Reader Ben Thompson asked me in a recent comment if I would opine on the topic of the impact of (and to, I would think) various companies in a buyer’s market:
Sorry to trend off topic, but Rob kindly please consider writing a blog post on the impact of companies like Redfin in a buyers market. You have hinted at the topic previously. Any chance you will consider a full blog post? The markets changing…. how does this impact Realogy, KW, Compass, eXp, Redfin, Zillow, Opendoor, Purplebricks? Who wins?
If I knew the answer, I feel certain that I would make a lot of money in the stock market. And would not tell any of you, obviously, because then you all would buy and sell too and move the market.
But opinions? I can do that. Opining and speculating and questioning are kind of what this blog is built on, after all. Plus, I just finished writing the August and September Red Dot reports, which forced me to research a bunch and read a lot of earnings reports. So I have some basis for these opinions.
The whole list of companies is, well, too long. Maybe that’s a full Red Dot on its own. But I can opine on Redfin and see if you guys think that’s useful.
So, without further ado, let’s get into it.
Set the Stage
To begin, let’s set the stage a bit. Because I don’t know that most people under the age of 50 today (which includes me) remembers what a “normal market” actually looks like. I mean, from say 2001 to 2007 we had the biggest real estate Bubble in history, followed by the collapse which almost broke the global financial system, followed by the strongest seller’s market in recent memory with home prices now above the peak of the Housing Bubble in 2006.
Of particular interest is this graph of the Case-Shiller Index vs. Median Household Income:
As you can see, median household income is barely back to 1998 levels, but home prices have never actually dropped below their 2003 levels. And median income has never caught up. So I just don’t know how far back we have to go to get to a “normal market” here. Certainly before I was in real estate, and maybe judging by the graph above, before I graduated college.
Now, it isn’t really clear what constitutes a “seller’s market” vs a “buyer’s market” except the dry and not entirely useful supply-and-demand thing: more supply than demand = buyer’s market, and less supply than demand = seller’s market. At least Redfin, the data darlings that they are, supply us with this definition:
An absorption rate above 20% is generally associated with a seller’s market, meaning that homes are selling fast. An absorption rate below 15% is generally associated with a buyer’s market, meaning that homes are selling relatively slowly.
So a “balanced market” would mean an absorption rate between 15% and 20% — seems like a pretty narrow band, but hey, what do I know? I’m not an economist or a data scientist. I’ll go with what the experts say.
Psychologically, real estate agents who were around for more than a few years remember the dark days of 2007-2012 or so. Homes sat on the market for months, sometimes years. Price drops were not only expected, you strategized around how and when and how much. You could hold an open house and see no one but a homeless guy looking for refreshments. Qualified buyers were the hot commodity and many a top agent who would have turned their noses up at having to drive buyers around were suddenly finding themselves unlocking lockboxes if they had a live buyer who could actually qualify for a mortgage.
Now, as I’ve said, I got started in real estate sometime in 2004 or so, which means I don’t know what a non-Bubble-collapse buyer’s market looks like. So in my mind, as I’m speculating, I am imagining something kinda like the situation in 2009/2010 but not quite as bad and not quite as nasty with far fewer foreclosures and REOs and all that fun stuff.
Since Ben asked specifically about Redfin, let’s start there. Glenn Kelman is very fond of saying that “Redfin was born in the dark” as it was founded in 2004 but didn’t really get going until 2007 when they raised $12 million from Greylock Ventures and Draper Fisher Jurvetson. Then the market crashed.
DFJ partner Emily Melton tells that part of the story in her triumphant post-Redfin IPO recounting:
A housing market correction was forecast, yet the extent of the 2008 financial crisis caught us all by surprise. This was a challenging time for many startups, but as a startup real estate brokerage it was terrifying. Glenn often says, “Redfin was born in the dark,” but in reality, this is when Redfin shined brightest. Each obstacle was viewed by the team as an opportunity and every challenge was something to overcome. It was a difficult year, but failure was not an option. I saw passion, resilience, and a competitive drive that proved Redfin wasn’t simply a technology product.
And here’s Glenn Kelman from his IPO Diary:
To emphasize the frugality we learned in the 2008 housing crisis, we included in our investor video a cameo of the Batman villain Bane, who talked about being born in the dark. We described ourselves in the prospectus as “rabid squirrels.”
More recently, during his Q1 and Q2 earnings calls, Glenn continued to sound caution talking about how Redfin knew that the market would turn, and he didn’t want to make ginormous bets on things like Redfin Now without being far more certain.
Now, maybe Glenn and team didn’t feel blessed in 2008 – 2012 or so, but in retrospect that housing collapse came at just the right time… for Redfin. During the height of the Bubble — an insane seller’s market matched only by the insane seller’s markets we are seeing in some urban areas today — you barely had time to put your For Sale sign in the yard before you were getting multiple offers. Internet advertising of listings was just kinda getting going, but… who needed that when you could take a listing in the afternoon and have it sold with a phone call to a friend by that evening at 10% over list price?
When the market collapsed, all of a sudden, sellers wanted… no, needed to put their listing in front of every possible place a potential buyer could be lurking. I don’t think it’s crazy to believe that the reason why Redfin and Zillow and Trulia are so successful today is because they came around right when the market had collapsed and sellers (and their agents) were happy to put listings (which are, after all, advertisements of homes for sale) on every single website that would take them. Plus, buyers became so valuable that agents and brokers became willing to pay these websites quite a lot of money to get buyer leads in case one out of a hundred ended up being a bona fide qualified buyer.
So, what happens to Redfin if the market turns back to a buyer’s market? Why, they blow the %*#$ up. How could they not?
Why Redfin Blows Up (In a Good Way)
Let’s go over a few reasons why Redfin would grow in a scary kind of a way if the market turns.
Redfin posted 28.8 million in average monthly unique visitors in Q2/2018 — a 17.9% YOY growth. I think it’s entirely possible that Redfin added more monthly uniques than Remax.com, ColdwellBanker.com, and Century21.com generated during that same period. (It’s speculation based on ratios and such, since those companies aren’t eager to trumpet just how far behind Redfin they are, but… if you’re really interested, let me know.)
Most website traffic is generated by buyers. We all know this, and Glenn said as much during his earnings calls. So if things turn to a buyer’s market, why, buyer traffic would just boom.
Redfin Will Flex
Some folks think Redfin is going to fall because of the success they’ve been seeing with their 1% Listing Fee program. It’s like they don’t even care to listen to Glenn:
And then I think we’ve tried to be clear that we’re not just going to talk about the market. We’re not a boat that goes up and down with the tides. We’ve got a sail, we’ve got a motor, we need to make our own headway.
He’s referring to comments he’s made over the quarters that Redfin has reduced some buyer rebates in order to offer the 1% Listing Fee. They can always adjust that mix so that revenues end up smoothing out. If things swing to something like what we saw in 2010, maybe Redfin goes to a 2% Listing Fee, and jacks up the buyer rebate so it picks up more of the buyer business.
They’ve got a sail and a motor and they’ll figure it out. But the flood of traffic they get on their own website gives them a massive lead generation advantage over everybody else not named Zillow.
Redfin Now is a Game Changer
I wrote extensively about this in the last two Red Dot reports, and you should want to go purchase them, so I’ll keep this part to a minimum.
Basically, Glenn revealed in the Q2 earnings call that Redfin is committing to Redfin Now because they have data that shows it works and is valuable to consumers. This thing is a game changer, but it’s likely to be even more impressive if we go into a buyer’s market. The psychology of the sellers has to be taken into account.
Sure, it’s easy to turn down Redfin Now (and Opendoor and Zillow and Offerpad and every other iBuyer) when you’re in a hot seller’s market and you feel like you’re leaving 10% on the table. It won’t be quite as easy to do if your home has been sitting on the market for three months with one showing and no offers, and you’ve already done two price reductions. (Or you hear that your neighbor is doing that, or your mother in law is having trouble selling her house….) Now that certainty of money on the barrel right now seems awfully attractive, doesn’t it?
And of course Redfin (like all other iBuyers) will just offer less, because they know that they’ll have to hold the home in inventory longer and merchandise it more. But if you bought your home in 2010 for $300K, and it’s now valued at $800K (not uncommon in some markets, yo), do you really feel like crap if you take Redfin’s offer at $600K?
More importantly, Redfin agents have a tool in their toolkit that other agents do not have (unless they have partnerships with guys like Zillow and Opendoor). And this isn’t a tool you can buy off the shelf from a vendor. Nor is it something that most brokerages are able to even dream about providing to their agents.
Redfin Jobs Are Going to be Primo
One thing I remember from the Bubble and the Collapse is just how fast formerly genius top producing agents and mortgage brokers suddenly became less than brilliant. Maybe it wasn’t their amazing marketing skills and deep knowledge of real estate that made them a fortune, but pure luck and a never-before-seen housing market.
I don’t know that we’ll see the same dynamic play out again, but… well… at the height of the Bubble in 2006 NAR had 1,357,732 dues-paying REALTOR members. In 2017, NAR had 1,308,616 members. At the end of July, NAR had 1,344,795 REALTOR members. About 13,000 more and we’ll have set a new record for NAR membership numbers.
Here’s the thing though. In 2006, there were 6.52 million homes sold, or 13.04 million transaction sides to be divided among 1,35,732 REALTOR members. In 2017, there were 5.51 million homes sold, or 11.02 million transaction sides. So we have just as many REALTORs today as we did in 2006, which we all recognize as the height of the Bubble, but 2 million fewer sides?
I should note that in 2012, NAR membership had dipped below 1 million: 999,824. More than a quarter of the REALTOR population dropped off the rolls, and one assumes, out of the industry altogether, from 2006 to 2012. A lot of them simply couldn’t make ends meet. They had to go get “real jobs” with a regular paycheck.
If that dynamic holds the next time we go into a buyer’s market, boy, that Redfin agent job is suddenly going to look mighty attractive to a whole lot of formerly top producing agents who today look down their noses at Redfin’s employee agents with their limits on earnings. “Unlimited earnings potential!” sounds fantastic, until you realize that the key word there is “potential”. It’s just another way to say, “You wake up unemployed every day.” Which is inspiring as hell in sales meetings, until you really wake up unemployed every day and nothing is closing and nothing is coming in.
Of course, these top producers have to be trainable… not have too many bad habits… and not be egomaniacs who can work in a structure with a boss and coworkers and such. Those are not traits often found among real estate agents, never mind top producing agents. The problem for them will be that Redfin doesn’t hire just any agent off the street because she’s a “top producer”. Redfin operates very, very differently from others and don’t look for the same kinds of traits and skills. Glenn Kelman has said that Redfin tends to find far more success by hiring people with sales and customer relationship skills from outside of the industry, then training them in the Redfin way with Redfin tools.
Nonetheless, I imagine at least a few agents will have the right mix of character traits, personalities, and work ethic to transition to a job at Redfin.
How Redfin Could Lose
Of course, success is never guaranteed. All sorts of things could happen between now and this buyer’s market future. Glenn Kelman could quit his job as CEO and decide to dedicate his life to increasing diversity in real estate and his replacement could be some incompetent dumbass. Maybe the entire Redfin leadership teams commits ritual seppuku out of despair when the Seattle Seahawks fail to make the playoffs. Governments federal and state could pass some laws that cripple Redfin; never underestimate the ability of politicians to ruin the economy. San Andreas could go from an action flick to a documentary (though that is far more likely to create an insane seller’s market….)
Short of such events, how does Redfin not blow up in a buyer’s market?
Short answer: Zillow.
Longer answer: A true Real Estate Platform emerges, and Redfin is not it. That takes away many of Redfin’s competitive advantages, and other brokerages — in a sharp departure from historical norms — learn to pivot quickly and effectively.
If you want more details, by all means, subscribe to the Red Dot.
Redfin’s Wins Will Come at Everybody Else’s Expense
One final note, since Ben asked about the impact of Redfin as well. I wrote in 2015 that real estate is a zero sum game:
So the clear implication is that everything in real estate is ultimately a zero sum game.
If an agent leverages technology, smart lead management, and topnotch service to increase production from selling 20 homes to 50 homes, then other agents in her market will be doing 30 fewer transactions. A broker making $100M more in revenues has to get that from somewhere — other brokers, from higher agent splits, somewhere. They don’t affect supply and demand; only macroeconomics does.
Similarly, if a vendor in the real estate industry becomes successful, that success must come from somewhere. It has to get a larger share of the Commission Pool, which necessarily means that someone else has to get a smaller share.
Well, not only would a dominant Redfin take market share from every other brokerage and agent team, it would put a serious hurtin’ on the real estate technology community. As far as I know, Redfin builds its own technology; spent $13 million doing just that in Q2 (that’s in three months, you guys).
So other brokers and agents will find their revenues and earnings plummet as Redfin just drinks their milkshakes, which means fewer agents and fewer brokers (see above re: NAR membership numbers from 2006 to 2012), but also means less of a need for IDX vendors, predictive analytics companies (Redfin does that already very well, thank you very much), CRM vendors, etc. etc.
Dismiss Redfin if you want. Their agents don’t know what they’re doing! It’s just a website! They have no presence in my market! It’s a free country, sort of, after all.
But Redfin was born in the dark, blew up like Biggie, grew up in the light, and they’ll be blowin’ up like I thought they would. And if you don’t know, now you know.