Commission Income in March

Existing home sales rose 3.7 percent in March compared to a month ago, and sales were 6.3 percent lower than the homebuyer tax credit-fueled activity of 12 months ago.  This information was shared with the reporters at a press conference on Wednesday and continues to be widely printed by national and local newspapers and on blogs.

From an industry income perspective, sales commissions probably rose 38 percent in March compared to one month ago, though they are down 12 percent from March 2010.  The differences in media figures and pocketbook figures are due to the differences in data from a raw count versus data that gets transformed with seasonable adjustment factors.

Nearly all economic data as reported by the media and in studies by economists are used on a seasonally adjusted basis.  This includes not only home sales but also jobs, income, manufacturing production, and a multitude of other economic data.  The exceptions to this are stock prices and the consumer price index.

The reason for seasonally adjusting the data is to more accurately assess true changes in underlying activity, rather than the swings that occur simply due to seasonal factors.  One good example to consider is employment trends at beach resorts.  In general, beach resort jobs in winter are very low while many are hired in summer to meet the rush of vacationers.  If during most summers 8,000 jobs are added at a particular ocean town, then a job addition of only 6,000 would not be considered good news.

Similarly, home sales always rise strongly from February to March on a raw count basis every year.  This is a normal seasonal swing.  This year, the February to March sales gain was a bit stronger than normal, which explains the rise in figures even after seasonable adjustment factors are taken into account.  Therefore, the March gain is implying some improvement (3.7 percent as reported) in the underlying changes to housing demand.

But for a REALTOR®’s pocketbook, what happened in March was a 36 percent gain in home sales and a further 2 percent gain in the prices of homes that were sold in March versus February.  Roughly speaking, therefore, REALTOR® income probably rose by 38 percent (36 percent from sales increase and 2 percent from price increase), provided the commission rate did not change in any meaningful way.  That’s good news for members’ wallets.

However, let’s be mindful that March 2011 came up short versus March 2010 (when home sales were juiced up by the tax credit).  Considering the lower home prices now versus 12 months ago (by 5.9 percent), the total commission income this March is lower by 12 percent from March of last year.

Also be aware that the raw home sales count will start to weaken from August into the deep winter months, according to what we know of seasonal factors.  So, despite press reports that say home sales are not falling in autumn and winter months, because they are adjusting for this phenomenon created by normal seasonal factors, REALTORS® and related occupations that depend on home sales for income will feel it in the pocketbook from August onwards.

Experienced professionals know about the seasonal income swings, so they manage their commission expectations over a full year.  So, what is in store for the remainder of the year?  If the true underlying demand for homes stays the same for the remainder of the year as it did in March, even after accounting for normal month-to-month seasonal swings, then home sales for all of this year will be 5.1 million.  That would be 4 percent higher compared to all of last year.  If anything, I project that sales will get an additional lift as we proceed into the later months just from moderate improvements in the broader economy that are creating some jobs.  There are plenty of issues to be concerned about, such as the outsized U.S. debt, oil price, and a weaker dollar, but my forecast at the moment is for 7 to 10 percent higher home sales for all of 2011 compared to last year.