2010 Forecast from NAR
A New Year: Good Prospects, Lingering Challenges
By Lawrence Yun, Chief Economist, NAR Research
Happy New Year! I think we were all glad to say good-bye to 2009 and to the recession, a suffering job market, and at least for most of the year, very sluggish housing activity.
Fortunately, towards the end of last year things were looking up for housing (finally). As we saw, the first-time home buyer tax credit provided a strong incentive for buyers to enter the market. From a sales pace of 4.5 million units (at a seasonally adjusted annualized pace) in the immediate months prior to the tax credit stimulus, existing-home sales soared to 6.1 million and 6.5 million in October and November, respectively. Now with the tax credit having been extended (and expanded) and the new deadline not looming until the middle of 2010, the deep cold winter will bring us a few calm months before another surge in home sales in spring and early summer. Of course, the big question is, once the tax credit goes away in the second half of the year, what can we expect?
The key to a real and sustainable housing market recovery can be summed up in one word: jobs! The job market continues to struggle despite recent respectable gains in production. That is, total production as measured by GDP grew for the first time in two years in the third quarter of 2009, by a decent 2.2 percent growth rate. Early indications are that the economy expanded by better than 4 percent in the final (fourth) quarter of 2009. Based on many economic indicators – from consumer credit and retail sales to the need for inventory restocking and rising exports – GDP is expected to expand by close to 3 percent for all of 2010. While that 3 percent GDP growth is somewhat lackluster coming out of a deep recession, the worst is definitively over.
Even as production rises, companies coming out of a recession push their existing workers to do more rather than hiring new workers to raise production. Not surprisingly, the unemployment rate remained high at 10 percent in December as far fewer people were working (or even looking for work)during the month. In December a net 85,000 payroll jobs were lost according to company survey data in December tracked by the Bureau of Labor Statistics. In a separate survey of households which asks people whether or not they have a job, there were 589,000 net fewer jobs. Since the beginning of the recession two years ago, the country has shed 7.2 million jobs. Over the short term, the unemployment rate will, I’m afraid, go higher – possibly even to 10.5 percent, particularly if many of the discouraged workers re-enter the labor force and start applying for a job.
However, there are several signs pointing towards potentially consistent job creation in the second half of the year. In December, temporary help employment rose for a fifth straight month. Because many companies first turn to such “temp” jobs coming out of a recession, this rising trend should imply permanent job creations starting in few months. Past historical experience also show that temp jobs rise before permanent jobs.
Sector by sector, manufacturing companies continue to bleed heavily while jobs are still being cut sharply in construction because of weak housing starts and near total collapse in new commercial real estate construction. Jobs at state and local governments fell slightly in December. There will be continuing pressure throughout this year for further job cuts as most state and local governments are running relatively high budget deficits and generally by law have to balance their books.
There are some bright spots. Those sectors that have been gaining jobs consistently have been in health care service and in education. For a recent college graduate with a nursing or education degree, the job prospects are much better. Another sector that had been hammered badly but is now showing job additions is the professional business service sector (e.g., accounting, management consulting, and law offices) which added about 50,000 payrolls in December. That could signal some good news for commercial real estate: these job gains will require office space, so this could be the very first sign of potential improvement and business opportunities for commercial REALTORS®.
Another bright spot: 2010, fortunately, happens to be the year of the Census and the counting of people. Consequently, the government will hire about one million people this year to collect and process the data. Yes, these jobs will be mostly temporary. But nonetheless it will provide jobs and income support until the private sector begins to add jobs on a permanent basis. Currently, the private sector is on the sidelines with a wait-and-see approach. But with overall production continuing to gain respectably, the private sector will eventually need to boost payroll. As the home buyer tax credit expires in June, private sector job creation will be key to a sustainable housing market recovery. My best guess is about 100,000 net job gains per month in the second half of the year.
Assuming the job market does turn around then, home sales for the year will be about 10 percent higher in 2010 compared to 2009. With inventory being absorbed, home values will likely squeak out a gain for the year as a whole. That is important in terms of boosting consumer confidence about home buying.
Home values are also important for boosting income for REALTORS®. Residential brokerage commission fell in 2009 by 6.2 percent to $40.6 billion according to Real Trends. That figure is roughly in line with NAR’s estimated 8 percent decline in average commission income based on 5 percent higher unit sales but 13 percent decline in home values in 2009. While it’s true that REALTORS® were much busier than normal in 2009 – both in terms of having more customers as well as having to spend longer on home sales transactions (particularly in regards to short-sales) – lower home values led to overall reduction in income on average.
Based on our home sales and home price projections for 2010, I think we can expect about a 12 to 19 percent rise in overall commission income in 2010. The forecast is never “on the money” (no pun intended) and the actual figure could be measurably higher or lower. Still, I’m comfortable in saying that following four years of a housing market recession, aggregate income is more likely to be up because of the tax credit in the first half of the year and the job creation in the second half.
However, any rise in the aggregate commission income for REALTORS® as a whole may not be reflected in the income for individual REALTORS® if many more people enter the profession. (Remember, this happened during the housing boom years.) Those contemplating entering the profession need to be aware of the business challenges in the early years of a real estate career. The average income of REALTORS® with less than two years of experience is well below $20,000 per year before expenses. In addition, referrals and personal relationships have been the dominant factors in drawing new clients. Over 80 percent of recent home buyers and home sellers recommend (or will likely recommend) their specific REALTOR® to colleagues, friends, and family members. As with any dynamic entrepreneurial business, there will be some start-ups who will do very well, but the initial edge in real estate business will be with veterans who have served their clients well in the past.