The Residential Real Estate Brokerage Industry: An Overview of Past Performance and Future Prospects
Zumpano, Leonard V., Elder, k. Harold W., Anderson, Randy I., The Journal of Real Estate Research
This article is the winner of the Real Estate/Brokerage Agency manuscript prize (sponsored by the Center for the Study of Real Estate Brokerage and Markets at Cleveland State University) presented at the 1999 American Real Estate Society Annual Meeting.
This study examines the developments in the residential real estate brokerage market over the last decade. In particular, the study focuses on how technological and structural changes in the market have impacted firm revenues, costs and profitability. The analysis is conducted using four national data sets provided by the National Association of Realtors. The results reveal that brokerage performance begins suffering with the recession of 1990, which triggered a period of consolidations and failures that show no sign of letting up. Further, the results suggest that firm size is a significant factor in determining performance. Small firms suffer due to their inability to take advantage of economies of scale, while large firms incurred significant costs attempting to maintain and/or increase market share.
This study is an analysis of the residential real estate brokerage industry over the course of the last ten years. It focuses on the impact that changes in the marketplace have had on firm performance and profitability. Underlying this study is a perception that real estate firms are less profitable today than they have been in the past. This research will attempt to assess whether this belief is supported by the data, whether the phenomenon holds true across different types of firms and if this view is verified, and also explore the factors that may lie behind this phenomenon. Equally important, this ten-year review is also undertaken to provide a view to the near term future performance of the residential real estate brokerage industry.
The primary data for the analysis are taken from surveys of residential real estate brokerage firms regularly conducted by the National Association of Realtors (NAR). The surveys' considered cover 1987-1996, and the data utilized is from 1987, 1990, 1994 and 1996. This period was chosen because it generally coincides with a complete real estate cycle. The 1987 data captures the approximate peak of the cycle, 1990 is at or close to the trough and 1994-1996 reflects the ongoing market recovery.
Unfortunately, there are limits to the inferences that can be drawn from the survey due to the way that this survey is conducted. The sampling process does not include a consistent set of firms over time nor is it a random sample of real estate brokerage firms. Response by a firm is purely voluntary, and why a firm chooses to respond (or not) cannot be ascertained from this data. Nevertheless, the findings have the potential to provide useful insights about the changes in the industry and allow us to develop hypotheses about the relevant factors affecting the success of firms in the brokerage industry.
The next sections provide an overview of the economic and industry conditions for the study period. In the following section, the financial condition of the residential brokerage industry is detailed and firm performance is categorized on the basis of firm size. The final section is the conclusion.
The Study Period: 1987-1996
The fortunes of the residential real estate brokerage industry cannot be easily separated from the events in the housing market or, for that matter, the overall economy. Since housing is a consumer durable good, one should expect the economic performance of residential brokerage firms to mirror events in the general economy. Other events specific to housing and brokerage markets have also affected the brokerage market. Both of these areas are explored to provide the foundation for an analysis of data from the brokerage firms from 1987 through 1996.
The Economic Background
The period from the mid-1980s through today has seen wide swings in the economy in the United States, and these swings were well reflected in the residential real estate sector. …