Real Estate Business News Update – May 2024

As part of the settlement, NAR agreed to rule changes expected to go into effect by July:

– MLS listings will be prohibited from including offers of broker compensation. Real estate professionals can still discuss compensation with their clients off the MLS.

– NAR will require MLS participants working with buyers to enter into written agreements with buyers. These agreements dictate how real estate professionals will be paid.

Watkins comments: “Remember, this is only a proposed settlement that still needs DOJ approval. Expect the final terms may have some substantial changes. As the proposal stands now:  Commissions have always been negotiable. Smart sellers will continue to offer the buyer’s agent a commission as a means of bringing more buyers to their listing, which in turn raises the final sales price. Buyers agents’ commissions cannot be publicized on the MLS, but may still be offered. So this simply makes it less transparent and puts more barriers up to the free flow of information. This is never a good thing. Experienced, professional, and full-time real estate agents with the majority of their business on the listing side will gain more market share and continue to succeed. Inexperienced, part-time agents that represent mostly buyers will see their business decline unless they adopt a more professional approach, which includes written Buyer Broker Agreements. The rich get richer. Ultimately, this change will hurt lower-income buyers and minority buyers the most, as the agents servicing these markets are usually less experienced. If sellers are ultimately prohibited from paying a buyer’s agent commission and buyers are forced to pay for their own agent, then a new wave of “creative solutions” (lender credits, rebates, etc.) will arise, further complicating the home buying process. Meanwhile, the attorneys that target class actions plaintiffs today and may focus on inter-party disputes (buyer vs. agent, seller vs buyer) in the future will win. Even the threat of lawsuit is enough for most parties to pay up in hopes of settling. The velocity of home buying will slow down. More paperwork and stricter pre-qualification, coupled with the new normal of higher interest rates (6%+), and the lock-in effect of existing homeowners with low-rate mortgages (sub 3%) means less buyers, less sellers, less transactions. Ancillary businesses (escrow, inspections, appraisals, title, etc.) are the most affected. Really, this whole issue is about steering and the buyers agent’s ability to search on the MLS by amount of commission offered. The class action attorneys seized on the opportunity and have succeeded in potentially dismantling an effective, albeit legally tenuous, system of buying and selling real estate in the US. Slowing down the home buying process will have larger ramifications for US economy as a whole and as usual, the longer terms effects of these changes will only be “obvious” in 5–10 year hindsight.” 

For more on this issue, I suggest the following: https://notoriousrob.substack.com/

2) BLACKSTONE’S NEW ACQUISITION MAY SIGNAL BOTTOM IN APARTMENT VALUES – Blackstone Takes AIR Communities Private in $10B Deal

Blackstone is taking private Apartment Income REIT, otherwise known as AIR Communities, private in a $10 billion deal, marking Blackstone’s largest transaction in the multifamily market. The REIT owns 76 rental housing communities and Blackstone plans to invest another $400 million to improve these properties. The investment by Blackstone comes as the private equity giant is ramping up its acquisition activity, spurred on by what it sees as the bottom of the market and an ideal time to invest. Kathleen McCarthy, its global co-head of real estate, has said that a lot of its capital is invested in logistics and rental housing, categories where new starts are down 30% to 75%, depending on the market.

Additional story regarding Blackstone and the SFR market.

Also, KKR put out a paper last month with a strong pitch for MFR investing, saying: “The once-in-a-decade opportunity for real estate equity investors is complex, but also exciting.”

3)  Build-to-Rent Housing Surges to Record Highs 

The build-to-rent sector celebrated its most successful year in 2023, with a record-breaking 27,500 new SFR rental homes completed—a 75% jump from 2022. Three key metros—Phoenix, Dallas, and Atlanta—led the charge, collectively accounting for nearly 33% of all new build-to-rent units added last year. Momentum is also growing in the following cities: Florida’s North Port; Raleigh, NC; Lakeland, FL; Savannah, GA, and Ann Arbor, MI; and Huntsville, AL, fueled by job growth and new residents at the Port of Huntsville.

The U.S. Department of Labor (DOL) issued a final rule regarding whether a worker is an employee or an independent contractor under the federal Fair Labor Standards Act (FLSA). The new rule, which became effective March 11, 2024, rescinds the 2021 independent contractor rule and replaces it with a six-factor test that considers: 1) opportunity for profit or loss depending on managerial skill; 2) investments by the worker and the potential employer; 3) degree of permanence of the work relationship; 4) nature and degree of control; 5) extent to which the work performed is an integral part of the potential employer’s business; and 6) skill and initiative. Additional factors may be relevant if they bear on whether the worker is economically dependent on the potential employer for work. Although the DOL believes the new rule will provide greater clarity and consistency for businesses, the opposite is likely to be true. It could potentially lead to an influx of litigation against certain businesses, particularly in the transportation and logistics industries, by attorneys seeking to have independent contractors reclassified as employees and awarded damages for overtime and deductions from pay, even if those workers prefer to be independent contractors.

I received an email from Redfin earlier this week highlighting their new program for real estate agents to join their brokerage. In years past, they were an employee based business model. But they have recently switched to a hybrid model with some guarantee and some commission-based income. This is a great model for some agents looking for more security and a base level of income. Other agents would rather “eat what they kill” and earn more (albeit with more risk).  The text from the email is posted below.

“As a Redfin Next™ agent, you’ll have unlimited potential to maximize your earnings. We offer competitive splits up to 75% while covering all the necessary expenses to operate your business. Marketing, mileage, dues, listing expenses, transaction support?

Covered—saving you over $20k per year. What you earn is what you keep!

Take your business to the next level!

Under the NAR settlement terms, it begin requiring its members to obtain written agreements with buyers spelling out their services and expected compensation before they can even show them a home. In response, Zillow is offering a non-exclusive and short 7-day agreement that allows agents to bring buyers on tours of homes without officially onboarding them as clients and with no expectation that they’ll be paid for those services during its duration.

1) There are finally more new sellers in 2024. It is a step in the right direction, and will dramatically improve once rates drop below 6.5%.

2) With a rising inventory, more homes are on the market than last year. The growth in the inventory is a direct result of more homes coming on the market in the higher price ranges, which take a bit longer to sell compared to the lower ranges, starter homes.

3) Demand has been bouncing along a bottom like 2023. Demand will only break higher when rates drop substantially below the 7% threshold. Until then, demand will continue to bounce along the bottom.

4) Today’s Expected Market time is 70 days compared to 51 days last year. The difference between 70 and 51 days is almost undetectable, yet if current trends continue, year-over-year comparisons will be much more noticeable.

5) Higher mortgage rates are limiting the true potential of the housing market. As long as rates remain above the 7% threshold, activity will slow and impact the number of closed sales.

I hope this information helps keep you up to date on the real estate market. Please reach me at 310-383-6239 or Andy@AndyWatkinsJD.com if you have any questions or additional comments. Would love to hear from you.

Best Regards,

Andy