When it comes to how the economy impacts the job market, it’s not exactly rocket science: poor economic conditions have a ripple effect on dozens, if not hundreds, of industries. The real estate sector is no different – a recent round of layoffs among brokerage firms, large-scale agencies, and other professional real estate companies has shaken the very pillars of the industry. Is this just a temporary correction or a harbinger of things to come? Let’s take a closer look at what this brokerage bust might mean for real estate professionals everywhere.
First, let’s investigate what exactly transpired to bring us to this point. While the economic landscape of last year wasn’t the best due to rampant inflation, the blame for all these newly-unemployed brokerage workers rests squarely on the actions of the US Federal Reserve. Whenever inflation gets too high, the Fed tries to rein it in using the only tools they have – raising the base US lending rate. This forces banks and lenders to raise the interest rates on their own lending products to keep up. The end result is that loans become more expensive for borrowers to repay, which leads to fewer companies and individuals taking out those loans. This puts the brakes on inflation by slowing down economic growth in general.
The problem with battling inflation this way, however, is that it rarely takes just one interest rate hike to get it under control. From March 2022 through February 2023 – nearly an entire year – the Fed has been raising interest rates steadily. Banks have been scrambling to keep up. While as of February the Fed’s base rate is between 4.5 and 4.75 percent, back before the decision was made to raise interest rates to combat inflation it was at a historically low 0.25 to 0.5 percent. This massive increase over a very short period of time has made all lending much more expensive. When mortgage repayment costs go up so precipitously, the number of qualifying borrowers goes down.
Fewer borrowers mean brokerage houses are suffering – and these companies are quick to tighten their belts by reducing their workforce. Let’s be clear here: this isn’t just a few isolated cases but instead a full-blown mass exodus. The dominoes began to fall in late December when big players like Zoom, Redfin, and Side began letting workers go as the price of mortgage lending placed millions of home buyers out of contention. The worrying trend continued into the New Year, with companies like WeWork and Compass also shedding employees. Things have gotten so dire that a Mortgage Bankers Association spokesperson estimated that attrition rates were as high as 30 percent.
To add insult to injury, the MBA believes that these numbers are likely to climb. More people employed by brokerage firms, mortgage lenders, and other real estate companies are likely to be let go as the companies that initially hired them wake up to the reality that what was once thought of as a “market correction” is much more serious and likely to be much longer-lasting. While the Fed has indicated that interest rate hikes are likely to begin slowing down as inflation rates begin to decline, pumping the brakes on the economy is like using chemotherapy to shrink a tumor – sure, it’ll kill off cancer cells, but it makes the rest of the body sick at the same time.
This brave new world that real estate brokers, agents, and other professionals now find themselves in is, naturally, cause for concern. But it’s not time to switch careers just yet – there’s still some life left in the real estate industry. Properties are still getting bought and sold, though transaction volumes are going to slide downwards. This means that a savvy real estate professional will have to work smarter, not harder, to stay afloat.
There is a silver lining to keep in mind, though it may be hard to see. Real estate markets are cyclical, and while we’re in a definite downswing right now the pendulum will indeed come back. Rising interest rates lead to fewer qualified buyers as well as smaller overall mortgage amounts. This, in turn, means that there will be downward pressure placed on property prices as there’s no longer a demand for high ticket price homes. Eventually, house prices will drop, creating better accessibility for this new generation of home buyers, and the market will bounce back.
The timing of this bounce back is amorphous, to say the least. There’s no telling when the Fed will finally be satisfied, and this means it will continue to “save” the economy by wrecking it for the time being. It’s going to be several months before markets begin to stabilize, and it may be near the end of 2023 or even into 2024 before the new normal sets in completely.
Your job, of course, as a real estate professional is to weather this storm as best you can. Whether you work for a brokerage house, as a real estate agent, or in any other capacity, keep an eye out for long-term solutions to market conditions and invest in those solutions as appropriate. Remember: it might feel like the end of the world, but it’s not as dire as all that. Once the smoke clears, it’s time to get back to work!