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A Bull Market in Real Estate Agents

Posted By Barry Ritholtz On April 17, 2005 @ 9:53 am In Real Estate | Comments Disabled

We’re continuing with Real Estate Sunday.

By way of Mike Panzner (New Laws of the Stock Market Jungle [1]) we get this interesting observation: There seems to be a breakout bull market in Real Estate Agents:

click for larger graph

Realpop [2]

The chart shows agents on a percentage basis (Labor Force and Total Pop) at all time highs:

As of March 2004, the individual membership of the National Association of Realtors@, a trade association for those involved in all aspects of the residential and commercial real estate industries, hit 1,118,201, a new record.

While that nominal gain in and of itself is not surprising, what is more interesting, perhaps, is the fact that the membership as a percentage of the total working-age and overall U.S. population has also hit new highs.

As of December 2004, NAR membership grew to more than 0.6% of the U.S. labor force, an increase of 37% over the past decade. Is that more evidence of a bubble in the real estate market?

I don’t believe this is evidence of a bubble. Rather, it is a normal function of capitalism. People are attracted to careers where they can make more money and in more pleasant conditions. As the number of participants increases, competition goes up, margins tighten, profits go lower. At a certain point, the field is that  much less attractive, reducing the number of new participants. The cycle ends.

Think about the high profile careers which went through that same life cycle over the past 20 years: Law in the 1980s (blame hit TV show L.A. Law), Stock Brokers in mid-1980s, then Investment Bankers in the 1990s, followed by Venture Capitalists, ands in the late ’90′s, Coders, Software Developers and Digital Graphic Designers.   

Once interest rates hit 40+ year lows, it was Mortgage Brokers turn. Now, I suspect Real Estate Agents are topping.

Competition brings along its own self correcting mechanism. That’s whats meant by creative destruction [3] . . .


UPDATE: February 10, 2007 10:32am

Ths week’s WSJ: 

Amid Slump, Real-Estate Agents Hang Up Their Blazers [4]

 "The long-awaited shakeout among real-estate agents is finally
happening — much to the relief of those who are sticking with the business and
prefer a bit less competition.

When David Lereah, chief economist of the National Association
of Realtors, addressed the group’s convention in New Orleans in November, he got
one of the biggest bursts of applause by predicting there would be fewer
Realtors around in a year. Mr. Lereah said in an interview that he expects
membership in the trade group to decrease by about 6% to 8% from the record of
nearly 1.4 million reached in 2006.

The culling of agent ranks is a reaction to the downturn in
housing that started around mid-2005. Sales of previously occupied homes last
year declined 8% to 5.7 million, even as the number of agents continued to
increase for the year as a whole.

Even before sales slowed, people in the industry said far too
many agents were chasing too few deals. If hordes of inexperienced agents are
scrapping for business, says Christopher Galler, a senior vice president of the
Minnesota Association of Realtors, that can only lead to "a race to the bottom
in fees."

More competition on commissions could strike many consumers as
a good idea. Mr. Galler argues the result would be poor service. He says more
productive agents, who complete 20 or more transactions per year, are better at
solving problems than those who do only a few deals annually."

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URL to article: http://www.ritholtz.com/blog/2005/04/a-bull-market-in-real-estate-agents/

URLs in this post:

[1] New Laws of the Stock Market Jungle: http://www.amazon.com/exec/obidos/ASIN/032124785X/thebigpictu09-20

[2] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/realpop.jpg

[3] creative destruction: http://www.amazon.com/exec/obidos/ASIN/0385501331/thebigpictu09-20

[4] Amid Slump, Real-Estate Agents Hang Up Their Blazers: http://www.realestatejournal.com/buysell/agentsandbrokers/20070208-athavaley.html

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