Real Estate Classifieds

Big changes ahead for the home listings business

A New Policy / Realtor Attitudes
April 2002
In Cooperation with The Newspaper Association of America

Acknowledgements

Borrell Associates would like to thank the Newspaper Association of America for its support and, in particular, Tony Marsella for his enthusiasm and willingness to alert the industry to important changes in the real estate sector. Sponsors include InsightExpress, whose survey software helped us collect responses from home seekers at a dozen newspaper Web sites, and CityXpress, whose real estate content packages are helping the industry develop a strong Web presence in this category.

• Peter Conti Jr., lead author
• Gordon Borrell
• Mike Donatello
• Peter Krasilovsky

Table of Contents

PART I
Foreword by John Tuccillo .................................................................................... 1
Executive Summary ............................................................................................... 3
Chapter 1: State Of The Real Estate Industry ....................................................... 5
Chapter 2: IDX: What It Is, Why It's Important .................................................. 10
Chapter 3: What Realtors Are Thinking, Planning, Doing ................................. 18
Chapter 4: Conclusions and Recommendations ................................................ 23
Appendix A: IDX Policy
Appendix B: Glossary

Foreword

By John Tuccillo - President, JTC LLC; Former Chief Economist, National Association of Realtors

Revolution spawns evolution. We often forget that the "Big Bang" was followed by years of slow development that eventually produced homo sapiens as we know him today. So, too, the expectations that have followed the revolutions in agriculture and industry vastly overstated the reality of history. We, in this 21st Century, have fallen into the same trap, thinking that the revolution in technology that changed the way in which we deal with information would go further and faster than it actually has.

This way of thinking causes us to dismiss change simply because it refuses to conform to our timetables. But things in this life change slowly if they ever change at all. Hence the progression of evolution over revolution. Make no mistake about it: Because technology has infused our lives, both personal and business, the world is very different. Our experience over the next several years and decades will be one of an unfolding of the impact of the information revolution.

The biggest change that has occurred is in the freedom of the consumer. Because information has become cheap and accessible, the power of the individual has been magnified to the point where the most important economic unit is the individual. Nothing will happen in the marketplace unless the consumer wants it to happen. Consumers call the shots, dictating where and how they will acquire the goods they desire. Business can only stand by and watch the throng move.

All this has occurred because of the information revolution, and newspapers and real estate professionals are feeling the effects. Consider how the relationship between the two businesses has changed. Real estate agents and brokers built their businesses on an information monopoly. The only place sellers could display their property to all potential buyers, and buyers could find out all the properties for sale, was at the real estate office, through the multiple listing system. Real estate professionals in turn used newspapers as their most important advertising channel.

With the advent of the Internet and the emergence of Realtor.com and Homestore.com, the relationship began to change. Now properties could be advertised electronically. But since the system was national and real estate is essentially local, newspapers were still key elements of the Realtor strategy. Newspapers proceeded along the same lines, developing their Web sites as information repositories, complementing their print products.

Eventually, however, real estate firms moved their advertising to their own local Web sites as a primary channel to the public. Finally, we have IDX, the subject of this report, allowing all firms in a given multiple listing system to display the entire local inventory on their Web sites.

It's important to grasp the magnitude of this last development. It represents both a threat to newspapers and an opportunity for their growth. Both lie in the growth of online real estate shopping. Statistics indicate that the majority of buyers spend at least some time on the Internet seeking properties and Realtors. A recent survey by the California Association of Realtors suggests that those who use the Internet spend less time physically visiting properties and display much higher levels of satisfaction with their Realtors.

IDX is a threat in that it represents a tool real estate firms can use to reach these buyers quickly and efficiently. Often these are buyers who do not buy or read newspapers, suggesting that brokers can capture the emerging sector of the market. But it's also an opportunity. Newspapers, unlike real estate companies, control a number of credible channels through which the consumer can be reached. Thus, their scope is far greater than the real estate industry's, as is their capacity to capture a greater mind share of the public when it seeks information about real estate.

The challenge for newspapers posed by the advent of IDX is to integrate the channels they control in such a way that the consumer is attracted to move from electronic to print and back, and in doing so find value that exceeds that offered by any other information provider.

This report outlines the dimensions of IDX, the impact it can have on real estate and newspapers, and suggests ways of meeting the challenges described above. I newspapers can envision themselves as information sources using a variety of distribution channels to create value for the consuming public, they are more likely to fend off the threats represented by IDX and to seize its opportunities.

Executive Summary

As if the newspaper industry didn't have enough to worry about, it appears that the most stable of classified categories – real estate listings – is sitting atop a tectonic plate that's about to shift.

Three drivers have come into play:

•  A new policy: Known as Internet Data Exchange (IDX) or "broker reciprocity," this new rule from the National Association of Realtors (NAR) turns their brokers and sales agents into local home listings publishers via their own Web sites, where the listings don't cost a dime and competing brokers don't advertise.
• A shift in reader habits: A decade ago, the definitive marketplace for home seekers was a local newspaper's classified ads. Today it's the Internet.
• Stewing customer revolt: Real estate professionals have long complaine that newspaper classifieds are too expensive and don't sell homes. They've been waiting for the right opportunity to cut back on their largest advertising bill. The Internet, coupled with IDX, may be it.

At first glance, the significance of this revenue category seems relatively puny. Real estate listings represent the smallest of the Big Three classified categories for newspapers. In 2001, real estate listings fetched $3.5 billion, or 5.8 percent of total newspaper revenues. For a newspaper of 50,000 circulation, this category typically represents less than $2 million. However, home listings also tend to bring peripheral advertising from garden shops, home improvement businesses, mortgage lenders and other real estate-related display ads. If newspapers lose their franchise among home seekers – built around that valuable paid "content" known as classifieds – they will lose an advertising segment worth far more than $3.5 billion. So will publishers of rack publications, which bring in an estimated $3 billion more.

The question is not whether real estate classifieds will be affected by this triple- threat of the Internet, Realtor sentiment and a complex new industry policy. Th real question is, will publishers learn from their experience in employment listings and recognize more trouble on the horizon in time to act? Just a year ag many still held a "What, me worry?" attitude toward recruitment listings, pointing to five years of revenue increases averaging 14.7 percent per year through 2000. By the end of 2001, the Internet, employer sentiment and the economy sent those revenues plummeting, for a whopping 35 percent loss in one year alone.

Real estate ad revenues are not likely to suffer such a dramatic one-year decline. But the foundation has undergone steady weakening. The fact is, until 2001 real estate revenues exhibited the weakest growth of the top three categories over the past five years, increasing less than 4.8 percent per year compared with automotive at 5.6 percent and employment at 14.7 percent. This is a particularly disconcerting phenomenon considering that the U.S. housing industry experienced four years of record home sales since 1996. It's likely that print real estate listings actually experienced an erosion over the past five years, masked by the rising tide of classified rate increases and a swelling home-sales market.

Despite this troubling picture, there is cause for optimism among advertising executives. With change comes opportunity, and the opportunity for local media is to find new ways to delight customers. In the real estate world, the service that real estate professionals clearly need is Internet-related. Research in this report indicates that Realtors rank the Internet as the most cost-effective means of advertising and the No. 2 source of leads behind personal referrals, yet many are novices when it comes to this new medium. Local media companies with Web sites are well positioned to serve these advertisers with their ballyhooed "cross- media" packages that can use print and/or TV to brand the advertiser and drive Internet traffic. The winner will be the local media property that is the first to prove to real estate professionals that it is savvy about their business and offers a dynamic market advantage that differentiates itself from competitors.

A Two-Part Report

This is Part I of the "Real Estate Classifieds" report. This installment examines the NAR broker reciprocity policy and dissects attitudes by agents and brokers toward newspapers, the Internet, and the new policy. Part II, to be published in May, will take a critical look at what newspapers have to offer real estate professionals by examining the responses of thousands of home seekers who use newspaper Web sites. Together, these reports are designed to help local media understand impending changes in the real estate marketplace so they can respond accordingly.

Chapter 1:State of the Real Estate Industry

Boom years ahead

Linking housing trends to the rise and fall of real estate advertising is a tricky business. Some claim that strong home-sales markets mean more listings; others claim that strong markets reduce the need to advertise, meaning fewer listings. Whatever the case, the growth lines for both home sales and classified revenue roughly paralleled each other throughout the latter half of the 1990s (see Figure 1).

Figure 1: Home Sales (In Millions of Units Sold) Versus Newspaper Real Estate Classified Revenues (In Billions of Dollars)

_{Sources: National Association of Realtors, Newspaper Association of America}

If you believe the economists, this housing boom will continue throughout the decade. That would generally point to the classified boat rising on that tide – except for a troubling downward trend in one important industry number: the sales cycle.

A strong market ahead

Favorable mortgage rates, easy loans and rising home values have kept real estate on a robust track for seven years, even during the recent recession. All signs point to continuing strength in the housing market. With the economy on the rebound, as well as a gradual increase in consumer confidence, economists expect favorable housing affordability conditions to continue. The impact of these trends on real estate sales – and the way Realtors choose to market themselves and their listings – should be significant.

Interest Rates

In an effort to stimulate the post-September 11th economy, the Federal Reserve continued to deeply cut interest rates through early 2002. These cuts helped push the average mortgage rate below 7 percent, among the lowest in almost three decades. The NAR predicts that mortgage rates will hover at historic lows of 7.0 to 7.5 percent throughout the decade.

Easy Loans

With a multitude of programs, lenders have made it easier than ever for homebuyers. The strict lending qualifications of the past have eased, bringing in more buyers than would have qualified previously. Driving up homeownership are mortgage products designed to move creditworthy households, oftentimes minorities, into homeownership. Special programs for first-time buyers allow them to finance the entire purchase price of home, pledge assets (instead of cash down), and even secure a mortgage with no down payment.

Appreciation

Consumers are finding real estate to be a good investment in these times. The value of homes continues to appreciate at an astonishing rate. During the home buying boom years of 1996 through 2000, prices of homes grew at an annualized rate of 6.3 percent, twice the rate of inflation.¹ More people are seeing the purchase of a home as a hedge against an uncertain future and economy – the one investment that is stable – offering security and rising value. The NAR asserts that the economics of housing as an investment is a factor in the strong housing demand.

Demographics

Even more good news for real estate professionals comes from Fannie Mae Chairman Franklin D. Raines. In a speech before a meeting of mortgage bankers last October, Raines said, "The 1990s were a terrific decade for housing. This decade could be even better."

With the growth in empty nesters, singles and seniors, the average U.S. household is getting smaller. As a result, as many as 15 million new households will be created in this decade, slightly more than were created in the 1990s.²

Fannie Mae expects homeownership rates to rise dramatically. Homeowner rates in the U.S. are now approaching 68 percent. This trend is expected to continue as Baby Boomers move into higher homeownership years. The National Association of Homebuilders predicts that home ownership will surpass 70 percent by the end of the decade.³

Taken together all this appears to indicate that the low rates coupled with a pent- up building demand will cause the housing market to continue on an upswing in 2002 and through the decade.

And if Fannie Mae's forecast is correct, that will mean a 50 percent increase in homebuyers this decade over the last.

The advertising conundrum

But this good news for real estate agents doesn't necessarily translate into good news for the advertising business. According to the NAR, houses are selling in a shorter period than in the past and, consequently, many Realtors feel less need to place a classified ad in the newspaper. In fact, Realtors (the agents and broker members of NAR) tell Borrell Associates that many houses go under contract before the classified ad appears (see Figure 2).

Figure 2: Are Your Homes Selling Before They Have A Chance To Be Advertised In The Classifieds?

_{Source: Borrell Associates Realtor interviews (December 2001 – February 2002, n = 83)}

More than half the Realtors interviewed for this report told Borrell Associates that they are placing fewer classifieds in this period when housing demand is so great (see Figure 3).

Figure 3: In A Strong Sales Market Do You Place More Or Fewer Classifieds?

_{Source: Borrell Associates Realtor interviews (December 2001 – February 2002, n = 83)}

What's it all mean?

A steady shift in the sales cycle, perhaps even enhanced by the immediacy of the Internet, is likely to dilute any growth that print classified may see due to increased home-sales volumes. The key to stemming the flow may be in giving Realtors greater flexibility in placing and deleting advertisements according to market whims. A local media company that gives Realtors the ability to respond with rapid posting and marketing will be in tune with the marketplace.

In addition, a brisk sales environment with shorter sales cycles may mean Realtors will increase their reliance on personal marketing. Traditionally they've relied on direct mail or "farming" certain ZIP Codes or clientele. Local media, in the form of television commercials, newspaper display ads and Web banners, also serve as effecting branding and personal marketing tools.

Chapter 2 - IDX: What It Is, Why It's Important

The path to local listings control

Understanding the evolution of this policy is important for local media that are trying to shape advertising packages for the real estate industry. The process explains why Realtors (or the local multiple listings service agency, known as MLS, that they often control) are likely to be reticent in forming alliances with local media trying to gain access to the listings. Having a good grasp of the strategies and subtleties of IDX will help those media companies form solid advertising sales strategies of their own.

The IDX policy sprouted from the NAR's response to inside pressure to wrest control of MLS listings on the Internet from third parties. Brokerage firms and their agents were adamant that control be returned to the local markets.

In the mid-1990s, home sales hit record levels and the Internet grew at its own blistering pace. Realtors watched as home seekers began migrating toward the Internet and away from newspapers and rack publications, where Realtors spend more than half their advertising dollars.⁴ Between 1995 and 2001, the percentage of homebuyers using the Internet to search for a home went from 2 percent to more than 50 percent.⁵ Anticipating that trend in 1996, the NAR started making some significant decisions.

Its first step was to align with RealSelect Inc. (now Homestore.com). This relationship allowed Homestore to manage Realtor.com, the national Web site that aggregates the MLSs and sells Web sites and other services to agents, brokers and industry vendors. In short order, Homestore and Realtor.com led the pack in terms of unique users among home-sale sites. Today, the Homestore family of sites significantly outpaces the competition. AOL's homes sites (which is managed by Homestore) is outpaced by a factor of two, while Microsoft's HomeAdvisor is outpaced by a factor of four.⁶

The industry quickly became disenchanted with Realtor.com. Interviews with Realtors conducted by Borrell Associates in late 2001 and early 2002 indicate a widespread belief that Realtor.com built its business on the back of the local MLSs. The local Realtors and associations saw little or no return in exchange for their valuable listings data and raised concerns over Realtor.com's pricing structure, service and an inability to keep the listings data refreshed and current.⁷

Realtors also were unhappy that home shoppers using the Internet were increasingly relying on Web sites that offered the most comprehensive listings, such as Realtor.com, and not coming directly to a broker's site that offered only a portion of the local listings. Realtors began to demand a solution – something that would allow the agent or broker's Web site to be the best source of listings and the first and last stop for the home shopper on the Internet.

The NAR's response was to develop a new policy for listings known as Internet Data Exchange (IDX) or "broker reciprocity." In the face of poor service, low demand and severe mismanagement by Homestore, the launch of IDX has proven to be a prudent move. (Homestore has all but collapsed under financial mismanagement. Its stock price plunged from a high of $37 last summer to less than $1 on Feb. 8, 2002.)

In May of 2000, the NAR's Board of Directors mandated that the policy take effect on Jan. 1, 2002. (For the complete policy, see Appendix A.) The NAR's official implementation guide defines IDX as "rules and enabling technologies allowing MLS participants to give each other permission to display each others' listings on their Web sites: each participant giving this permission also receives reciprocal permission from other participants. Only the listings of participants who have not opted out of IDX can be displayed on other participants sites."

Simply put, IDX is a system whereby brokers give each other permission to display their firm's listings on each other's Web sites. If a brokerage refuses on a blanket basis to permit display of its data, then that broker may not download or frame the aggregated listings data of the other IDX participants.

The new policy has established the foundation for a potentially catastrophic problem for listings aggregators such as newspapers and rack publications. If brokers and/or Realtor boards, through their control over the MLS agencies, refuse to allow media to gain electronic publishing rights to the MLS, and if those brokers begin curtailing their print listings, the local media property will be left with a Web site that is less than adequate for consumers seeking comprehensive listings. So IDX holds the potential for collapsing not only the newspaper's print listings business, but also its e-listings business.

A local angle offers options

There are some local provisions, however, that media companies can use to their advantage if they have a clear understanding of how these provisions are being implemented in their markets. In areas where the local brokers may not be completely up to speed on the IDX policy, a media property can demonstrate its competence and interest by arranging for its staff or an industry expert to help to educate the advertiser on the policy's implications.

IDX participants can set their own local rules in four key implementation areas:

• Authorization: Opt-in or opt-out consent for listings sharing? Most MLSs are using the opt-out provision in which the consent of each participant to permit display of their listings is assumed unless a broker notifies the MLS in writing that it will not share its listings. Participatio in markets where "broker reciprocity"⁸ has been in place for a year or more runs at almost 100 percent.
• Participation: Will IDX be limited to Realtors only? In some markets where MLS participation by non-NAR real estate professionals is currently allowable (as a matter of law or local determination), the IDX participation may or may not be restricted to NAR Realtors only.
• Display: How will the data be displayed? This section is the most elaborate, with 14 provisions and recommendations for how to display some or all of the data. These provisions determine if certain information, such as the listing agent's name, will appear with each listing. What appears to be a minor provision to allow advertising on the IDX site offers the potential for a local media site to obtain IDX from individual participating brokers without having to make an arrangement with the MLS agency.
• Service Fees and Charges: Will there be a price for participating members to download or frame the data? The NAR requires only that the local MLS make the raw data available to brokers for IDX. The NAR has urged the MLSs to provide a smart-frame site of IDX listings for their participants. As a matter of local option, the MLS could charge participants for the services.

In addition (if permitted by local IDX), individual agents can take advantage of the new policy to enhance their own Web sites. Agents may use IDX on their sites if the agents' brokerage is contributing its listings to the program. The agent is then allowed to frame into the broker's site.

Brokers become publishers

The NAR has conducted an extensive educational and promotional campaign for IDX over the past 18 months. In materials distributed by the NAR, the following merits of IDX are emphasized:

• Consumers look first to sources of real estate information they already know (so Realtors shouldn't fear disintermediation by displaying the listings publicly)
• IDX allows "brokers to fully market their services on the Internet"
• Realtors can now direct customers to "their Web site and not to aggregator Web sites which expose the customer to the branding and contact information of competitive brokers"
• IDX reduces the broker's competition (through a reduction in certain contact information on the listing and the elimination of competing Realtor advertising)
• Seventy to eighty percent of homebuyers relocate within their current market area (so aggregators with national reach don't have much to offer from outside the local market)
• Unlike Realtor.com, IDX positions the local broker as the source of virtually all local listing information

To capitalize on these IDX sites, the NAR suggests that brokers "prominently promote in all their advertising that their agency Web site contains ‘virtually all listings' in the local market." This is already taking place. Long & Foster Realtors, for instance, uses the top portion of its display ads in The Washington Post real estate section to promote the fact that it has more than 42,000 listings covering its five-state Mid-Atlantic region. While the company is clearly attempting to funnel home buyers to its Web site, there is no intent to encourage its agents to curtail their print listings, according to Long & Foster's vice president of corporate advertising, Michelle Ball. "Print advertising is here to stay," Ball says. "It's a good complement to Internet advertising."

We also spoke with executives at two of the Northwest's largest firms – Windemere Real Estate Services Co. and John L. Scott Realtors – and discovered that offline advertising has been funneling a bonanza of customers directly to their Web site listings. Windemere claims 825,000 unique visits per month. The company's Web page boasts more than 100,000 listings from not only its own agents, but also from other cooperating brokers in an eight-state region. Windemere's Vice President, Lynn Sweeney Pedersen, said nearly 3,000 individual office and agent Web sites share the same database of listings "thanks to our successful partnership with broker reciprocity and our philosophy of maintaining the first and only point of contact on all listings for our agents at no cost."

One of the early proponents of broker reciprocity is J. Lennox Scott, president of John L. Scott Realtors, which has 107 offices in Washington, Oregon and Idaho. Scott believes that listings should be local and has discouraged cooperation with the national listings sites. Scott says agents heavily promote the Web listings by placing URLs on every listing. He also says he spends more than $1 million per year on Web-related staffing, technology and support. As a result of the company's Internet emphasis, the site fields 375,000 unique visitors per month. The strategy to reclaim the traffic from national aggregators has paid off: Scott claims that 57 percent of buyers come to the company's site, while only 12 percent of buyers in the region visit Realtor.com.

"The Internet is all about relationships," Scott says. "If you have the inventory, there is no need for the national portals. That's perception over reality. Businesses are only going to be able to compete if they apply real-time marketing. Information, communication, relationships and productivity gains all depend on real-time marketing."

The advertising disruption: Local TV, Yahoo! move in

The implications of IDX for real estate listings both online and offline are significant. In order to pay for IDX implementation and the increased need to advertise their sites, brokers are targeting their existing online budgets – spent mainly with Realtor.com and with local newspapers. Realtors have withdrawn heavily from their Realtor.com relationships especially in light of the problems with Homestore and the promise of IDX as a replacement. They've also begun curtailing their spending with newspapers' online classified operations. One California newspaper reported to Borrell Associates that it lost $100,000 in online revenues in 2001 as a direct result of broker reciprocity.

Competition for print listings revenue is coming from another local front: TV stations. In early 2002, Fox- and Belo-owned stations in Minneapolis-St. Paul and Portland, Ore., respectively, launched advertising programs to serve the brokers need to promote their own Web sites. Those deals are highly attractive to the TV stations because they are aimed at newfound revenue and because they fetch premium rates by combining both on-air and online promotion. The packages, if deemed successful, are likely to spread to other owner markets.

Finally, brokerage firm eRealty, which serves seven Mid-Atlantic states, is using a loophole in the MLS policy to become the exclusive provider of MLS listings on Yahoo! Real Estate for key relocation destinations across the U.S. (as well as for home searches in the areas that eRealty serves). While this move has upset brokers and MLSs, NAR officials said in early March that it is within the MLS guidelines. Yahoo!, meanwhile, is seeking deals with brokers to become exclusive MLS providers for other areas.

Most approve of IDX, but there are pockets of resistance

Local media attempting to cultivate advertising relationships with Realtors should understand that one goal of IDX is to level the playing field among brokerages in the industry. There is indeed dissent in the ranks regarding whether IDX actually accomplishes this. Not everyone is enthusiastic about the idea of sharing listings. Despite the NAR's best efforts to appease all players, interviews by Borrell Associates indicate that IDX has created a small pocket of dissent and a larger pocket of ambivalence.

Some who were unsure of the new policy said they did not feel IDX would, as a Realtor Association Outreach Presentation distributed by NAR asserted, "level the playing field" among big multi-office firms and small single-office firms. In fact, many fear that it boils down to which firm can advertise the most. Even though every participating broker could display all the listings, it's feared that multi-office brokers with their larger advertising budgets will be able to drive more traffic to their Web sites, cornering a greater share of sales leads.

Some multi-office brokerages also expressed reservations with IDX. These brokers thought that they were giving away their larger pool of listings so that the single-office brokers and buyer's agents (who have no listings) could now represent a buyer who found their listing through the latter's site, thus eroding the multi-office firm's total commission on a sale. Such may be the case with Weichert, Realtors, which covers seven states from Virginia to New York. Weichert refuses to participate in IDX and withholds its listings from being displayed on competing brokers' sites. A spokesman for the company's corporate office said company policy is to not discuss the IDX decision, but staffers at Weichert told Borrell Associates that the company is assessing the situation.

Our interviews show that while Weichert may be in the minority, it has company in the wait-and-see category. When asked how they felt about IDX, 64 percent of the Realtors we spoke with said they approved of the policy while 29 percent said they weren't sure (see Figure 4). Of this 29 percent, some expressed uneasiness over how much of a listing firm's information would be revealed – information that could cut them out of the transaction if a homebuyer could contact the listing agent directly.

Figure 4: How Do You Feel About IDX?

_{Source: Borrell Associates Realtor interviews (December 2001 – February 2002, n = 83)}

Whatever ambivalence they felt about the IDX policy, more than three-quarters of the brokers said they will participate in IDX (see figure 5). Another 19 percent said they still weren't sure but they felt a lot of pressure to participate. Only 3 percent gave a definite "no" to participation.

Figure 5: Will You Participate By Sharing Your Listings In IDX?

_{Source: Borrell Associates Realtor interviews (December 2001 – February 2002, n = 83)}

Although the majority of Realtors say they will participate in IDX by allowing others to display their listings, not everyone is sure that they will display the listings themselves just yet (see Figure 6). Concerns ranged from the comments above, to the lack of budget to improve their Web sites to accept IDX listings. (For Florida brokers, cost won't be an issue: The Florida Association of Realtors announced in January it was offering IDX listings free to all of its members in the form of smart-frame listings or a raw data feed.)

Figure 6: Will You, Or Your Firm, Display IDX On Your Site?

_{Source: Borrell Associates Realtor interviews (December 2001 – February 2002, n = 83)}

Chapter 3 - Ad Spending: What Realtors are Thinking, Planning, and Doing

Classified under scrutiny

In 2001, while the procedures and structure for a mandated IDX were being put in place, recessionary pressure was causing Realtors to closely examine all their expenses, especially the estimated $6.5 billion they spend annually on classified advertising in both newspapers and rack publications.

This scrutiny is not a new phenomenon. Profit margins have long been eroding due to real estate brokerage consolidation. In 1990, brokers spent 6.1 percent of their gross commissions on advertising; today that figure is 3.95 percent.⁹

"What's happening in our business is that profit margins have been eroding for 10 years," explained Steve Murray, co-editor of REAL Trends Inc., an influentia real estate industry newsletter. "The average commission rates have dropped nine-tenths of a point. Ad spending has dropped by 35 percent."

Murray sees a larger effort under way to cut newspaper spending. "Consumers are telling us that in roughly equal proportions they use newspapers as much as they use the Internet. I can almost assure you that brokers are going to use this information to educate sellers and their real estate agents that, because the customers have shifted their use of media to find houses, the seller and the agents need to shift their advertising investments accordingly.… These brokers are going to start a campaign – and in fact they have already started that campaign – to adjust their spending so there's more going to the Web than to [print] classified listings."

Surveys support Murray's observation. When Borrell Associates asked Realtors about their plans for newspaper spending in 2002, 57 percent said they would spend the same as last year, 24 percent said they would spend less and 19 percent planned to spend more (see Figure 7). Of that 19 percent, the majority attributed planned increases to classified rate hikes rather than increased linage.

Nearly all Realtors were eager to elaborate about their spending intentions. Even though a combined 76 percent were spending the same or more, the majority of Realtors responded that newspaper classifieds were too expensive and the least efficient method of advertising.

Figure 7: What Are Your Plans for Newspaper Spending in 2002?

_{Source: Borrell Associates Realtor interviews (December 2001 – February 2002, n = 83)}

All the multi-office brokerages responded that they foresee their marketing efforts moving to the Web once they implement IDX and that they would begin to reduce their print classified spending accordingly.

Realtors insisted that the only reason they continue to advertise homes in the classifieds is that some sellers still demand it. They foresee this changing over the next five years as more sellers begin to rely on Web listings for immediate gratification, especially compared with the delayed response of Sunday classifieds. More Internet-savvy, younger first-time buyers will also hasten this change in seller expectation when they purchase their second homes and sell their first.

Executives we contacted at 10 local associations/boards and MLSs around the country echoed these sentiments. "I see a significant shift away from classified usage by the local Realtors and classifieds will continue to decline," said Ralph G. Cantrell, executive vice president of the Richmond (Va.) Association of Realtors. He notes that more homebuyers use the Internet to seek more home information and that Realtors are getting fewer referrals from newspapers and more from the Internet.

The Internet as a cornucopia of leads

Some Realtors speak of the Internet as if it were the Holy Grail of lead- generation. Our own survey shows that 91 percent of Realtors contacted consider their Web presence an effective method of getting leads.

When asked to rank the most- and least-effective methods of advertising, Realtors picked the Internet as the most effective method for advertising their business overall (see Figure 7). These Realtors feel the Internet (e-mail, Web sites, links and banner ads) give them the biggest "bang for their buck." Newspapers ranked fifth as the most effective advertising medium (only 24 percent of Realtors gave it the top ranking in that category) but topped the list as the least effective medium (with 40 percent of Realtors calling newspapers the least effective – almost three times ahead of the second-place rack publications).

Overwhelmingly, the ideal marketing package for these Realtors was a combination that included the Internet, networking referrals and the visibility of yard signs.

Figure 8: Most Effective And Least Effective Methods For Advertising

_{Source: Borrell Associates Realtor interviews (December 2001 – February 2002, n = 83)}

Evidence of a newspaper-to-Internet advertising shift to generate leads is further supported by a survey conducted two years ago by Long & Foster among its 200 top agents and sales managers. When asked "do you find Internet advertising more effective than newspaper advertising," 43 percent responded yes, while 41 percent said no.

A case in point is Barbara Simmons, owner of Realty World Equity Center in Thousand Oaks, Calif. Simmons has been a Realtor for 25 years and runs a single-office brokerage with seven agents. She claims to get 100 percent of her new leads from the Internet – a remarkable 30 to 40 leads per day from her site, www.thousandoaksproperty.com. In the two years since she established the site, her income has quadrupled. Meanwhile, she reduced her newspaper spending from $4,000 per month to $200 per month. That $200 is spent on a small display ad with her photo in it and her URL.

"I'm not the average Realtor," Simmons explains. "The average Realtor hasn't figured out the Internet yet. That's why I do so well."

There is a message of urgency here for any local medium – especially newspapers – that would develop advertising relationships with Realtors. Our surveys found that 41 percent of Realtors had no formal method of tracking leads. How accurate, then, could their opinions be about the effectiveness of certain forms of advertising? In the case of the beleaguered classified industry, newspapers and rack publications must develop traceable advertising results for their clients. The most sure-fire way is to take advantage of the interaction provided through the Internet.

One of the clearest examples of how a newspaper can use the Internet to affect and measure lead-generation is on the site operated by the 18,000-circulation daily The Lawrence (Kan.) Journal-World, www.LJWorld.com. The Journal-World uses Web programming furnished by Homeseller.net that gives site visitors two very clear e-mail links to featured Realtors. The featured Realtor rotates for every new site visitor. By using print promotion to drive traffic to the page and the e- mail link to drive leads, the Journal-World converts its print publication into a measurable sales-leads generator.

An important part of the future: Local advertising

Now for the good news for local media. The NAR's Outreach Presentation on broker reciprocity offers an interesting declaration: "The success of IDX sites [is] – Local Advertising."

As discussed earlier, brokerage firms are placing advertising to promote their Web sites. While this advertising may merely amount to placing the URL and a few extra words in existing ad space, there are likely to be many opportunities for local media to sell Realtors larger branding packages involving print, broadcast and online promotions. Feedback from our Realtor interviews indicates that brokers were enthusiastic about cross-media packages offered by the local media. The survey also indicated that the opportunity is wide open in many markets: Only slightly more than half of the Realtors said that newspapers had approached them with online advertising opportunities (see Figure 9).

Figure 9: Has Your Local Newspaper Approached You About Advertising Online?

_{Source: Borrell Associates Realtor interviews (December 2001 – February 2002, n = 83)}

There appears to be rich opportunity imbedded within local media sites when it comes to providing marketing opportunity for Realtors. Many media properties own the local URL (i.e., CITYNAME.com), which offers a strong advantage in selling online advertising to Realtors. Why? Our research shows that the vast majority of out-of-towners begin their home search on the Internet. And with an estimated 20 to 30 percent of homebuyers coming from outside the local market,¹⁰ a natural inclination for Internet home seekers is to type in the city URL. (The results of our consumer survey, with detail on how consumers search for homes online, will be published in Part II of this report.)

Local media shouldn't assume that their Web sites and traffic numbers qualify them as Internet experts in the eyes of the real estate community. Realtors without a strong overall newspaper relationship or partnership with the local board/association lacked confidence in their newspaper's ability to market them effectively on the Internet. A slight majority of the Realtors felt they knew more about the Internet than the newspaper, and only about one-third said they would be interested in attending online-marketing seminars run by the newspaper. Many Realtors believed that the newspaper, both online and offline, was not innovative and didn't think "outside the box."

Chapter 4 - Conclusions and Recommendations

Local media must act

Our research into IDX policy and Realtor action comprise a vital part of understanding the dynamics of how this advertising segment are being reshaped. But these conclusions paint only half the picture. An equally vital part is understanding the consumer. The conclusions here are intended to help local media companies initiate a meaningful dialogue with local real estate leaders; Part II of this report will help those companies understand whether they have the goods to deliver, or whether they'll need to make a greater investment in interactive operations before moving forward.

The initial recommendations:

Form a task force

Get up to speed quickly, not only on the new IDX policy, but also on how the local IDX provisions are being formed. Since this may be time-consuming, consider hiring outside help to guide the discussion and research to a conclusion. Include the print real estate sales staff as well as the online sales staff.

Determine for yourself the urgency of this issue

Develop an estimate of your total real estate revenues at risk. Don't forget to count the peripheral ad revenue from mortgage lenders, home improvement businesses and others that may buy advertising adjacencies. Examine the local market's five-year trend toward spending on real estate advertising with a critical look at classifieds and compare it to the trend in home sales volume in the market. Classified linage – rarely available or accurate – is a better indicator of trends than revenue. Understanding the trend will help gauge the magnitude and urgency.

Begin positioning your media company externally as "Internet-smart"

Don't assume that Realtors know more than you about the Internet, and don't assume that they know about your Web site and all its attributes. Use the data from this report to conduct seminars for Realtors to discuss how the Internet has become a tremendous leads-generator and how local media Web sites (and their core print or broadcast products) are driving traffic to those sites. Forming a partnership with the local association/board will give you an advantage in marketing efficiencies and create a barrier to other advertising competitors. Don't assume that no one else can muscle in on this territory. Disruptive technology has changed the rules and many new businesses will be competing for Realtors' ad dollars.

Build a stronger brand that crosses media lines

Develop a single brand name for the real estate section in print and online (e.g., NewYorkHomes), and promote and sell this as one brand. Realtors are confused by two separate brands from the same company. Use this brand to mine opportunities for a local listings aggregation of the fragmented new homes builders, planned communities, vacation properties and luxury homes.

Create cross-media advertising solutions that funnel traffic to broker and agents' Web sites. Without this core property integration into the package, local-media Web sites begin looking like the same type of pure-play aggregator sites that Realtors wanted to avoid in the first place.

Move to better understand your own real estate section

Begin preparations to learn more about your real estate section online. Consider surveying your local online users, analyzing site traffic and reviewing content offered on your Web pages. (This will be discussed more in Part II. )

Talk to your MLS

If you haven't already, initiate a dialogue with the local MLS executive. It is likely that gaining e-publishing rights to the MLS database will play a key role in operating a successful Internet site – and a key role in attracting advertising dollars from Realtors. If you cannot strike a partnership with the local MLS there are still other opportunities, through IDX-enabled Realtors, to gain comprehensive local listings for your site. (A chapter will be devoted to the importance of this in Part II.)

Appendix B - Glossary

Agents

Licensed independent sales workers who provide their services to a real estate broker on a contract basis. In every state and the District of Columbia, real estate brokers and sales agents must be licensed. As of 2000, there were 339,000 residential real estate agents in the U.S.

Brokers

These are licensed independent business people who sell real estate owned by others. Brokers supervise agents. Brokers also manage their own offices, advertise properties and handle other business matters. Many brokers have franchise agreements with national or regional real estate organizations. There are 93,000 brokers in the U.S.

IDX

Internet Data Display (IDX) is a policy that allows brokers to exchange consent to display one another's property listings on the Internet. This program is known by several names, including Internet Data Display (IDD) and Broker Reciprocity(sm), and several MLSs across the country have been doing it for years. But as of Jan. 1, 2002, NAR has mandated that all MLSs must enable their MLS participants to display on participants' public Web sites aggregated MLS active listing information. In other words, brokers can now post listing information directly from their local MLS – with some limitations – on their own Web site without having to frame another listing site.

MLS

The MLS proper is a shorthand name for one of the members-only Multiple Listing Services that real estate agents use to exchange listing data among themselves. The MLS Web sites republish listing information from the corresponding MLS proper, by downloading changes to the listing information every night. MLSs may be local association/board controlled or local broker controlled and some are organized as a non-profit. Many MLSs have banded together to form larger, regional MLSs. Independent operators often run the regional MLSs, answering to a board comprised of the contributing MLSs.

NAR

The National Association of Realtors® (NAR), is America's largest trade association, representing approximately 800,000 members involved in all aspects of the residential and commercial real estate industries (brokers, agents, property managers, appraisers, counselors and others).

Realtor

The term REALTOR® is a registered collective membership mark that identifies a real estate professional who is a member of the National Association of Realtors® and subscribes to its strict Code of Ethics. Members belong to one or more of some 1,700 local associations/boards and 54 state and territory associations of Realtors®.