For some, a housing market slowdown can be unforgiving. For others, it presents new opportunities.
Ten years ago, the market was gutted, as were many real estate companies who struggled to hold on during a housing depression. Some companies thrived.
While few, if any, experts are predicting anything like that type of slowdown today, it’s worth looking at how different parts of the real estate industry might fare if the market faces rocky waters ahead.
How do the franchises perform this time around? Are tech companies ill-equipped for a housing splat? Are virtual companies perfectly poised because of minimal overhead? Will new technology come to the rescue for smart agents?
Market conditions are radically different this time around. Most home buyers are not over leveraged, mortgage standards have not gone haywire and if inventory loosens up, a more normal market will return.
The economy enjoys nearly full employment, wages are rising (slightly) and interest rates are declining. Many buyers are waiting on the sidelines, ready to pounce if inventory frees up or home construction catches up.
Nevertheless, there are signs in some areas that the market is adjusting. Not falling apart, but there’s a shift ahead.
So who does well and who doesn’t in a changing market?
Agents survive, many thrive
Experienced agents who are opportunistic can quickly adjust to market changes. They counsel anxious sellers, focus on distressed sales and help buyers snap up deals.
Their digital marketing prowess, their existing customer base, their agility and low-cost structure, help good agents move quickly.
Real estate investors often get more active so agents with investor clients can do well.
Sure, a draught in deals hurts all agents, but smart ones survive, and many thrive. This is a tenacious bunch, who don’t topple easily.
“Yes, the market is changing, and so it has never been more important to focus on our relationships,” said David Hoffman, owner, DHG, Charlotte North Carolina. “The consumers need us more than ever when the market is shifting, so we are going back to the tried and tested ways but using the latest technology.”
Indeed, the outlier is technology, which wasn’t as mature during the last downturn. Some agents will figure out how to use new tech tools to find clients and come upon new opportunities.
Broker owners must move quickly to pare expenses
For broker owners with only one revenue stream — commissions — times can be tough. But because their labor pool is built on independent contractors, their payroll expense is minimal. The most daunting cost in a downturn is the expense of office space.
Those firms that have gotten control of this expense will do better. @properties in Chicago is a good example. Its post-recession growth was managed well with a third of the office space of a traditional broker owner.
Broker owners who avoided debt and created liquidity during the good times can buy market share by acquiring struggling companies on the cheap.
And well-capitalized independent firms like Douglas Elliman and strong regionals like Howard Hanna and Windermere could use a downturn to expand and grow share. They all have multiple revenue streams.
Experienced broker owners know how to adapt by paring expenses quickly, supporting their best agents and moving the business into the distressed market as quickly as possible, if the market cools.
They also have experience coaching sellers to adjust price expectations and helping buyers find value when inventory increases and prices fall.
Tech brokers more challenged, less experienced
Redfin’s shares tanked after reporting second-quarter earnings, even though the company beat its top and bottom lines.
In its Q3 guidance, CEO Glenn Kelman suggested there might be a market slowdown in high-cost coastal areas, which could hurt the company’s performance.
“The reality dawned on Redfin — much like any traditional real estate brokerage, Redfin’s revenues depend primarily on real estate commissions,” wrote Gary Alexander in Seeking Alpha. “There’s no subscription revenue stream or ad sales to support Redfin as the housing market begins to cool off. There’s only the real estate commission – the 1-2% that Redfin collects on buy and sell transactions. As transaction volumes and dollars in the wider real estate industry slow down, Redfin’s growth will decelerate in parallel.”
Hyper growing Compass faces the same peril. It’s only revenue stream is commissions and it is stuck with lots of expensive office space in high cost areas. In the case of its Pacific Union acquisition, it did acquire some related businesses in the PU bundle like its new home unit, which may cushion the blow if resales get hit.
But like Redfin, both companies are capitalized to weather a downturn. And based on its current acquisitive behavior, you might expect Compass to be more aggressive, buying up broker owners.
Zillow grew through the last recession because it had money in the bank to get through the bad times.
Plus, sellers expect higher digital ad spends to sell houses that are moving slowly.
The agent/seller ad spend dance gets awkward when the market changes.
IBuyers, how does buy-low, sell-high formula work in new market?
You might expect some home sellers to jump on this option during a slowdown, as certainty becomes more important.
However, the whole iBuyer model depends on buying low and selling high. Declining prices make that math tougher.
It could work if deals emerge and the iBuyers are capitalized to hold onto their investments.
iBuying was birthed from the last downturn when Wall Street made a second killing (its first was subprime) by buying distressed properties they could afford to hold until the market recovered.
This time around, if the market cools and the rental market is overbuilt, expect investors to unload some of the 500,000 homes purchased during the last downturn. Freeing up supply could be good for the market but also hurt prices.
New virtual models could thrive
New business models like eXp Realty and the Keller Williams’ expansion team model could do well because they do not require perilous office overhead.
However, their agents are not the most productive so overall revenue might suffer.
Keller Williams cleaned up during the last recession. Realogy was stuck with $6 billion in debt after a private equity takeover by Apollo Global Management just before the market tanked in 2007. KW moved quickly to snap up agents and was poised for growth when the market recovered. Plus, its agent recruitment revenue sharing model resonated after the market meltdown.
This time around, Realogy is better positioned to compete with its global footprint, as is Berkshire Hathaway with Warren Buffet’s deep pockets.
Re/Max, Sotheby’s and Coldwell Banker have some of the most experienced agents with the deepest referral networks and customer base, so they often represent the survivalists in any downturn.
Smart folks in the industry are always looking ahead to changing market conditions and are prepared if things change.
It is very rare that the market changes on a dime — 2008-2010 was an anomaly.
The housing market is a big ship that changes direction slowly, giving the industry time to be smart about what’s ahead.
