This report is available exclusively to subscribers of Inman Intel, a data and research arm of Inman offering deep insights and market intelligence on the business of residential real estate and proptech. Subscribe today.
The last time real estate companies reported earnings, it wasn’t pretty.
Zillow lost $22 million in the first quarter of the year. RE/MAX lost $700,000. Opendoor lost $101 million. Compass lost $150 million. The list could go on.
Though a few companies managed annualized improvements, the overall picture was grim. Thanks to higher mortgage rates and low supply, transactions were elusive. Most companies in the housing business simply failed to turn a profit.
Executives didn’t describe the quarter as a blood bath, perhaps having been inoculated by a brutal late 2022. But looking back, the phrase comes to mind.
Now, those companies are gearing up for round two: Beginning this week and continuing into August, all major publicly traded real estate companies will report their earnings for the second quarter of 2023. And, forebodingly, rates remain high, housing inventory is low and prices haven’t meaningfully budged.
Against that backdrop, analysts and industry observers will watch for a handful of key signs in the upcoming earnings reports. How, for instance, have brokerages managed to cut costs? What kinds of losses or profits are the iBuyers seeing on the sales of their homes? How are the portals diversifying?
But more broadly, the bigger question is even simpler: Amid tough times, will the second quarter of 2023 be a repeat of the blood bath in Q1?
Opinions among the experts who spoke to Intel for this story vary, but at least one person advised bracing for bad news.
“Horrible,” industry veteran and Collabra Technology CEO Russ Cofano replied when Intel asked how earnings season may look overall. And when Intel noted that the news has been slow in some corners of the industry lately, Cofano speculated that too was evidence of hard times.
“It’s been quiet because nobody wants to leak that they’re going to get killed.”
The coming weeks will reveal if that view is right or not. But as earnings season begins, there’s no question that the second quarter was a challenging one.
Table of Contents
The battle for agent count
While major headlines from the big brokerage companies have been fleeting this year, one thing they have been doing is actively battling for agents. Indeed recent months have seen that battle boil over into a growing rivalry between Compass and Coldwell Banker, with both companies announcing that they’ve managed to recruit top performers away from the other.
Who you think is coming out on top depends on how you slice the data. But brokerage earnings reports do include figures on changes in head count, and those figures will be one of the most important to emerge this season.
“I think the big story is going to be obviously agent count,” Cofano said.
Russ Cofano
Cofano went on to point out that “there’s a causal correlation between agent count and revenue.” On top of that, Cofano will also watch in particular for “per agent profitability.”
“What are they making on each agent?” he wondered.
Critically, these numbers will come against a backdrop of declining numbers of Realtors in the U.S., which in turn has increased competition for talent.
Aside from numbers related to agent count, Cofano also suggested watching for the ways in which brokerages are managing their cost structures and expenses. His point was that revenue may be down and out of brokers’ control, but they can still get their companies into the black by trimming the fat.
“We’re not going to see sellers get off the sidelines,” Cofano said, “and until we see sellers get off the sidelines gross revenue is going to be impacted and therefore cost structure is going to become more important.”
So who might be excelling at this right now?
Cofano guessed that eXp could ultimately do well on that front thanks to its virtual orientation and lack of physical infrastructure.
Cofano will also watch Compass, which expects to be cash-flow positive starting in the second quarter of this year. Compass has less cash available than eXp, meaning it might have to be more careful about where it invests, Cofano said. But Compass has made a point of celebrating its recruiting successes and earlier this year floated the possibility of branching out into franchising.
Meanwhile, Anywhere reported earnings on Tuesday, revealing that, despite a drop in revenue, turning a profit of $19 million in the first quarter was possible. The profit was a reversal from previous quarters when Anywhere suffered net losses and seems to bear out Cofano’s point that managing costs is key right now.
Brokerage and franchise stocks
Credit: Barcharts
The chart above shows the percent change in share price over the last six months for Anywhere (black), Compass (green), RE/MAX (red) and eXp Realty parent eXp World Holdings (orange). The big winner here is eXp, which has seen its share price rise nearly 60 percent this year. Compass is also up nearly 18 percent.
Meanwhile, the legacy brands have struggled to get investors’ attention and have seen minor dips in their share prices.
Key questions:
- Who lost agents? Who gained agents?
- How are the brokerage companies dealing with low inventory?
- How are they cutting costs?
- How are the legacy brands holding up against newer companies?
The portal wars
Amid a relatively slow summer for real estate news, the portal war between Zillow and CoStar has provided some of the only real drama. And as Intel recently reported, insurgent CoStar has a long way to go to dethrone incumbent Zillow — though crazier things have happened.
CoStar has already reported earnings this season; but going forward, experts who watch the proptech space are keeping a close eye on Zillow to see how much progress the company is making in its post-iBuying era.
Jay McCanless
“Zillow outperformed the market in 1Q,” Jay McCanless, a senior vice president at Wedbush Securities, told Intel. “So the biggest thing I’ll be watching for is whether Zillow can outperform the market for a second quarter in a row.”
McCanless went on to say that he’ll specifically watch to see how well Zillow has been able to beef up ancillary service offerings, such as mortgages, among other items.
Meanwhile Nick Jones, a managing director at JMP Securities, said he’ll watch to see what progress Zillow makes with its conversion rates, adding that many people use the portal for free and the trick is getting those users to actually become sources of revenue.
Jones is also interested in the efficacy of Zillow’s efforts to provide real-time showing services — efforts that have ramped up in the wake of the company’s ShowingTime acquisition and which are a major part of its “super app” ambitions.
Nick Jones
“What they’re doing is trying to integrate themselves more into the transaction without a lot of capital,” Jones told Intel.
All of these comments highlight the fact that Zillow has a lot of irons in the fire. And while it’s ultimately unlikely that the company will explicitly weigh in on the rivalry with CoStar, its progress on these many different fronts will hint at how well the portal giant is holding on to its king-of-the-hill status.
Ryan Tomasello, a managing director at Keefe, Bruyette & Woods, said that he doesn’t see CoStar dethroning Zillow, though he does think CoStar’s Homes.com portal could become the second- or third-largest player in the space within years.
But whatever happens, Zillow needs to show that its user base remains strong.
“What would cause Zillow to get worried is if they start to see their traffic numbers fall,” Tomasello said.
Analysts will also be watching Redfin and News Corp-owned Realtor.com. When it comes to Redfin, McCanless said the company’s timing when it bought Bay Equity last year was not great. But more recently, the company has managed to pull off “a really nice pick up of mortgage attachment rates in the first quarter,” and McCanless is curious if that’ll continue.
The portals, like other sectors of the housing industry, will likely take a hit from the low supply of homes, McCanless also said.
“In 15 years of covering this, I’ve never seen existing home inventory stay this low,” he said.
The ultimate takeaway from Inman’s conversations with analysts is that no one expects this earnings season to upset the current pecking order and analysts want to see progress on the initiatives the portals have previously announced.
Portal stocks
Credit: Barcharts
The chart above shows the percent change in share price over the past six months for Zillow (black), CoStar (orange) and Redfin (red).
Shares in both Zillow and CoStar are up nearly 20 percent over the past six months. But the real standout is Redfin, which has seen shares soar more than 140 percent since the beginning of this year. The rally is one of this year’s biggest success stories for a publicly traded real estate company.
Key questions:
- Which portals are seeing traffic gains?
- How are Zillow’s super app and general diversification going?
- Can Redfin justify its share gains?
- How is Realtor.com differentiating itself in a crowded marketplace?
iBuying or an iGoodbye?
Six months ago, iBuying as a concept faced something of an existential dilemma. Both Zillow and Redfin had given up on the concept, and Opendoor and Offerpad held inventories of homes that were purchased at higher prices when the market was much hotter.
Since then, however, things have improved somewhat. Both companies have worked to offload those more expensive homes. Opendoor in the first quarter of the year avoided the epic losses it suffered in 2022. And Offerpad pulled off a reverse stock split that kept it from getting booted from the market.
But analysts still have questions about iBuying as a concept.
Ryan Tomasello
“We don’t necessarily think they’re out of the woods yet,” Tomasello told Intel when asked about Offerpad.
Tomasello praised both Offerpad and Opendoor for their efforts at moving through their old inventory, which has less favorable margins. And he said that newer inventory purchased after the market slowed down could potentially have much higher margins.
But Tomasello also has questions about the sustainability of the iBuying model.
“I think we are skeptical of the ability of these companies to scale the iBuying model profitably,” he added.
Both of the iBuyers consequently need to post numbers this season that’ll help dispel such skepticism.
Multiple analysts who spoke to Inman also noted that the iBuyers are working to add on “adjacencies” such as mortgage services. And Opendoor specifically has launched an asset-light marketplace known as Exclusives.
But the analysts said that such efforts are likely to remain a small portion of the iBuyers’ overall business, meaning all eyes will still be on the core, bread-and-butter operations of buying and renovating houses.
“Can they buy a home and sell it for more?” Jones wondered aloud. “That’s the key question. That’s what melted down last year.”
Credit: Barchart
The chart above shows the percent change in share price over the last six months for Opendoor (black) and Offerpad (green). Both companies are up over that time period; but Opendoor shares have had a truly remarkable rally, jumping more than 170 percent over six months.
Key questions:
- How many homes did the iBuyers purchase versus how many they sold?
- How much did they make or lose on each home?
All a-lone
The market downturn has largely been driven by high mortgage rates, so it’s no surprise that mortgage companies have had a rough time in recent months. In May, for example, Rocket Mortgage’s parent company revealed that it lost $411 million during the first three months of this year. United Wholesale Mortgage lost $138.6 million during that period.
More ominous still, despite some speculation that rates would come down this year, in early July they actually hit their highest point since the year began — a fact that suggests the hard times aren’t over.
Heading into second-quarter 2023 earnings, no one expects mortgage companies to post record profits. But the question will be just how bad things got, and if there’s any end in sight. The situation may also ultimately parallel the brokerage world and that sector’s need to manage costs; with less money coming in, lenders have to look at costs.
McCandless said his firm currently has a neutral rating for Rocket, meaning they’re not recommending either buying or selling the company’s shares. And he said that in general, he’s more bullish on companies that focus on servicing mortgages as opposed to those that originate loans.
“Trying to gain share in this market is very difficult,” he added, “But we’re still very comfortable with the servicing names.”
Mortgage stocks
Credit: Barchart
The chart above shows share gains for Rocket (black) and UWM (blue) over the last six months. Both companies performed well and have seen share prices rise. But UWM is the standout for pulling off a rally that has sent shares up more than 40 percent this year.
Key questions:
- Can mortgage companies stem losses?
- Which segments of the lenders’ businesses have proven most profitable (or least catastrophic), and how are companies leaning into those segments?
- Do mortgage companies have a long-term plan for higher rates?
A glimmer of hope
While 2023 has been rough so far, one thing does stand out about the graphs above: Many companies in real estate have seen their share prices rise over the past few months. And in a few cases, the gains have been massive.
That fact offers something of a counterpoint to the grimmer news about high rates and low housing supply. The market may face many challenges right now, but investors are actually bullish on real estate.
Tomasella described the rallies as companies having “pretty good momentum” in the stock market. And he added that as earnings season begins, the thing to watch for is if real estate companies can maintain that momentum.
“I think investors,” he explained, “are looking for whether or not the underlying fundamentals of these companies can support the moves of these stocks.”
