A Growing Number Of Realtors May Signal A Real Estate Bubble

by: John Engle

Exuberance of amateurs in a sector or industry may be a sign of a bubble.

The number of licensed realtors tends to rise with real estate prices.

Analyzing the number of realtors working in the market can offer some predictive insight on the state of the market and the believability of real estate price levels.

We are approaching a number of licensed realtors not seen since just before the financial crisis; this may signal a degree of over-exuberance.

According to The Money Game, one of the all-time classic works on Wall Street culture and investor behavior, a useful way to tell if a bull market is running away with itself is to check the “Jericho Indicator”:

It is related to the number of walls in Wall Street office buildings that come tumbling down. As more and more walls come tumbling down, the indicator starts flashing. The reason the walls come tumbling down is that prosperity touches Wall Street, the partners have a meeting, they figure they could make twice as much money if they had twice as many registered representatives – brokers – on the telephone. They take over another floor, they move to another building. Tumbling walls are a slightly lagging indicator, but walls never tumble in a bear market.

Yet in the 21st century, brokers have ever diminishing power and thus any predictive power of Smith’s Jericho Indicator has been diminished. While other proxies might suffice, such as the number of accounts opened with online brokerage services, the problem of lag remains. Yet the inherent insight of the Jericho Indicator may still apply, but to a different industry: Real estate.

Who Wants to Be a Realtor?

I have to give credit where it is due: The spark for the idea of applying the logic of the Jericho Indicator came from a member of the Seeking Alpha community, Clay Baker, who sent me an interesting data-set that is maintained and updated monthly by the National Association of Realtors. The data consists of the total number of licensed realtors and realtor associates in the United States.

The data goes back to 1910, but complete monthly data is only available from 1956, and the base changed in 1975 as the count began to include realtor associates in addition to realtors. That makes delving into historical data somewhat challenging, but we can concern ourselves with the more contemporary data for the sake of this article.

To visualize the growth and decline of the number of registered realtors and associate realtors, see Chart 1 below:

Chart 1: Licensed Realtors and Associate Realtors, 1977-2017 Chart 1: Number of licensed realtors and associate realtors, 1977-2017

There is a relatively stable number of realtors and associate realtors between 1985 and 2000, followed by a sustained rise until 2008, when the financial crisis crushed house prices and buried many of the dilettante realtors who had entered the market when it seemed as if perpetual, rapid house price growth would continue forever.

Taking a narrower timeframe, the collapse during the financial crisis is readily apparent.

Chart 2: Number of Licensed Realtors and Associate Realtors, 2001-2017 Chart 2: Number of licensed realtors and associate realtors, 2001-2017

The rapid and irrational rise of house prices and its role as an essential component of the financial crisis is well known. But can we use the number of practicing realtors as a means of determining when a crisis is building?

Dilletantes, Greed, Chaos, and Prediction

Let us next attempt to create a usable visualization of the increase in licensed realtors and the proximate cause of new entrants: house prices.

Chart 3: Number of licensed realtors and associate realtors over time compared to median US house prices over time

Chart 3, which shows overlays the change in the number of licensed realtors and associate realtors and the median sale price of homes in the United States, is a bit of a mess. Looking at correlation analysis, there is only correlation between them of 0.52.

What does that mean? Well, it means that the number of licensed realtors is not a great statistical tool for determining an overheating market. However, identifying patterns such as this one, especially in the context of today's real estate market in which house price are once again climbing - in some markets to above pre-crisis highs - and at the same time realtor licenses are again being issued at top speed, we should look to it as a potential heuristic worthy of consideration.

The current real estate market is not the same as it was before the financial crisis. But irrational exuberance is a vital part of our financial markets. Any clues that can help us sift through the data to find the truth is worthy of some consideration.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.