Tapped Out!

A little quote from NAR’s Chief Economist, Lawrence Yun:

Housing equity – housing asset value minus mortgage liability – has greatly shrunk in the painful aftermath of the housing market crash. The aggregate homeowners’ real estate equity stood at $6.1 trillion today versus $13 trillion in 2006 according to Flow of Funds data from the Federal Reserve. According to Census, there are 74 million homeowners. So on average, the average equity per homeowner in 2011 is $82,000, which is down from $170,000 in 2006. A separate Federal Reserve data from Survey of Consumer Finances showed that the median homeowner net worth to be $190,000. This larger net worth figure is due to homeowners having other assets in addition to housing equity. The median renter’s net worth was $4,000. The only good news at the moment is that the further declines appear largely over. Price measurements from NAR, Case-Shiller, Core Logic, and Federal Housing Finance Agency have all noted a slight uptick in home price in recent months.

We just don’t have the clout of equity we did five years ago; and it was clout.  I’ve seen it in franchise sales.  Five years ago an eager prospective franchisee could easily pull a second mortgage to finance a start-up business.  The equity was there and banks were falling all over themselves to lend the money.  Today that door is pretty much shut.  Most times, the equity is not there and when it is, the lenders are so difficult (and guidelines so strict) that the old equity cash-out bonanza is almost impossible.

The good news is (and there’s always good news):  It’s not that expensive to get started today.  Five years ago, retail space was very pricey and Marketing – which in Help-U-Sell was largely direct mail based – was huge.  HUS offices routinely spent $7,000 -$10,000 a month on marketing and it was mostly postcards and mailbox delivered flyers (ETMs).  Today, postcards are still an important part of the mix, but Marketing is mostly about the Internet.  While it’s not free, it’s cheap compared to mailbox stuffing.

But the drop in equity has had big implications elsewhere, too.  Small business expansion is not happening like it used to.  In fact, most real estate companies are doing the opposite: scaling back, hunkering down, closing offices, merging, and consolidating.  I talked with a Help-U-Sell broker the other day who was a little intimidated by the new mega-office in her town.  Two medium-sized companies had combined to produce the largest house of agents on the block.   I reminded her that offices consolidate in an effort to cut expenses, and it happens when neither office is making it on their own.   She used to have two competitors, each with 50 agents doing less than half a closed side a month.  Now she has one competitor with 100 agents each doing less than half a closed side a month.  She called back to say she’d run into the new consolidated broker and he wanted to know how she was doing so well.  He’d seen her listing and sales activity and was amazed that she was able to turn the numbers with her minimal staff and small location.

Now let’s get practical.  Let’s assume we have a homeowner with equity (hallelujah!).  Let’s assume this homeowner is in a $300,000 house (that used to be worth $425,000) and has a mortgage of $200,000. That’s $100,000 in equity.  The homeowner is grieving for the $125,000 he’s lost, but still needs to sell.  ABC Realty will take the listing and charge 6%:  $18,000.  But that $18,000 is 18% of the homeowner’s equity! Here’s a homeowner who already thinks he’s lost more than half his equity to the economic downturn and now some real estate broker is trying to extract 18% more!!

Thank goodness Help-U-Sell is in the equity preservation business!  If this homeowner is smart he’ll keep interviewing until he finds a HUS broker charging a low set fee of, say, $4,950.  That works out to a savings of $13,050 and the set fee is just 5% of equity, not 18%.

Yes, we’ve had a huge collective drop in equity.  We all want to hang on to as much of what we still have as possible.  Today, that means saying goodbye to high, percentage-based real estate commissions and hello to Help-U-Sell.  In addition to ‘Save the Whales!’ and ‘Save the Rain-forest!’ let us add ‘Save the Equity!’  List with Help-U-Sell.