Real Estate Industry in Need of Real Innovation

The real estate market and the overall real estate industry are in dire need of new business and cost strategies to positively shift consumer confidence and affordability factors enough to stimulate and sustain growth within this pillar of the overall U.S. economy.

With the expiration of the homebuyer tax credit, new home sales have collapsed. Mortgage underwriting standards are an increasingly small and faster moving target to hit. Rates can drop to 2 percent, but if only a tiny pool of consumers qualify for a mortgage, the cheap money doesn't do much good. Currently, 5-year adjustable-rate mortgages for the most qualified buyers are in the mid-3 percent range and 30-year-fixed-rate programs are in the mid-4 percent range ... which just sounds extraordinary as I type it out.

It doesn't help that mortgage professionals are not trusted by the general public, period, as they've been painted as financial molesters by the media and most everyone else, fairly or not.

What needs to change?

Well, everything.

The aforementioned tax credit was effective from a psychological aspect more than a real cost savings to borrowers. Pundits rank the success of the homebuyer tax credit widely, but at the end of the day, it's proving to be more fluff than fuel.

The real cost benefit to an end buyer is subjective, as the (up to) $8,000 tax credit is just that, a credit against income. Which means the hard monetary benefit is a relatively small percentage of the total tax credit, depending on an individuals tax bracket. Nonetheless, it motivated a fair number of consumers who may not have been in the market or on the fence to go ahead and buy.

But what about a whole new approach to the real estate business model?

Tech-driven brokerage Redfin offers consumers a novel, consumer-centric alternative business model (in select markets) while traditional brokerages like Prudential Douglas Elliman in New York City is implementing big technology in hopes of seaming together a fractured listings system in the largest market in the country. Coldwell Banker is offering an incentive in the form of a rebate on certain houses for sale, although they require a seller to effectively discount the price of their homes in order to grant the "rebate," which makes the offer more smoke and mirrors than substance. There are many third-party sites that offer a cornucopia of information.

Zillow, Trulia and others offer the equivalent of real estate porn -- objectifying real estate data that was once locked behind vault doors, for profit.

So, there are pockets of innovation, some substantive, some not. There needs to be much, much more and it must originate at the root of the business of the industry rather than on the surface.

It's no secret that consumers do not think highly of real estate agents, consistently ranking the profession at the bottom of numerous polls. Agent services are commonly viewed as overpriced for the value received, with good reason.

Assuming a $300,000 sales price, the traditional 6 percent Realtor sales tax, plus another 1.5 percent in loan origination costs ... the cost for a homeowner and homebuyer to sell/buy that $300K home is approximately $21,000 in commission. That's ridiculous. Real estate professionals will quickly point out that they only get half of that $21K, minus expenses and taxes -- which is true. Many brokerages claim a mere 3 percent profit margin using this methodology. Which means that the business of real estate is and has been badly broken.

There are very few industries where someone just out of school can demand as much for their services as someone who has a 20-year track record. There is no authoritative and transparent method to vetting a real estate professional to make sure they are who they say they are. It is no wonder why so many consumers think so lowly of the industry. There is little to no accountability, which ruins things for those professionals who actually are worth their rate.
In my next three articles, I'll lay out three tangible business and cost-based strategies that the real estate industry can innovate around to stimulate consumer confidence and move the market instead of having the market move it.

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