I’ve been extraordinarily busy due to a bunch of deadlines for a couple of projects. That isn’t an excuse, or an apology, but a setup since it was research for one of those projects that leads to this post.
Let’s not bury the lede:
On current trends, Redfin will overtake Realtor.com as the second most trafficked real estate website in the U.S. by 2020.
Should that become reality, it will have all sorts of interesting consequences for those three companies, as well as the industry as a whole.
Zillow vs. Realtor vs. Redfin
Let’s begin by noting that the whole “monthly unique users” thing is a terrible metric, except for the fact that it’s the only thing we have. Let’s also begin by noting that these numbers are based on the companies’ internal metrics; there is no third party validation. Once again, that’s terrible, except for the fact that it’s the only thing we’ve got.
In their respective Q3/2017 earnings reports (Realtor.com reporting under News Corp, which is the parent company of Move, and has a non-calendar fiscal year), the three web giants reported their traffic numbers.
- Zillow reported average monthly uniques of 175 million, up 6.7% YOY from 141 million in Q3/2016.
- Realtor.com reported average monthly uniques of 55 million, up 3.8% from 53 million in Q3/2016.
- Redfin reported average monthly uniques of 24 million, up 38% from Q3/2016.
Since Redfin is starting from a far lower base than either Zillow or Realtor.com, it’s huge growth looks far more impressive than it is. So what about raw numbers?
- Zillow: Up 9 million uniques
- Realtor.com: Up 2 million uniques
- Redfin: Up 7 million uniques
That’s… more impressive. Redfin added almost as many unique users from Q3/2016 to Q3/2017 as did Zillow. In contrast, Realtor.com is way, way behind both of them.
So what happens if the three websites maintain that growth rate?
If the three companies maintain their growth rate from 2016 to 2017 for the next three years, Redfin overtakes Realtor.com as the second largest real estate website in the U.S. by 2020.
First, one year is not a “trend”. In fact, two years are not a “trend”. But it’s something to look at, cuz it’s interesting.
I can say that Realtor.com grew 15.2% from Q3/2015 to Q/32016, from 46 million to 53 million. That is robust indeed. The same period, Zillow grew 16.3%, from 141 million to 164 million, which is mucho robusto. Redfin, in the same timeframe, grew by 36.3% from 13 million to 17.8 million.
But while Zillow and Realtor.com both slowed down in 2016-2017, with Zillow’s growth rate down to 6.7% and Realtor.com’s down to 3.8%, Redfin maintained its 37.8% YOY growth. Granted, Redfin is starting with smaller bases, but again, in raw numbers, it’s a lot as well.
Second, assuming that one year’s growth rate would hold steady over three years is likely foolish. All three companies are going to do stuff to increase the traffic to their websites. Or fail miserably to increase traffic. Could Zillow stumble, while Realtor.com sees huge success from some TV ad? Could Redfin zoom ahead with some cool new technology it releases?
Who knows. This is a blogpost after all, not a well funded research project that would maybe let me really dig in.
So What If Redfin is Number Two?
Let’s suppose for the sake of fun and games that Redfin does overtake Realtor.com as the #2 website in real estate. So what?
Well, first of all, the Redfin dynamic means that more it grows, more the other two suffer. We already know that Redfin does not syndicate for obvious reasons. We also know that more traffic to Redfin translates to more business. What some people don’t know is that traffic to Redfin these days is translating more and more to listings business instead of buyer business.
We don’t speak specifically to that mix. In general, the listing business is growing faster, and our goal is to be at an equilibrium for a long time. We’ve had far more buyers than sellers because we’ve built a real estate search site for buyers, but the strategic advantages of listing homes are numerous. It gives us more leverage over other websites and it really lets us serve our buyers better when we also have our own homes for sale. So we will continue to drive listing share as a financial lever, but also as a market lever. [emphasis added]
Other brokerages who also hate Zillow and doesn’t want to syndicate do not have the number two website by traffic; Redfin does. They can much more easily tell their clients that they won’t syndicate to Zillow or Realtor, because they have the second highest trafficked website in the country.
Which means that as Redfin grows traffic, Redfin grows its listings, which means fewer listings for Zillow and Realtor.com, which means lower traffic for them, which means more traffic for Redfin, which means more listings, which means… You get the idea. That’s a virtuous cycle that Redfin would looooove to get into.
It also means lower ROI for Zillow and Realtor customers — those agents who are paying for leads. Which likely means pricing pressure, at least in some markets, since Premier Agent spend isn’t returning as much as it once did.
[Update: Please see Glenn Kelman’s comment below about syndication.]
Don’t Be Too Thrilled, Now
I can hear the cheering going on in the Zaterade section of the real estate web. But don’t be too excited just yet.
You see, one of the reasons why Redfin’s listings business is growing faster is its 1% listing commission offer. When Redfin has ~1.66% market share, it’s a big shrug. When does it stop being a big shrug? At 40% market share? 30%? Whatever that threshold is, Redfin has a much better chance of reaching it if it’s doing 63 million monthly uniques than if it is doing 24 million.
This is one of those key differences between Zillow, Realtor.com, and Redfin. The former just sell leads to agents; none of them have much of an incentive to go start offering lower listing fees. Redfin has done it, and will continue do it, to capture market share. One puts zero pressure, and the other puts serious pressure, on your commissions.
This is something that some analysts bearish on Redfin miss. They tut-tut the 1% fee thing, saying that puts pressure on Redfin’s margins. They miss the fact that it puts pressure on everybody else’s margins too, if Redfin gets sufficient market share. Sure, maybe that means Redfin will be valued more like a real estate brokerage than a tech company. Doesn’t change the fact that every other brokerage will have to do something about it.
Of course, other brokerages aren’t setup to compete on low cost, like Redfin is, so there’s that. They’re not generating 36% margins like Redfin is, since they’re giving away 80-100% of the GCI to agents who grow steadily more powerful and steadily less needy of their brokers.
So if you’re Realogy, HomeServices, Howard Hanna, or any of the other Biggest of the Big Brokers (think Top 20 in the country)… and your website isn’t even a real player, what exactly do you do? What’s your gambit? Not even your own agents believe this “our website generates thousands of leads” propaganda today; how will it be when the #2 website is one that doesn’t sell buyer leads to Premier Agents?
In Case You Missed It
By the way, why is traffic such a big deal for Redfin?
If you’re asking that, you probably missed this post in which I explain the relationship between Redfin’s traffic and revenues. Feel free to read the whole thing, but let me summarize here for the TL;DR crowd.
There is a clear relationship between traffic and revenues for Redfin. Back in 2009, he posted a slide during a talk showing $38,170 in revenue per 100,000 unique visitors. That’s how they think of revenues: directly related to traffic.
Further, if you look at the Key Statistics that Redfin offers, there is (probably) a strong correlation between its website traffic and revenues (it’s 0.88, which is pretty damn strong, but if someone wants to do real stats and math, let me know.) And Redfin’s average revenue per 100,000 uniques over the past two years (from Q3/2015 to Q3/2017) is not $38,170, since it’s gotten better at converting the traffic. The average revenue per 100,000 users is $131,651 over the past 9 quarters.
So doing some simple math, we get this for Redfin’s annual revenues if it continues to grow at its current rate and overtake Realtor.com:
- 2018: $533.7 million
- 2019: $735.3 million
- 2020: $1,013.1 million
That’s right. If those numbers hold (they won’t, but if nothing major changes, I don’t think it’ll be that far off), Redfin might be making a billion dollars in revenue by 2020 when it overtakes Realtor.com. That would put it at about 1/4 of what Realogy’s NRT does every year.
Every single one of those transactions has to come from somewhere, because real estate is a zero sum game. You know who they’re not going to take those transactions from? Zillow. Realtor.com. But Realogy? HomeServices? Your local Re/Max office? Well, who knows… but those transactions have to come from somewhere.
There is and can be no conclusion here. I’m just having fun with numbers and speculating based on bad assumptions. I know there are lots of reasons why the above can’t happen, won’t happen.
Or are there? Seems to me that barring some unforeseen circumstance (some new law, regulation, economy tanking, some Harvey Weinstein type of thing, etc.), Redfin’s traffic growth is likely to continue. Given the strong correlation between traffic and revenue, Redfin’s revenue is likely to grow as well. Unless something happens to create a real divergence between the two, seems like that’s the future — maybe not in 2020, but at some point and in the not-too-distant future.
Final question: Maybe Zillow can afford 7% YOY growth, since it’s starting with 175 million monthly uniques. Can Realtor.com really afford 3.8% YOY growth? With the money and power and name of News Corp behind it?
Your guess is as good as mine.