As I pointed out in a recent post, 1,000 realtors left the real estate business in Chicago last year. I can attest to how poorly most real estate agents are doing in this market because I periodically look up the sales statistics for agents that I know and most of the time their numbers are pretty low. So, finally, just the other day I decided to try to quantify realtor performance in the Chicago market. I pulled data on the last 12 month’s closings by realtor in the entire area covered by our MLS system, which is a huge area covering all the surrounding suburbs. I then ranked the real estate agents by the dollar value of their closings.

The bottom line is that of the almost 25,000 real estate agents with recorded residential sales in the last 12 months only 3,189 agents exceeded $3 MM in sales. If we make the simplifying assumption that those agents earned 50% (their split) of a 3% commission on average then close to 22,000 agents earned less than $45,000 last year – and that is before expenses. At the national level median expenses for realtors were $5,810 in 2008. When you factor in that this is not a cheap area to live in you can see that these agents are struggling. Furthermore, as you might expect, a minority of the agents closed most of the deals.

Now this analysis comes with a whole bunch of caveats:

• I emphasized above that this focuses on agents that had recorded sales. If an agent never closed a deal in the last 12 months then they are excluded from this analysis because I have no way to know who they are. But I suspect there are quite a few who did nothing in the last 12 months.
• Assuming that these agents earned 50% of 3% on average is a very big assumption. Many agents earn quite a bit more than 50% but on the other hand the commissions might be a bit less than 3% – e.g. typical cooperating commissions are 2.5% but could be as low as 2%.
• Many of the agents that are included in this analysis might actually make most of their income from commercial real estate and maybe they just did one or two residential deals in the last year.
• Many of the included agents might be part timers
• There may be quite a few agents that are excluded because they have no recorded sales in this time period but they might actually be quite profitably employed as members of a celebrity realtor‘s team, where the celebrity realtor takes all the credit for their business (this is a common practice).
• There may be a few agents that are included above who are members of a celebrity realtor’s team but one or two transactions appear under their name for one reason or another.
• As you start to get into the really high numbers – even as low as $16 MM – you start to run into the celebrity realtors who have teams working for them, some of which do a lot of developer work. So it’s not like the #1 realtor did $171 MM of closings all by himself.

Nevertheless, I believe that this data is directionally correct as it is consistent with data provided by the National Association of Realtors. In their 2009 member profile they show that on a national basis 62% of realtors had gross income of under $50,000 in 2008, with a median gross income of $36,700. After taxes and expenses those numbers drop to 64% earning under $35,000, with a median net income of $23,200. And those numbers are all for 2008. You can bet that 2009′s numbers are going to be a bit worse.

There are a bunch of headlines around today that broadcast a 7.2% plunge in January home sales for the nation. I’m not even going to bother to try to figure out how they came up with this number – is it from December to January? Is it seasonally adjusted? – because it sends the wrong message. The same articles go on to point out that January sales are 11.5% higher than last January. So…how is that a 7.2% plunge? It’s the year over year numbers that matter.

And in the Chicago area sales are up a whopping 29.2% over last year. In order to allow year over year comparisons of January data I have graphed 13 month histories below.

As you can see we are close to the January 2008 level now, though we are still below 2007 levels. No doubt this is extremely positive, though we have to wait until the tax credit expires to know what’s really going on. In the meantime, I think it’s a safe bet that activity will remain strong through April. Business has really picked up in the last few months and mortgage rates are still near 50 year lows.

I guess it’s no surprise that 2009 was a tough year for the real estate industry but I’ve just run across some information that gives us a pretty good idea of just how bad it was. After losing 4,000 agents in 2008, the Chicago area lost another 1,000 agents in 2009. That’s a 7.6% decline on top of last year’s 25% drop, bringing the total down to 12,054 as of early February. I guess these agents ran through all their relatives and friends – or they’re no longer on speaking terms with them.

Meanwhile, business hasn’t  been good for the brokerages either. Realogy, which is probably the largest brokerage organization, just reported a loss of $262 MM on revenue of $3.9 B. In case you didn’t know (most people don’t), Realogy is the parent organization of the following brokerages:

• Coldwell Banker
• Century 21
• ERA
• Better Homes & Gardens Real Estate
• Sotheby’s International Realty (and you thought they were high end)
• NRT

How do you charge outrageous commissions and still lose money? For starters, it doesn’t help if you have a huge overhead and spend a lot of money on advertising of questionable value. However, the biggest issue is that Realogy was taken private in 2007 by Apollo Management, a private equity investment firm. As with most private equity deals this one was heavily leveraged and today Realogy still has around $6.7 B of debt from that deal. Oh…and they have negative equity – close to $1 B worth – which is appropriate given that most of their former clients also have negative equity. Things got so bad last fall that Realogy was on the brink of bankruptcy when Carl Icahn stepped in at the last minute and saved them.

BTW, I find Realogy’s so-called strategy interesting. Either they’re not too bright in having all these brokerages that compete with one another or they’re smart enough to realize that there really isn’t any real competition between them. What do you think?

Anyway, Realogy’s woes are symptomatic of the entire real estate industry. RealTrends and Bloomberg recently reported that the dollar value of real estate commissions dropped by 6.2% last year. So, that’s about in line with the decline in the number of real estate agents in Chicago, which makes sense.

But what does all this mean for you? I’m afraid not much. There are still more real estate agents than there is productive work for them (much more on that topic in upcoming posts). And even if Realogy closed the doors on all their brokerages I maintain that it would have zero impact on the real estate industry because all those realtors would simply get new business cards with a different broker’s name on them. At least that’s the way it works with the independent contractor model (more on this some day soon also).

Chicago’s University Commons development in University Village has a lot to offer – great spaces, and fantastic amenities. However, the development has been plagued with a host of distressed sales – short sales and foreclosures – in the last year. I was actually shocked to discover that, of the 21 2 bedroom/ 2 bath units sold in the last 12 months, fully 11 were either short sales or foreclosures.

If you look closely at the data (sorted above by selling price) you will see that there is a higher concentration of distressed sales at the low end. In other words the lofts that sold were the ones that sold at the biggest losses. However, if you also sort the data by closed date you would see that there is a higher concentration of distressed sales as time progressed. My interpretation of that is also fairly negative – i.e. as time goes on sellers in University Commons are getting increasingly desperate and being forced to sell under distressed circumstances.

Having recently listed and sold one of those 21 units (1000 W 15th #414), I can speak first hand of the challenge in selling the lofts there. You just can’t get the traffic. Part of the problem is that University Commons is just not that well known. People looking for lofts in that price range typically think of either the West Loop or the South Loop and may not even be aware that very nice loft options exist in that area. So when you set up the listing you find out that it does not match the criteria of very many people and very few of the people whose criteria do match the listing will express an interest. You have to really work hard to find a buyer.

However, another problem is that the people who bought these units from the developer received a substantial 8 year property tax benefit – e.g. taxes of $1000/year on a $450,000 purchase. Doesn’t sound like a problem? Well, this tax benefit allowed the developer to charge a premium for the condos. But the tax benefit can’t be passed along to the next buyer so that premium is lost upon resale. I think this has contributed mightily to the losses that sellers are experiencing.

The good news is that if you are interested in buying in University Commons there could be bargains to be had because there is a lot of inventory available relative to the rate at which it is selling.

Crain’s came out with a story today about how the Chicago housing market won’t recover until 2013. This comes at a time when many statistics have been released and there has been a lot of debate regarding the interpretation of those statistics. Since I have recently been providing the bullish perspective on the housing market in Chicago I thought I should give equal air time to the other point of view.

The Crain’s story includes outlooks and analysis from John Burns Real Estate Consulting, Economy.com, First American Core Logic, Realty Trac, and Fiserv Inc., which calculates the Case Shiller home price index. In a nutshell:

• According to John Burns, existing Chicago home sales won’t start to rise until 2011
• According to Fiserv, Single Family Home prices in Chicago will continue to decline another 5.7% before heading back up
• Chicago homes are still expensive relative to incomes. From 1980 to 2000 the median home was 2.6 times the median income but currently that ratio is 3.3 (and that’s down from a peak of 4.2 in 2005)
• The home ownership rate of 69.3% is well above the more normal 65% level. If you believe that the incremental home ownership was driven by reckless lending to people who can’t afford to own a home then you can expect that percentage to drop – the hard way
• The number of foreclosures in Chicago was up 33% in 2009 and that will continue to drag down prices
• More foreclosures are expected because 21% of all Chicago mortgages are underwater
• Unemployment will drive even more foreclosures, with the rate peaking this year at 11.5% from the current 10.6%

Those do seem like pretty compelling arguments. On the other hand, a 5.7% drop isn’t that much, so if you are trying to find the exact bottom of the market you could easily miss it.