Remax

Company Background RE/MAX is one of the fastest expanding real estate franchise operations in the United States and is an independently owned and operated network of offices and member sales associates. Dave and Gail Liniger of Denver, Colorado founded RE/MAX, in 1975. Their dissatisfaction of the real estate business pushed them to start the business since, "regardless of an operation's size, most real estate offices used the commission-split system, requiring sales professionals to forfeit half of their commissions to their brokers in exchange for an office environment and company services" (Official RE/MAX Web Site, 2005a, para. 2). What transpired was an industry hampered by high turnover with staff that did not have the experience or level of professionalism to make organizations profitable. RE/MAX used high commissions, advanced support services and national advertising to attract and retain the best associates. The associates paid the broker a fixed management fee, which gave them the freedom to succeed and prosper. "In an industry rife with mergers and acquisitions, RE/MAX is the only major real estate network still owned and directed by its original founders" (Official RE/MAX Web Site, 2005b, para. 9). As of 2004, RE/MAX had posted another record year, not only in revenue but also in new agents recruited. Industry Background The United States has an economy that supports private and commercial real estate ventures and this market is growing. A recent article by Robert Schiller "argues that housing in many cities is undergoing the same irrational exuberance as stocks did in their bubble days" (Schiller, 2005, p.74). What is driving this activity and will it continue, into the foreseeable future' With increasing housing prices, as witnessed across the U.S., is this a time to invest in real estate' "The fact is, according to many industry experts, a major national housing boom may be brewing over the next decade" (Earl, 2005, p.1). Purpose of Paper For RE/MAX, this macroeconomic forecast paper performs the following: • Assess the accuracy of macroeconomic forecasts from various forecasting groups • Identify economic indicators are important to RE/MAX's future • Determine reasons for differing economic forecasts • Quantify the implications of the forecasts on planning and operations • Provide recommendations, including risks and opportunities Macroeconomic Forecasts This section analyzes and assesses the forecasts provided by three recognized macroeconomic forecasting groups. The accuracy of their forecasts is analyzed to determine the accuracy of their forecasts, based on their past performance. These forecast groups include the Mortgage Bankers Association (MBA), the Federal Reserve, the U.S. Department of Commerce's Bureau of Economic Analysis (BEA), and the U.S. Department of Housing and Urban Development (HUD). Mortgage Bankers Association The Mortgage Bankers Association is a forecasting group used to assess macroeconomic factors such as mortgage data, interest rates and housing activity that serve as a direct input to the strategic plan for RE/MAX Corporation. The MBA is an industry leader in the aggregation of microeconomic factors into macroeconomic forecast as illustrated in their recently published "Long Term Economic Forecast "(Mortgage Bankers Association Web Site, 2005). Key attributes of the MBA are the following: • National association representing the real estate finance industry, headquartered in Washington, D.C • Ensures the continued strength of the nation's residential and commercial real estate markets by expanding homeownership prospects through increased affordability Membership includes 2,900 companies including mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance companies (2005)" (Mortgage Bankers Association Web Site, 2005). MBA: Long-Term Economic Forecast In April of 2004 the MBA released its' long term forecast for the US Economy and Housing Finance market that spanned 2004 - 2006. The MBA forecasted strong GDP growth rates for this period that would be near or in excess of 4%. Key points of this forecast as they relate to 2004 in particular have been extracted for assessment to determine the overall confidence level in the long term forecast for REMAXs' strategic planning.  MBA Forecast: Real GDP growth would average 4.6% during 2004 o According to (Bureau of Economic Analysis Web Site, 2005) Real Gross Domestic Product for 2004 averaged 4.4%. Considering the MBA forecast was published in April of 2004, two tenths of a percentage point variance is seen as a vote of confidence in the MBA GDP forecast  MBA Forecast: 10-year Treasury rate would rise to 4.3% by Q4 2004. o According to the US Department of treasury (United States Department of Treasury Web Site, 2005) the 10-Year treasury rate as of 12/31/04 was 4.71% representing 3 tenths of percentage point off of the MBA April forecast, close enough to maintain REMAX confidence  MBA Forecast: Mortgage originations would be down from a record $3.8 trillion in 2003 to $2.57 trillion in 2004. o In 2003 66% of all mortgage originations were due to re-financing, economist almost universally agree that an increase in interest rates will substantially slash originations o The drop off in loan originations would come from the area of refinancing. o "The volume of mortgage originations – combined borrowing to buy houses and refinance existing loans – should fall to $1.75 trillion from $3.67 trillion a 52 percent drop. The lion's share of decline comes from an anticipated 76 percent drop in refinancing, which has boomed as mortgage interest rates fell earlier this year to lows not seen since the early 1960's, Berson said. Rates are likely to rise as the U.S. economic recovery gains strength in 2004" (Reid, 2003, p. 1) Federal Reserve The Federal Reserve (Federal Reserve System Web Site, 2005a) contains the breadth and depth of information on all economic indicators as well as historical data on consumer finances dating back to 1962 available to the public. Key attributes of the Federal Reserve System are: o Archives of economic research and data that encompasses: household finance; industrial activity, interest rates, money stock and reserve balances, census data and a host of other data that both directly and indirectly influence the housing industry Overall, economic health as indicated through employment levels and GDP have a direct correlation to the amount of activity in the housing market. Federal Reserve: Monetary Policy and the Economic Outlook The Federal Reserve Boards' yearly forecast submitted to Congress, "Monetary Policy and the Economic Outlook" (Federal Reserve System Web Site, 2005b) assesses indicators of the economy and provides instructive guidance to Congress on what the next year economic disposition will look like. On February 11, 2004, The Federal Reserve Board submitted "Monetary Policy and The Economic Outlook" to congress in which the following forecast was made for 2004: • Economic growth will continue in 2004 at a rate of 4 ½ to 5% • Unemployment rates would drop from 5 ¾ to 5 ¼ percent by year-end • Inflation would be held in check at around 1.4% On February 16, 2005, The Federal Reserve Board submitted "Monetary Policy and The Economic Outlook" to congress in wherein the following data was provided on the state of the several economic indicators as of year-end 2004: • Nominal GDP 6.2% • Real GDP 3.7% • PCE price index excluding food and energy 1.6 • Civilian unemployment rate 5.4 The Federal Reserve System year over year reports on the state of the economy and projections, have a proven track record of consistency, and thus have become a trusted and reliable source of information for REMAX to leverage in the decision making process.