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Four months ago, Keller Williams co-founder and Executive Chairman Gary Keller stood before thousands of real estate agents, dumbfounded by a rapidly shifting real estate market influenced by several public health emergencies, rising mortgage rates, slowing home sales, worsening affordability, and increasing recession fears.

“I would say this is the most confusing market I’ve ever seen in my entire 40-plus years in our industry,” Keller said during August’s Mega Camp training conference. “It’s confusing, and it’s only confusing because you have mixed signals. Normally, you would expect all the signals to aim in one direction. And that’s not what’s happening.”

While all of those market factors still linger, Keller had a better read of the tea leaves and a clear message for the 10,000 agents watching his State of the Housing Market address on Sunday  — step up or step aside.

Gary Keller | Credit: KW

“I truly believe that 2023 will be a really tough year. It will be very, very hard,” he said on Sunday beside KW execs Jay Papasan and Jason Abrams and KW Chief Economist Ruben Gonzalez. “And if you don’t work hard to match the hard, your year is gonna suck. It will.”

“I said it yesterday, but I’ve been through this seven times,” he added. “And what I noticed is that there are people that don’t do anything different than they were doing during the good times. You can’t do that. When times get hard, you have to ramp it up.”

Putting home sales in context

While the past 12 months have felt like some of the worst ones on record, Keller said the historical data proves that we’re nowhere near the valleys of previous market cycles that saw annual home sales fall to the 3 to 4 million range — a rate we last saw in the years after the great recession.

“You’re sitting there thinking oh my gosh, we’re going to go back to production levels of 2009 and 2010 based on numbers of transactions,” he said while pulling up a slide of annual home sales data ranging back to 1990. “But here’s the gift of appreciation, and that is the volume of business that is predicted to occur this year would be the third highest in recorded history. Oh, by the way, the other two highest were the previous two years.”

Keller said part of the whiplash real estate agents experienced in 2022 was simply from how fast the market shifted, with home sales dropping from 6.1 million to 5.0 million in one year. “If it felt like you were falling off a cliff, news for you — You did, ” he said. “You fell off the second-highest cliff in recorded history.”

Although sales have slowed, Keller said 2023 is on pace to be the third-greatest year in recorded real estate history with $2.13 trillion in total market volume, even as home price appreciation is expected to decline 1.0 percent.

“You hear the ‘Oh my gosh, the sky’s falling, the sky’s falling,’” he said. “No. Look up. You’re most likely going to be in the neighborhood of the third greatest year in the history of real estate in terms of total volume.”

Before the crowd could get too excited, Keller said it would be harder than ever for real estate agents to get their “unfair share” of the market, thanks to the booming interest in the real estate market that saw the National Association of Realtors experience record membership gains in 2021.

“Okay, this is where you go boo, boo, boo,” he said to a wave of laughs from the audience. “Because you look up and you see in 2022 it was 6.3 transaction sides per agent, which is the lowest recorded. It’s never been lower in the number of sides.”

“Why? Because NAR, coming out of the Great Recession, added 580,000 agents, and average transaction sides dropped from 9.8 to 6.3. The historic average is around 10,” he added. “Notice how over time, it always finds its way back to that. Why does it do that? Well, we wrote about that in the book SHIFT. It’s called the law of equilibrium.”

Abrams said the industry is currently overrun with agents who joined when the market was hot and saw the opportunity to potentially get rich quickly. Right now, many of those agents are still hanging on; however, he expects them to quit over the upcoming year.

“We’re seeing lots of headlines about people who jumped into real estate right? Because of COVID, they were looking for another way to make money and are realizing this is a pretty tough industry, right?” Papasan added. “You have to be committed and they’re going back to their day jobs. So we will see this number go down.”

Keller and Abrams said a shrinking pool of competition leaves plenty of opportunity for experienced agents and dedicated newer agents to be successful in the coming year, especially if they’re willing to fight back against the negative narratives they and consumers hear about the market.

“Just because there are less opportunities, does not mean that anyone’s opportunity is less,” Abrams said.

The issue with fixating on mortgage rates

Keller, Abrams, Papasan and Gonzalez said the greatest challenge real estate agents and consumers will have to overcome is the Federal Reserve’s battle to curb inflation, which has in turn, caused mortgage rates to balloon by more than 400 basis points in the course of a year.

“It’s kind of still gonna be a rocky ride in ’23 because ’23 will be a full year of the federal government trying to get control of inflation [because] they don’t want to send the economy into a full-blown recession,” Keller said. “The odds are, you’re going to have one — my definition is that we had one last year, but no one talked about it because all the numbers were good.”

When it comes to inflation, inflation is most severe in the medical and education industries with costs for hospital services (+227.2 percent), college and tuition fees (+181.2 percent), college textbooks (+163.7 percent), medical care services (+132.2 percent) and childcare (123.1 percent) increasing by the triple digits since 2000. However, housing costs have increased by 87.1 percent, he said.

Although 87 percent is a staggering number, Papasan said it’s not as bad as it seems when you calculate the real change in prices when adjusted for inflation. Keller Williams compared the real change in prices from 1989 to 2022, which saw the monthly mortgage for a median-priced home only rise 2 percent.

“The takeaway here is that housing isn’t changed as much as people thought,” Papasan said. “Your mortgage is only 2 percent higher in real dollars than it was in 1989. That’s crazy, it is crazy.”

Keller admitted the impact of inflation varies across generations and personal life circumstances, with millennials and Gen-Zers battling the cost of college educations and baby boomers feeling the weight of staggering medical bills.

Even with that, Keller said most Americans would be smart to purchase a home and secure steady housing costs.

“When I got in real estate in 1979, interest rates were below 10 percent and interest rates within like a year period when they actually peaked at 18 percent,” he said. “Why would you buy a house at that interest rate? Well, a lot of people did.

“And by the way, those who bought houses at 18 percent 10 years later had the last laugh,” he added. “Why? Two things, real estate appreciated and interest rates came down and they refinanced.”

All four panelists acknowledged homeowners who secured record-low rates in 2020 and 2021 will only place their homes on the market if they absolutely need to since it’ll be impossible to get that kind of rate again. “You’re not gonna see three in your lifetime. My guess is you will never see four in your lifetime,” Keller said. “But that’s OK.”

Even though it won’t match the two-percent rates seen in 2020, Keller said today’s homebuyers who lock in a rate at the seven percent range will likely have an opportunity to refinance at the five to six percent level as the Fed gets a hold on inflation.

But even if they don’t, he said real estate is an investment that always pays off in the long run, especially since today’s homeowners and homebuyers are in a more secure financial position than one or two decades ago.

“[Purchasing real estate] has been proven to be the best long-term plan to build wealth because the second that prices go up on the houses, people that can’t afford to buy and they go rent and every greedy landlord in the room today will raise the rent on those suckers. Yes or no? Yes, yes, you will. Of course, you will. So rent never does it.”

“Even if owning a home takes up 60 percent of your income, do it,” he said while noting the average homeowner puts around 36 percent of their pre-tax income toward a monthly mortgage. “Why? Because you’re trying to lock in your cost of living.”

Debt ceilings, Ukraine and climate change

Although the first half of 2023 will be rough, Keller said the back half of the year will most likely yield calmer seas if domestic and global politics don’t get in the way.

“Well, if we look ahead this year and say, ‘Okay, what could derail us? What would be the things that we just need to keep an eye on?’ Number one would be any further escalation in Ukraine,” he said. “That could destabilize so much from oil and gas to wheat, you name it. I mean, there there are products coming out of that region that make a difference.”

The second-biggest threat comes from the Fed as they continue to battle inflation. So far they’ve been relatively successful, Keller said, but there is a chance that inflation takes a turn for the worse and throws us into a recession.

“In fact, if something weird happens and instead of getting it under control this year, it goes up, all bets are off,” he said matter of factly. “All bets are off.”

Keller said the partisan battle over how to handle the federal debt ceiling will have a major impact on the third and fourth quarters of 2023, while the increasing risks associated with climate change will guide the market for the foreseeable future.

“Look, I don’t care who caused it, but there is climate change,” he said. “Just come to my house and look at all the trees that are freezing. I mean, it’s unreal. Climate change is very real. By the way, it’s going to destabilize cities and it can destabilize a government overnight.”

Abrams and Papasan nodded in agreement, with Abrams telling agents to dial into environmental issues as they’ll become a greater factor in homeowners’ and homebuyers’ real estate decisions. “You can also have an immediate disaster, which changes the economic future in a moment,” he said. “Those [disasters] are happening more and more often. So we have to be cognizant of it.”

Thriving in a consolidating market

Beyond political and macroeconomic issues, Keller said real estate agents and companies must pay attention to a converging industry where everyone is battling to disrupt the traditional homebuying and homeselling experience and create the ultimate all-in-one tool that consumers will come to count on in the future.

“People forget that we tend to overestimate the short term, and then we completely underestimate the long term,” he said. “What you see happening again is a convergence. When you hear firms like Zillow talk about The Great App or The Super App…”

“What they’re talking about is pulling all of this into one experience,” he said. “It’s going to keep and it’s going to keep this is going to keep happening.”

However, Keller said the current market shift is showing who’s actually got the proof in the pudding, with the downfall of iBuyers being the prime cautionary tale of rushing to invest in the next shiny, new thing.

“You would have thought that the iBuyers two years ago, were the smartest, most brilliant people in the entire industry, right? They got the front stage. I remember Eric Wu, who is no longer running [Opendoor],” he said. (Note: Wu has taken on another executive role with Opendoor.) “I remember Eric came to Austin and we were a group of us met with him. At one point I asked him, ‘What are you going to do when we go into a downturn?’”

“He gave a really sophisticated algorithmic answer of how they knew how to figure that out,” he added. “He didn’t know what he was talking about. In the short term, people that sound good can make you look stupid. But truths are truths. They don’t change over time.”

Keller said real estate companies who own their tech are in the best position to lead the industry and support agents in their journey to serve agents and create solid, long-lasting businesses.

“You’re the number one source that people use,” he said. “So even if they’ve looked at real estate online or they start their journey and all these different ways, who do they end up going to? The real estate agent.”

Email Marian McPherson