price the product or guide an offer based on a thorough understanding of supply, demand, velocity and overall trends.

Moreover, and perhaps more important in the long term, is the guidance a real estate professional can provide in removing contingencies, obtaining financing and solving undisclosed issues. So while market knowledge is a given requirement, specific knowledge about financing, the closing process and procedures, and a general understanding of real estate law will be the differentiating factors in the future.

Patrick F. Stone is chairman of The Stone Group, a commercial brokerage and development company. He is also a director of First American Corp. and president of Bretton Woods Inc., a Santa Barbara, Calif.-based consulting company. Find out more about the Inman News Roadmap to Recovery project at Inman.com/Roadmap.

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