Friday, December 5, 2008
David Stevens waits for the bounce
Washington Business Journal - by Mara Lee Staff Reporter
This is not a good time to make a living off of real estate. David Stevens, who recently rose to president and chief operating officer of the region’s dominant residential real estate company, The Long & Foster Cos., talked frankly about how we got here and what’s happening now. And — with trepidation — he takes a stab at predicting the future.How many agents does Long & Foster have in the region, and how has that shrunk since 2006? Something in the range of 10,000 agents. Since ’06, we’ve shrunk a little over 5 percent. What happens when you’re going through a market correction like this is some agents [who] can’t be successful at it, give up their licenses and go do something else.
With Realtors’ incomes declining, how does that affect Long & Foster’s profits? Clearly our revenue is down. This is our 40th anniversary as a company. We’ve never lost money. And this year it’s hard to say how it will exactly finish out.
What’s keeping the market from bouncing back — down payments, job anxiety, inability to sell? Yes. In certain markets, where average income standards are lower, the down payment has become an issue. This recession has spread well beyond housing. Our opinion here is it’s a consumer confidence crisis, first and foremost. Second [is] credit availability to homebuyers. Savings is actually third. Even those people who have down payments are waiting on the sidelines. We go on two core fundamentals. Anybody who owns a home wants a nicer one. And anybody who doesn’t have a home wants a home. And the only thing holding them back right now is confidence — and some credit issues. And not everybody should have a home. Heck, we learned that clearly through the last cycle. But there’s a gap right now of people who could be buying and should be buying.
When do you think prices will stop falling in Prince William and Loudoun counties? Those were the first markets to correct. Those are the markets where we’re seeing significant increase in unit sales over previous years. They have the most distressed sales, but it also tells you there is an elasticity point where those properties do get purchased. So price matters. And the price levels of those markets have come down. Many of us think those markets are pretty close to stabilizing. We’re seeing sales prices not change much month to month right now. Our data says that the existing inventory is being sold at a faster rate in those markets than it is in closer-in markets.
Do you think mortgage underwriters, brokers, Realtors and consumers share responsibility for the bubble and foreclosure crisis? Yes. There is absolutely no question in my mind having looked at this for decades, I think most consumers did not understand the depths of the terms, particularly around adjustable-rate mortgages. What they didn’t understand were the subprime 2/28s. They didn’t understand the neg-am ARMs. And that disclosure process was too complex. [A 2/28 mortgage is an adjustable-rate mortgage with a 30-year term and monthly payments that change after two years. Negative-amortization mortgages allow buyers to pay nothing toward the principal, not even enough to cover the interest, so the balance grows rather than shrinks.] And the question is, who’s at fault? Caveat emptor. Buyer beware. Buyers thought they could never lose; it was their way to make their riches. We saw books written on it. We saw national speakers going out talking about how to get rich buying real estate. And investors, even the most sophisticated investors ... they just didn’t build into their forecast models enough default risk. Buyers should have known they were stretched. Lenders should not have created terms that allowed you to finance 100 percent of the value of the property, particularly with stated income, and qualify them [based] on starting rates on ARMs. Real estate salespeople shouldn’t have gotten people overly consumed with buying one, two, three, four, five properties because you can make more money on more than just the house you have.
Zillow reported that 38 percent of sales in the metro area in the last quarter were lower than the previous purchase price. How does a Realtor manage sellers’ expectations? It’s very tough. The challenge is showing the seller what their home is worth. Some agents are encouraging the seller to get a real appraisal on the home before they put it on the market to give them a reality check.
How many are doing that? Ten percent or less at this point. It’s something we’re recommending. I highly encourage it. In fact, I’m looking to buy a home right now, and I’m getting an appraisal on a home myself because it’s really hard to tell what the real home value should be.
Are you selling too? I will at some point. But not at the same time.
How many of your buyers use Long & Foster’s subsidiary, Prosperity Mortgage, and what’s your goal for that number? We get approximately one in five of every purchase transactions. That’s up significantly. When I first came here, it was about one out of six or one of out seven transactions. I’d like to see us grow to a third of all sales transactions.
Will the 6 percent real estate commission model still be with us in 10 years? [Laughs.] You can’t buy and sell homes over the Internet. You can see homes you want to buy over the Internet. I don’t think truthfully the 6 percent model will change all that much. We’ve seen discount brokers make their attempts in the market, and they’re having a very difficult time surviving right now. When the Internet first rose, everybody predicted the demise of the 6 percent commission and the full-service brokerage business, and, quite frankly, I’m seeing the opposite.
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