The news this morning from The Wall Street Journal that New-Home Sales Hit 7-Year Low paired with yesterday’s news of discount broker Foxtons going out of business makes me wonder if any discount model can survive in a slumping housing market. Take for instance the quote from Foxtons’ senior vice president and general counsel, John D. Blomquist:
"The plain fact is that we have been battling against a real estate market that recently has turned into a sharp decline, and the company no longer has the liquidity to operate as a going concern."
So as housing prices continue to decline across the country, there appears to be a bit of a double edged sword. With profits dwindling and perhaps losses expanding, seller’s are obviously going to want to keep as much of the proceeds of a sale as possible. The problem however is that the discount model that would allow sellers to do just that doesn’t provide the caliber of service from a marketing perspective necessary to sell a home in a falling market.
I have been selling real estate for 16 years and I’m here to tell you that when I started in the industry in 1992, representing sellers was tough! Property often languished on the market for 18-24 months despite continued marketing efforts. A large percentage of the 6% commission (almost always split with another agent) was spent over that lengthy period on marketing. So how will a discount broker model that stands to make only a few thousand dollars or only 1-2% commission deliver buyers in a slumping market? I suspect it will be more challenging than most of them had ever imagined. It’s not unlike the experience to come for the real estate agent who has only been in the market for the past 5-7 years and has very little experience marketing or selling property because it has basically sold itself. The discount brokers who have popped up during the housing boom are in for a rude awakening as they realize that their business models won’t pay the bills if they can’t sell the homes.
I suspect that Foxtons won’t be the only victim of the nation’s housing slump and that seller’s are going to experience a renewed appreciation of the value that a solid, knowledgeable real estate professional brings to a transaction. In fact, if it gets any worse, many sellers will just appreciate any transaction.