As WorkItDaily.com has noted, while occasional downturns in the economy are inevitable, real estate agents can end up making good money despite those
Do “middlemen” or “brokers” tend to be in an unstable position? If so, why?
Yes. Anyone with broker or agent in their title is an endangered species.
Brokers and agents are typically part of businesses established to take advantage of information asymmetries in markets. More simply, the business models of these jobs and businesses are completely predicated on having more knowledge about both sides of a transaction than either the buyer or seller. Because the broker, agent or middle man has superior knowledge of the market, buyers and sellers are or were willing to pay them to facilitate a transaction. The rational for using these brokers is the broker’s broader knowledge of the market enables the buyer/seller to find a higher/lower price for the transaction and this higher/lower price more than compensates for paying the broker a fee or commission. Common brokers include professionals like travel agents, real estate agents and even investment bankers.
Over the past decade and a half, we’ve seen the decline of these professions due to a process commonly called dis-intermediation or getting rid of the middle man. The primary driving force behind dis-intermediation is the internet and its democratization of information. The internet is making information that was once only available to a select few available to the masses at little or no cost. As a result, where it once made sense to pay a broker to help facilitate a transaction, buyers and sellers are now finding that for certain transactions (e.g. something fairly simple or commoditized) it actually makes more sense to do the leg work and analysis themselves since the cost of their own time is in many cases a fraction of what the hard cost of the broker’s fee would be.
A fairly straightforward example is the one of airline flights and travel agents. Before the internet and the myriad of online booking sites were available, it made sense to use a travel agent to do the leg work and to buy an airline ticket with the right combination of schedule, cost, and restrictions. Twenty years ago when I was making my first spring break reservations, I can remember calling at least 6 different airlines and spending more than 5 or 6 hours trying to figure out the best schedule and cost combinations for a starving college student. If I had the money then, I could have found many better alternatives for that use of my time and a travel agent would have made sense. Fast forward to today and anyone can search on or any other of the 10 or so travel sites and get a pretty solid grasp on the market for the specific type of ticket they are selecting.
This is a huge change and the key here is that the internet and its ability to make information free flowing has effectively destroyed brokers ability to make money on transactions that are fairly simple, like a spring break flight to Florida. These kinds of simple transactions in most markets are the kind that make up 80 percent of volume, but only take 20 percent of the time. So, while they probably were not high margin, they were easy to do and represented the bread and butter of the business. The internet made these types of transactions cost effective to do yourself. As a result, the profession of travel agents has been indelibly changed in that the travel agents that still exist today focus mostly on customized travel (e.g. a around the world trip or a once in a life time trip). Effectively, they now only do the 20 percent of trips that take 80 percent of the time part.
The travel business is not alone, we will see more of this in all the businesses that use brokers. Real estate is probably next. As websites like Zillow start to proliferate and make it easier for buyers and sellers to understand local real estate market values, it makes less and less sense to pay a commission on a home in Iowa that may only be worth $50,000. Just like travel agents, you will ultimately see garden variety real estate agents either pushed up market to high value home transactions (home values in the multi millions) or out of the market all together. As more and more information becomes available, the squeeze on these professionals will get tighter and tighter.
I also expect you will see similar trends in investment banking. At one time, it was very difficult to find information and analysis on all but the largest companies, now you can pretty much go to Google or any finance site and quickly learn everything out there in short order about even obscure private companies. When it comes to acquisitions, mergers etc the vast majority of companies are fairly straight forward in terms of their ownership, costs etc so, eventually using an investment banker will make sense for only the most complex transactions with exotic financing requirements. The bankers will be pushed up stream just like the real estate agents as many business owners choose to handle much of the transactions themselves with their legal counsel supporting.
Finally, a bit of speculation and opinion. California is/was the epicenter of the real estate bubble and with it the state had a lot of people employed in broker type roles (real estate agent, mortgage broker etc). These people made a living sitting at the center of deals and taking advantage of the ignorance of sellers and or buyers. With the real estate bubble bursting and the internet making more information widely available, I think its reasonable to suspect that many of these people will not have the same jobs to return to even if the economy or housing market rebounds.
So, here is the problem: the professional psychological orientation of these individuals is one of “doing deals” and not actually creating things whether it is software, books, machines or whatever. As a result, I expect these people have and will continue to contribute to California’s high rates of un and under employment as they seek to find jobs for their skills and experience that do not or will not exist anymore. Perhaps the most pernicious part of this problem, in my perception, is that these individuals lack the mindset to move into other professions where their labor resources may be needed. A “deal” oriented person, is probably not going back to school to learn how to become a software engineer.
When I was growing up in Pittsburgh in the early 80s, the region underwent a dramatic change when the steel industry slowly downsized and moved production resources overseas to places like Japan. When I contrast my experience in Pittsburgh with my experience in post bubble Los Angeles, one thing seems very clear to me. The rust belt workers (Buffalo, Cleveland and Pittsburgh) all had professional orientation towards making things and as a result, many were able to be retrained and moved into new vocations (not without substantial disruption or human cost, but labor resources reallocated). As a I mentioned above, the psychological orientation of many of the unemployed in California who were broker types is radically different and presents a serious problem for fixing the California jobs problem. Many of these broker types have fully accepted the real estate market isn’t coming back, but they have yet to grasp that the very concept of the job they like to and are are qualified to do is on the marked for extinction list.