60 percent more realtors, what does this mean for Colorado real estate prices?

The top job-related search between January 2021 and January 2022 was “how to become a real estate agent.” More than 60% more people became realtors during the pandemic.   What is this statistic telling us about future real estate prices in Colorado?

What was in the data regarding realtors?

From burned-out health care workers to parents looking for flexible careers during remote schooling to laid-off sales executives taking their skills to cash in on a booming market, real estate has drawn an abundance of workers while nearly every other industry has struggled with hiring. In 2021, there were a record number of real estate agents in the United States, according to the National Association of Realtors. More than 156,000 people joined their ranks in 2021 and 2020 combined — nearly 60 percent more than did in the two years prior.

According to the National Association of Realtors, tens of thousands more people joined the profession in 2020 and 2021 than in previous years. Colorado got an additional 2,469 real estate agents last year. It was the biggest jump in a decade.

Why is it important to watch the number or realtors?

Real estate also is appealing in part because of its relatively low barrier to entry, said Ken H. Johnson, a professor at Florida Atlantic University who specializes in real estate economics. Training typically takes two or three months and costs just a couple hundred dollars, though brokerage and multiple listing service fees can cost a few thousand dollars more.

Historically, the number of agents tends to grow in boom markets. In 2005 and 2006 — the frenzied years leading up to the market collapse in 2007 — more than 250,000 people became agents. In 2008, after the market crashed, the ranks of real estate agents declined by more than 10 percent, according to data from the Realtors’ association.

On a side note, in 2014, NAR reported 87% of all new agents fail after five years in the industry, with only 13% making it.  In other words real estate is a very cyclical profession with huge ups and downs with people jumping in during good times and leaving during tougher times.

The huge influx of new realtors signifies a peak in Colorado real estate

Real estate during the last two years has been a goldmine.  Basically, any property sold as long as it had 4 walls which lead to the largest increase in realtors in the last decade.   We see the same thing in the mortgage arena with low rates driving a huge increase in the number of mortgage brokers.

Researchers at the Federal Reserve Bank of Dallas are concerned that a fear of missing out, colloquially known as FOMO, is creating a buying snowball effect that may lead to a housing bubble if left unchecked.

The current market, where higher prices and other factors are not resulting in a slowdown in prices, is moving away from market fundamentals, they found, suggesting that buyer exuberance, in the form of fear of missing out, is driving the current trend.

The number of new realtors entering the industry this late in the game is a clear sign that the FOMO effect is in full force. As realtors continue to use past returns as an indication of future returns.

We don’t have to look far to see the same trends in the stock market with the euphoria up to a few weeks ago.  This occurred right before the recent sell where prices have declined around 30%.

Summary

Colorado real estate is clearly at a peak as further price gains are not sustainable.  The sheer number of realtors entering the market is a clear indicator of market euphoria where past returns are expected to be future returns.  Unfortunately, this thinking never works out well as we can see from the recent stock market rout.  The Colorado real estate party cannot continue much longer.  Look for Colorado real estate to eventually succumb to market forces and unfortunately almost 90% of new realtors will be forced to exit the industry, many of whom just got into the market at the peak in the last two years.

Additional Reading/Resources

1. https://www.marketwatch.com/story/here-is-why-people-love-to-invest-at-market-peaks-2017-05-04
2. https://www.denverpost.com/2022/05/19/new-realtors-jump-into-colorados-hot-housing-market/
3. https://www.9news.com/article/money/markets/real-estate/real-estate-brought-in-more-workers/73-99dbe4b5-d1dd-41f7-a949-0652743c3b73
4. https://www.nytimes.com/2022/03/04/realestate/real-estate-agents-pandemic.html

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Written by Glen Weinberg, Owner Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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