Home ownership and the American real estate industry's development

¶ … legendary "American Dream" is home ownership. From the beginning of the republic, the right to own real estate in the United States has been recognized as an important right of all citizens, rich and poor (Mozilo). Many of those who originally settled in America did so simply so that they would have the right to own property and to haves such ownership be protected by the government. In many ways, it was residential real estate that contributed to the process that eventually made the United States into the powerful nation that it is today. The one asset that the new nation had was real estate and it was that real estate that provided revenue for the young government. Through the sale of frontier lands the American government was able to not only pay its considerable debts but also attract new settlers (Grubb).

The value of private ownership of real estate in the United States represented a profound change in attitude. Most of the early settlers in America emigrated from Europe where land ownership was extremely limited and the use of owned land was even more limited. Often times, individuals were allowed to use the land they lived on to farm or operate a business but the land was publicly owned. From the beginning, the situation in America was entirely different. For the American colonists, the ownership of property was evidence of their independence from the monarchy.

As the United States developed, its only real asset was its vast reserves of land. In fact, for a great many years land was used like currency in the United States as a standardized monetary system had not been established and land was more widely accepted as a means of trade and value. For early Americans, land ownership was vitally important and that tradition has continued.

In this paper, the process of how real estate became so vital to our national identity will be examined, what the future might hold for the industry, and the problems that it presently faces will also be studied.

II. History of Real Estate Industry

In the early days of the United States there was little need for the involvement of real estate companies or real estate agents in the process of property transfer. As late as the beginning of the twentieth century 75% of Americans lived in rented property and there was limited transfer of property and what transfers did occur were done through the exclusive use of government offices. Before the formal admission of territories into statehood the transfer of property was done through the auspices of land grant offices but as the states were admitted county auditors and recorders maintained the legal details of real estate transactions. Information as to the availability of property, negotiations as to the purchase price, and details of the sale were handled by the parties to the sale. In the larger cities along the Eastern seaboard such as New York, Boston and Philadelphia some limited use of real estate agents was being witnessed but outside the big cities there were few organized brokerage houses or sales agents. In 1891 an aborted attempt was made to organize a national real estate association but there was insufficient support to sustain the effort (Weiss). Finally, in 1908, the National Association of Real Estate Exchanges was formed. The stated goal of the National Association was to involve itself in all matters affecting real estate. Within a few years, as the use of real agents became more popular, it was determined that a national code of ethics was necessary for said agents and the National Association adopted its first Code of Ethics (North).

Despite the existence of a national organization and national code of ethics, there was no requirement that real estate agents be licensed in any of the particular states until the State of Michigan enacted such licensure in 1919. Following the State of Michigan's lead, other states followed with their own systems of licensing which led to a new level of professionalism among real estate agents. When a year later the University of Michigan initiated a Master degree level program in real estate sales the movement toward professionalism in the industry was well on its way.

The dawning of the twentieth century witnesses a major surge in home ownership in America. Whether the increase in professionalism among real estate agents fueled this surge or whether the surge caused an increase in professionalism among agents is subject to debate. Whatever the causes, homeownership in America became a marker of social success in the twentieth century and there is no argument that real estate agents and brokers were a major participant in this movement.

The profession of real estate agent began, like most professions of the time, grew up as a male dominated career. In a time when few women worked outside the home, very few women were licensed as real estate agents. Over the first fifty years of the twentieth century the real estate industry grew not only in numbers but also in professionalism. It developed so well that by the middle of the century it was nearly unimaginable to either buy or sell a house without the assistance of a licensed real estate agent.

The real estate industry transformed itself from a group of snake oil salesmen into a group that enjoyed widespread respect. This was done through the process of adopting a system of professional ethics and education. While doing so, the industry virtually created itself. The word realtor was not even recognizable at the beginning of the twentieth century and by the end it was not only a recognizable word but one zealously protected by the National Association of Real Estate Board. To be considered to be a realtor one must be both licensed as such and a member of a legitimate real estate association.

The growth of the real estate industry and the proliferation of home ownership in America were symbiotic (Rybczynski). As the real estate industry grew home ownership became a national policy and became to represent national policy. From a nation suffering from the effects of the Great Depression and a World War the fifties became synonymous with prosperity and the real estate industry was in the forefront as they were promoting home ownership.

The Fifties became to represent the prosperity and the establishment of real estate selling as an industry. It also represented the emergence of women into the professional world. Unlike other professions where women were not to be equally represented for several decades, women in real estate industry became active beginning in the Fifties. Although there was considerable opposition from male salesmen and brokers women began to enter the real estate industry in record numbers in the Fifties and Sixties and by the opening years of the 1970s had obtained near equality (Hornstein).

III. Business Challenges

A. Competition

Even the most optimistic real estate professional is forced to admit that the industry is facing serious problems. Housing prices have fallen for a number of years and there is a glut of available homes on the market that some argue is symbolic of the fact that homeownership is no longer part of the American Dream (Talbott). Against this background, it is difficult for real estate agents to envision the future and many agents have, as a result, left the business.

There are many unfortunate aspects to the present residential real estate market including the aforementioned fact that many agents have left the field but many experts argue that the present situation is transitional and that the market will eventually recover (Associated Press). In the meantime, the answer lies in finding a way to be remain competitive. For many decades, the residential housing market was all upward. More houses to sell, at higher prices, and to more buyers. In today's market, however, that is not the case. In today's market, imagination and creativity are required to close deals and it is the agent and broker who are not afraid to innovate who will be successful. Innovation brought multiple listings on the internet, it brought new forms of creative financing, and it brought out new methods in marketing properties.

The problems in the market have caused corner real estate office to consider new methods of doing business. Gone are the days of relying entirely on word-of-mouth advertising, handing out business cards at social functions, and placing one's name placard on the bottom of for sale signs. In today's real estate market, the real estate professional must find new ways to market not only himself but also his listings.

It is in listings that real estate agents and brokers have historically made their money and, not unexpectedly, it is also where the majority of litigation and dispute arise. On both a local and national level, regulatory agencies have been busily monitoring the activities of brokers and agents. Most of this regulatory activity involves attempts by certain real estate organizations or multiple listing groups to limit the information contained in the internet listing. The proliferation of the internet has threatened to undermine the capacity of real estate agents and brokers to control the dissemination of information in the real estate market. Prior to the inception of the internet and the adoption of its use by the real estate industry, details relative to real property was largely within the exclusive province of the agents and brokers. Multiple listing services, property transfer information, existing liens and mortgages, etc. were, until the proliferation of the internet difficult, if not impossible, for potential buyers to obtain. The internet changed all that but many real estate professionals have attempted to hold on to their control of such information which has precipitated considerable litigation (Darlin). The battle that is raging is between a real estate industry attempting to remain competitive in the market place and consumers demanding more autonomy and more information.

B. Marketing and Customer Demand

There is no denying that the real estate market is suffering through one of the worst periods since its tremendous growth following the end of the Second World War. Presently, due to unemployment and a struggling economy, the demand for housing has slowed. Yet, supply and demand considerations are unique when it involves residential real estate. Typically, if demand increases in economics the reaction is to increase the supply correspondingly until a balance is found. Unfortunately, the unique nature of real estate makes it less susceptible to typical demand and supply economics (Maisel). Unlike other commodities, which is really what real estate is, real estate is essentially a local matter and not dependent on national trends. In typical fashion, an over-supply of homes lowers the prices while a corresponding an under supply will result in higher prices but, unlike other commodities supplies cannot be transferred from one market to another in an effort to stabilize prices. Real estate is tied to the land and is, therefore, not capable of moving to satisfy the demand. Thus, real estate becomes a local concern.

Nationwide the concern is over interest rates, pricing trends, new housing starts and a plethora of other housing factors that experts claim influence housing prices. When examining the overall housing market these indicators are important but because real estate remains a local matter the prudent real estate professional does not allow these factors to interfere with the operation of his business. Some of these factors may be influencing real estate sales in a particular and some may not. The successful agent or broker is one who keeps a careful eye on the factors that are at work in a given market and adjusts accordingly. If one is working in a heavily industrialized area, watching production projections is important and will likely influence the demand in near future while working in resort type areas an agent must be mindful of such factors such as weather trends and the aging of the population.

In short, national trends in real estate sales make for interesting discussion but it is the factors affecting local supply and demand that are essential for the typical real estate agent and broker. Homes may be selling quickly and at high prices in one locale while languishing on the market for months and at reduced prices somewhere else. This condition has characterized the United States' housing market for most of the past decade and continues to the present. Still, many agents and brokers have managed to make money in this economy. These agents have managed to leverage the situation to their advantage by adjusting their selling strategy and approach to the market.

The good news for the real estate industry is that this continued decline in prices and unit sales cannot continue forever. The reality is that supply and demand must eventually balance. People must live somewhere. Presently, the market is recovering from a sustained period of growth in housing starts, inflated housing prices, and huge demands. The struggling economy has caused new housing to slow down, prices to drop rapidly, and demand to decrease to levels not seen in many years. This situation cannot continue forever. Eventually all those who have been delaying purchasing will have to make a move toward purchasing a home. This will serve to push prices back up as the demand will, at that time, exceed the supply causing prices to again raise. The likelihood of prices reaching the same levels enjoyed around the turn of the century is minimal but prices cannot continue to fall once the demand is increased.

C. Financial

The struggling economy has impacted not only the price of homes and the rate at which homes are selling it has also impacted how those who are buying real estate finance their purchases. The United States real estate market is recovering from a period that was highlighted by no and minimal documentation loans (Craft). During this period, loans were being made to individuals who traditionally did not qualify for mortgage loans. The result of this process was a huge spike in home buying that was highly profitable for the real estate industry but, in the end, caused a severe drop in the real estate market and collateral problems in the banking business. In response to the problems that developed, the U.S. Congress and the government regulatory agencies that control the standards for determining mortgage eligibility established new rules. These new rules apply to only government backed insured mortgages but in today's market that applies to nearly all mortgage activity. Private mortgage money is difficult to procure and tends to be as conservatively provided as government backed mortgages.

The new mortgage changes began to take effect during calendar year 2009. These new changes affect nearly all lenders and will impact nearly all aspects of the mortgage process. These changes will affect who is eligible to qualify for mortgages and, until such time as the buying public becomes accustomed to the new rules, it can be expected that these rules will have a chilling effect on the mortgage loan market.

One key change is the requirement that all new hires applying for mortgages must be able to provide minimum 30 day pay stub documentation before being able to close on a new loan. Technically this is not a new requirement in that it has been a suggested guideline by both Fannie Mae and Freddie Mac for some time but it has been largely ignored until the new rules were put into place. Historically, lenders have overlooked these guidelines and allowed such loans if the new hire could document his employment history and his new salary. With the new rules, however, new hires cannot realistically expect to close on a new home for at least four to six weeks after beginning work. Despite outcries from various segments of the economy, all lenders have held firm on this rule to the frustrations of many otherwise qualified individuals seeking new homes near their new jobs.

The second significant change involves the appraisal used by lending institutions. The appraisal business was subject to much abuse during the no documentation loan period and new regulations by Fannie Mae and Freddie Mac require that all appraisals be done consistent with the Home Valuation Code of Conduct (HVCC) guidelines (Miller). These guidelines were designed to improve the reliability of home appraisals and to eliminate inaccurate appraisals. In the no document loan period, fraud in the appraisal business was rampant and the hope is that the new HVCC guidelines will provide some measure of uniformity in the industry relative to appraisals.

A third change is that lenders are no longer allowed to consider the trailing co-borrowers' prior salary in the calculation of eligibility. Prior practice allowed the lender to consider such income as part of the calculation process but for a variety of reasons including the struggling economy and high rate of unemployment an unemployed co-borrower's prior salary is no longer a consideration.

In addition to the documentation changes discussed above there were a number of timing and technical loan closing requirements enacted subsequent to the housing and banking collapse that occurred in 2007-2008. These changes have added another layer of difficulty for those seeking to buy or sell a house in the present real estate market.

D. Human Resource

The significant downturn in the real estate market has created problems for everyone involved in the industry. One of the more serious problem areas is in the procurement and management of the personnel involved in the operation of a real estate office (McCormick). During the boom years real estate offices had no difficulty attracting new agents; hiring qualified appraisers; and meeting payroll requirements for auxiliary staff. Today, that is no longer the case. Thousands have left the area of real estate sales and many of those who have remained are struggling to maintain themselves financially. For a human resource professional in the real estate industry, the present difficulties facing the real estate industry are considerable and most successful real estate companies have determined that outsourcing the functions usually managed by human resource professionals is economically prudent and frees the management of the office to perform other valuable functions such as business development, financial services or property management. Typically, real estate brokers and offices utilize the services of outside organization that manages daily administrative functions such as payroll processing, tax filings, employee benefits management, and workers compensation matters. By doing so, real estate offices are able to reduce and control operating costs. The use of an outside agency also reduces office overhead and allows the company to redirect capital to other areas of the business and provides the organization with a level of expertise in the areas of employee benefits, workers compensation, and federal compliance that might otherwise not be available for the organization. In an era of increasing regulation and competition it is imperative that a successful company provide the advantages that a professional human resource company can provide. It frees the real estate agency with the capacity to free itself of employment related paperwork, ensure that they will be in compliance with the multitude of workplace rules and regulations, and allow the management of the company's benefits to be done efficiently.

F. Legal/Regulation/Political

The nature of real estate is such that it generates a considerable degree of litigation. Because of its potential financial and intrinsically unique value individuals have battled over the ownership, use, and transferability of property for centuries. Under most circumstances the legal issues surrounding property are beyond the province of most real estate professionals. Usually these issues are best left for legal professionals to address but it is still necessary that realtors have a working familiarity with basic real estate law principles.

A practicing realtor should be familiar with the laws and regulations regarding rights and interests in real property; the selling and buying of real property; title and lien considerations; zoning and land use basics; and mortgage loan requirements. The need for knowledge in these areas is only rudimentary and the rendering of legal advice on any of them is strictly prohibited but being familiar with the terms allows the realtor to feel comfortable in any discussion where such issues may be raised (Mortgage News Daily).

Knowledge regarding the recent changes in the mortgage qualification rules is particularly important in today's market place. Clients will need to be advised as to these changes and will undoubtedly be confused and frustrated by the strict new standards. Even clients with excellent credit will find frustration with the new rules and a properly prepared agent can allay the concerns of the clients early in the process which may, in the end, save a potential sale.

Licensing is now required in all fifty states and all states maintain some form of continuing education program. The continuing education requirements vary from state to state but as the real estate industry attempts to upgrade its level of professionalism and the legalities surrounding the area of real estate become more complex there is an increased need for such educational programs.

The real estate industry remains active in the lobbying area on both the state and federal level (Woellert). The real estate lobby is eager to protect a governmental system of support provided to the industry since the early 1950s when Fannie Mae and Freddie Mac first began offering support. In the brink of the housing and banking collapse that occurred in 2008, the National Association of Realtors donated $3.9 million to various Congressional and Senatorial candidates in that year's election. These lobbying efforts were successful as, heading into the election, there was some discussion relative to ending the support of Fannie Mae and Freddie Mac but through Congressional support both organizations have been restructured to the point that they now own or guarantee more than half of all existing U.S. mortgages. Debate continues as to the future of Fannie Mae and Freddie Mac. There is a large sector of the political spectrum, mostly originating from the Republican side of the aisle that would like to privatize the mortgage guarantee business and eliminate the government from the process but the real estate industry remains solidly behind the continuation of the process supported by Fannie Mae and Freddie Mac.

G. Ethics

Maintaining professionalism has been a goal of the real estate industry for a great many years. Requiring licensing and continuing education is one of the ways used by the industry to ensure that their members remain professional but the National Association of Realtors (National Association of Realtors), the industry's largest professional association, also publishes a Realtor code of ethics and requires that all its members adhere to the tenets of the code and that such members complete ethics' training every four years. The terms of the Code of Ethics are extensive and cover all aspects of the real estate process. In essence, the code requires realtors to treat all parties involved in a real estate transaction honestly and to advertise their services in a true and straightforward manner.

The Code of Ethics provides a systematic system that allows a client believing that he or she has been aggrieved by the unethical conduct of a realtor to file a complaint and have said complaint heard by both formally and informally. The system established by the National Board relies heavily upon the local realtor associations and encourages the use of informal dispute resolution techniques before the filing of formal complaints. As all states require licensing for realtors, all aggrieved parties also have the option of filing formal complaints through the state licensing authority. The state licensing authority would have priority over any proceedings involving either the local, state, or national association but, nevertheless, the system provided by the National Association provides an alternative approach for clients to seek when attempting to address their concerns.

The sanctioning authority of the National Association of Realtors and its subsidiary associations is secondary to any sanctions imposed by the state licensing commission but range from a simple reprimand to termination of membership. The National Association treats ethical breaches very seriously but considers its role as being primarily educational. It recognizes that the primary role of monitoring the legal relationship between the real estate client and the agent and/or broker lies with each state's real estate commission. In the most serious cases, the National Association's responsibilities will serve as a compliment to the actions of the state commission. It is the minor grievances where the local, state and national associations have the most input. In such cases, the realtor associations attempt to resolve disputes informally so that more formal methods are deemed unnecessary.

H. Other

The real estate industry is not alone in finding itself facing a period of transition and change. Globalization, technological advancements, and increased competition have impacted on nearly every industry and so the real estate industry must address its concerns in company with many other affected industries. Technological developments, increased regulation, and increased competition are causing the real estate industry to adjust and find new ways of marketing its services and justify its continued existence. Some argue that the need for real estate professionals in the process of buying and selling real estate is no longer necessary but, in reality, the profession is merely in a period of transition in an effort to redefine itself.

In order for the real estate industry to avoid becoming obsolete it must continue to emphasize its greatest asset: information. The industry still stands in the unique position of possessing access to the information that buyers and sellers need to effectively close their real estate transactions. Even with the proliferation of the internet and the trend toward property sales being finalized without the intervention of a realtor there is still a large segment that still needs the assistance of a real estate professional. The open availability of information is one thing but having the ability to access that information and how to utilize it is another and it is here that the importance of realtors becomes paramount. In the future, realtors must take advantage of their superior position in regard to information and its utilization. Information is power and realtors are in the unique position of possessing more information than their clients. Realtors must strive to maintain their superior position relative to information in order to survive. Once they lose this advantage, their reason for existence is extinguished.

IV. Industry Responses/Strategies/Solutions

The dawning of the twenty-first century has seen remarkable change in a number of major industries. For instance, the recording industry, the automotive industry, and the travel industry have all seen their very existence challenged. Like the real estate industry, each of these industries had adjusted poorly to technological changes and failed to exercise the foresight needed to adapt to these changes. In all three examples, certain segments of the industry eventually adjusted and survived while many others found themselves left out of the equation. In the real estate industry this same process is ongoing and, in the end, the result will be the same. Some will survive while many others will not.

The industry is striving hard to redefine itself. During the boom years of the 1990s business was so good that little attention was directed toward the future. The result of this shortsightedness was the dismal conditions that the industry now finds itself facing. The industry did not forecast and prepare for the severe drop in housing prices, the sudden drop in housing demand, and the imposition of new documentation standards that have stalled the mortgage business. A more enlightened approach might have either forestalled or minimized the effects of these developments but the industry failed to do so. Today, they are paying the price.

V. Recommendations and Conclusions

The industry must streamline itself. It must continue to emphasize the professional nature of its business and make entrance into its profession more difficult. The need for large scale sales' office has been diminished. More can be done with less thanks to the proliferation of technology and the fact that potential clients today are far better informed than they ever were. Today's realtor is not just a sales professional. He or she is a marketing expert and it is the realtor who finds the best method for marketing his or her skills that will be the most successful. Let the public know what you can do for them. The client may no longer need an agent to find a property that he wants to buy but the agent can assist him in investigating any problems that the property might have; assist in finding and procuring the best financing options; and eliminate any delays in getting the transaction closed. The key to success is in letting the client know that you are needed.

It is time that the real estate industry put aside its successes of the past and rededicate itself to trying new approaches. The boom years are gone and it is now time to adopt new approaches. What worked in the 90s will not work in the new century. The market has changed and it is incumbent that the industry adopts new approaches.

One of these new approaches is an emphasis on service. Instead of lamenting how technology has changed the industry and, in the process, diminished the value of real estate professionals realtors should be examining how they can utilize these new technologies in an effort to better serve potential clients. Whether through the use of Facebook, Twitter, Linkedin, email, or texting communication is the key and letting clients know that you are ready and available to serve them is the key to success. In today's busy world, letting potential clients know that you are not only available to serve them but also want to serve them will ignite their interest. Lightening the load of their clients should be the goal of every realtor. Some aspects of the sales process may have changed but the bottom line is service. The nature of the service may have changed but the need for that service has not.

Every way one turns today there are doomsayers predicting the demise of the real estate agents and the overall depressed state of real estate in general. One of the strongest weapons in the arsenal of a realtor may be his or her confidence. Self-promotion and promotion of the health of the real estate business can overcome a good amount of the negativity that is being expressed by the media and others. The result of this negativity is that potential clients are afraid to get involved in the real estate process. The responsibility of realtors is to overcome this fear and convince potential clients to re-enter the market. Doing so will have a domino effect that will spiral the industry back to health.

Finally, the industry must recreate itself and make the owning a home a part of the American Dream. For most of the twentieth century this was the case and it must be again. Owning one's home must be something that everyone feels compelled to do. Once this is done the future of the real estate industry will be assured.