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Housing bull run near end, CEO says

ROBERT TRIGAUX
Published November 21, 2003

Van Davis just delivered a message to area real estate brokers lulled too long by the bull housing market and the easy money from inflated sales commissions.

Wake up and smell the tougher real estate market. Smarter full-service competitors, the rise of cheap-commission real estate agents and customers made savvy by an Internet laden with real estate data are industry trends bringing a quick end to the cozy and comfy boom in residential home selling.

That's the crux of a mile-a-minute pep talk delivered earlier this week to a gathering of area brokers of Century 21 franchises by the president and chief executive officer of Century 21, one of the world's largest residential real estate companies.

Last year was the sixth record year of real estate sales for Century 21, Davis said. Sales are up 11.8 percent this year. But before the audience of brokers could slap each other on the back, Davis brought them back to earth.

"This is the first time in six years that we are losing market share," he said, warning against complacency. "Volume is not a measure of success."

Consider the mirage of success in selling housing in a fast-rising market. When a Century 21 office sold a $150,000 home in 1997, the typical 6 percent commission was $9,000. When that same house sold this year for $275,000 - after six years of serious appreciation - the 6 percent commission grew to $16,500. That's essentially a $7,500, or 83 percent, gain by selling the same structure again.

That makes for a nice increase in compensation. But it's a poor indicator of share of an expanding market. Just this week, the Commerce Department said that housing construction in October reached its highest level in 17 years.

Are you winning or losing the war? Isn't this a fine time to be in the business? Davis soberly answered his own questions. "It won't last," he cautioned his St. Pete Beach audience of about 100 brokers at the Don Cesar Beach Resort and Spa. "I hope you are putting some money away in the bank because you're going to need it."

Davis, 45, is a sharp and energetic fellow, sensitive to the fine balance between cheerleading and criticizing. This week, they are both on his agenda.

The Tampa Bay housing market has prospered lately thanks to rising home prices and a growing population that keeps residential demand strong. A housing bubble isn't happening here, Davis said. Housing affordability is high.

On the other hand, Davis told his Century 21 franchisees, fast-rising home prices won't continue forever. "You can't have appreciation that continues to outpace the growth of personal incomes," he said. If you do, housing will become less affordable and prices will flatten until incomes catch up.

Century 21 is the largest franchiser of real estate brokerages with 4,100 offices in the United States and 6,600 worldwide. The franchise is owned by Cendant Corp., which bought the real estate business in 1995 from Metropolitan Life. Cendant later added the ERA and Coldwell Banker real estate franchises, which continue to compete against Century 21 despite common ownership. Cendant is also a collector of franchises that include Avis and Budget rental cars, such lodging chains as Ramada Inn, Days Inn and Howard Johnson, and tax preparer Jackson Hewitt.

Davis began his career with Century 21 by selling real estate in rural Maine, later becoming a broker with several offices. He became CEO of Century 21 three years ago, and relocated to the company's headquarters in Parsippany, N.J.

In some ways, his rise in real estate was preordained. His father was a stock broker who bought and sold farms on the side. His mother was and still is a Century 21 franchise owner.

So when CEO Davis explains he must answer to a higher authority, he's not kidding.

A frequent speaker to Century 21 franchisees, Davis knows he can't simply order brokers to do things his way. In the case of a franchise system, the executive can only strongly recommend. In the end, it usually is up to the local broker to decide.

That does not mean Davis is not tightening his grip on Century 21 franchises.

"We've had the greatest brand in the world but generally let everyone do their own thing," Davis said. That's changing. "We will become more proscriptive," he said, suggesting that a more centralized approach is in the works.

In a wide-ranging interview, Davis explained why he is so bullish on the housing market and eager to boost productivity in order to keep Century 21 at the top of its game. Here are some excerpts:

Q: How long can we expect housing to remain such a hot business?

Davis: The demographics are extraordinary in most major markets. Between the echo boomers (baby boomers' kids born between the late 1970s and the early 1990s) and the coming of age of immigrants here, there is expected to be 1.25-million household formations annually for the next 10 to 15 years. That's a big number by historical standards. You also have affluent boomers looking to buy about 300,000 second homes every year for the next decade. And another 400,000 or so homes that become obsolete or are torn down each year that must be replaced.

Q: So if things are so good, what red flags should we be watching for?

Davis: Thanks to low interest rates, housing affordability hit a 40-year high this summer. If interest rates start to rise and mortgage rates reach 8 or 8.5 percent, that's where the rubber will meet the road. That's when the housing market will slow. Of course, rising interest rates may reflect a stronger economy, which means many of the unemployed may be re-entering the market. And that may help.

Q: Housing has been the hot industry even while the country has been struggling with a weak economy and now a jobless recovery. Are there opportunities in real estate for people who have lost jobs that may never return?

Davis: This is a fabulous time to be recruiting. The country has lost 2.5-million jobs in the past 2.5 years. Many of those out of work are mature, thoughtful, experienced and understand the work ethic. With the average age of a real estate agent between 52 and 53, another good place to recruit is on college campuses. Students are tech savvy and motivated to work. And young adults in their 20s will be in their 30s when many real estate people are retiring.

Q: You say the Internet is the biggest change ever to hit the real estate market. Is there more to come?

Davis: More people in the first six months of this year used the Internet than newspaper classifieds in the process of purchasing a home. That's a first. In 1995, 2 percent of home buyers tapped the Internet. In 2003, 70 percent do. (In his remarks to brokers, Davis spent most of his time explaining the range of new Internet tools Century 21 is developing for its franchisees.)

Q: What about the image of the real estate business as a great place for part-time workers?

Davis: Part-timers are going away. Real estate is just too complex now. And too competitive.

Q: What's your outlook for the Florida market?

Davis: It's got good tax advantages. The state is pro-development. Good weather. A range in housing prices. It still has a lot of land available. So Florida is well positioned. I will only add that housing appreciation is not sustainable without rising incomes.

- Robert Trigaux can be reached at trigaux@sptimes.com or 727 893-8405.

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