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We’re in the middle of a perfect storm. But clearer skies are ahead

Marian McPherson | Inman

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The real estate industry has been hit by a perfect storm — a convergence of five powerful events. 

A frozen housing market, an energized DOJ investigation, robust consumer lawsuits, a crash in the proptech sector and a reverberating scandal at NAR.

The industry is experiencing all of these events at once, unlike any other time in history.

Imagine losing a dear friend, filing for divorce, getting fired from your job and getting arrested, all on the same day.

Here are my insights on the five colossal industry events that are reshaping the industry.

A frozen housing market

Residential real estate transactions are down as much as 30 percent to 60 percent this year. Stung by high mortgage rates, most buyers are stuck on the sidelines. Sixty thousand purchase contracts were canceled in August alone.

Supply was constrained for three years, but in some markets it’s now loosening up, which creates a new set of problems as prices begin to slip because buyers are in a perpetual holding pattern.

Agents, brokers and franchises are scrambling for revenue. If rates stay high, industry bankruptcies and company consolidation will accelerate.

Not surprisingly, industry optimism is waning.

This week, I conducted an informal LinkedIn survey with the question: “Will the US housing market, measured by transactions, recover next year?”

With 349 responses, 58 percent predicted that a recovery is not in sight next year. This pessimism comes largely from industry people, who have seen their income slashed and who struggle to stay positive. 

The proptech collapse

During the pandemic, real estate experienced the greatest wave of innovation ever.

New products, applications and business models flourished.

Digital replaced paper; leaner and more agile business models like virtual companies took hold; automated home loans and marketing apps became common; and artificial intelligence is making its way into every aspect of real estate.

And never before has the industry embraced and adopted these innovative technologies at the pace that it did in the last three years. 

The profession had no other choice, as buyers and sellers were trapped in their homes, under COVID lockdown. They were employed, flush with cash and eager to move to new locations and buy houses with record cheap debt.

The market surged and it beget further homebuying inventions.

Then the digital revolution came to an abrupt halt, as proptech companies struggled to stay afloat. Innovations like iBuying and power brokers were paralyzed; new companies couldn’t find funding and tech stock prices collapsed, losing 80 percent to 90 percent of their value.

Some great entrepreneurs are in limbo, as the graveyard of dead proptech companies is just beginning to fill up. The ghosts of the unicorn phenomenon will be with us for years to come.

The legal challenge

In the 1960s, tobacco companies ignored reality even as the ground under them began to shift. Regulation and then lawsuits undermined their footing.

That is similar to the real estate story today.

Real estate is self-regulated and does more or less whatever it wants. For NAR, protecting its broker cooperation model was a major objective.

But times have changed.

Big, well-funded consumer lawsuits brought tobacco to its knees and are doing the same to organized real estate.

For a couple of years, NAR and large real estate companies were locked hand-in-hand, defending the status quo.

Not anymore.  

Anywhere and RE/MAX broke off first, settling hundreds of millions of dollars in claims. As part of these settlements, the firms officially shunned NAR. Other big companies will likely do the same.

NAR now stands alone, struggling to unite the industry that it represents.

Now others — mostly government agencies and judges — will decide how real estate is bought and sold.

NAR must shoulder some of the blame, as it failed to lead the way with necessary industry reforms.

An aggressive federal government

For almost 25 years, the U.S. Department of Justice has been trying to pierce the century-old broker-cooperation agreement. The feds resolved two decades ago to take aim at NAR as the chief culprit in protecting what it sees as anti-consumer business practices. 

The feds first investigated NAR’s efforts to thwart innovation and trip up alternative business models, and later turned its sights on the opaque confusion consumers face when buying and selling a house.

At the center of the controversy are MLS rules and broker cooperation — a system that is the envy of the world but can be fraught with conflicts and questionable industry practices.

The DOJ has recently doubled down on its investigation and shown an unwillingness to compromise on what it believes are consumer fundamentals. Transparency, free and open competition and competitive pricing.

Now, NAR is on its heels and the federal government has the upper hand.

Is this the deep state out of control? I don’t think so. I have watched and interacted with the federal investigators — FTC and DOJ — over the years, and I have been impressed with their curiosity, professionalism and dedication to methodically pressing for industry accountability and reform.

The recent NAR scandals

You might think that the recent sexual harassment scandal is an isolated event and is unrelated to other industry challenges.

But it is not.

The structure of the trade organization helped spawn the sexual harassment charges at NAR; the mega lawsuits and its ongoing battle with the federal government.  

Full of many smart and well-intended professionals, NAR does not peddle cigarettes or represent gun owners, but its tradition of protecting the status quo is the same. 

How the trade group is organized helps explain its missteps over the decades.

NAR is governed by 1,200 board members, but with a small and elite group of volunteer executive leaders who call most of the shots.

The mantra: Don’t rock the boat and fight major industry changes with all its might.

Protecting its own — its leaders — also fits the modus operandi.

This explains the questionable management of the recent sexual harassment scandal at NAR.

So what’s next? 

The market will come back, the industry will survive, NAR will be reformed and the government will get what it wants.

NAR membership dues will likely go up to foot a big share of the lawsuit bill. Publicly traded investors and private company owners will all fork over their share.

Is that it? No.

A new chapter of how real estate is bought and sold will be written. The process will be more transparent and will put consumers first. Start-ups will have a second life and innovation will accelerate. With the help of AI, we will finish the last mile of a seamless digital transaction.

Companies will tout their AI agents, giving them names and handing out awards, as they work tirelessly alongside human Realtors to make homeownership possible.

When the dark clouds dissipate, you will all be remembered and honored for surviving real estate’s perfect storm of the early 2020s.

“There was nothing like it,” you’ll recall.

Email Brad Inman