Zillow, Power Buyers, and the Challenge of Attaching Mortgage

In 2018, Zillow set itself lofty goals when it entered the mortgage business. Three years later, Zillow's actual performance is far, far below its predictions, highlighting how difficult the mortgage space is, not just for Zillow, but for every real estate tech company targeting mortgage as a lever for growth.

Setting High Expectations

Zillow's 2018 Annual Report, released after Mr. Barton assumed the CEO role, clearly set out the company's 3–5 year goals in mortgage:

Mortgages Segment

• Zillow Home Loans achieves a 33 percent attach rate to Zillow Offers, up from zero in 2018.

• Zillow Home Loans originates more than 3,000 loans per month, up from nearly 4,000 MLOA loan originations in all of 2018.

The 33 percent attach rate to Zillow Offers is down from the lofty 75 percent attach rate quoted earlier by Mr. Rascoff in Zillow's 2018 second quarter earnings call:

"So for anybody who is wondering why we just bought a mortgage lender, just to hit some of those numbers again, at a mere 10,000 homes sold a month from Zillow Offers, a 75% attach rate gets to over $800 million a year of revenue opportunity for mortgage origination.”

Three years and over 10,000 homes bought and sold later, the reality is a mortgage attach rate to Zillow Offers of less than 1 percent.

(Zillow and Opendoor's attach rate is based on the markets where the service is live.)

Zillow's goal of originating 3,000 loans per month, or 36,000 in a year, remains highly aspirational. Loan originations actually took a step backwards in 2019 before rebounding in 2020 due to the pandemic and record low interest rates -- but are still less than 20 percent of Zillow's original goal.

It's worth noting that proportionally, Zillow's purchase volume (versus refinance) has steadily declined from 97 percent in 2018 to 31 percent in 2020 (and down to 10 percent in Q1 2021). The growth in Zillow Home Loans is being fueled by refi.

The Rise of Power Buyers

Ironically, Zillow is attaching more mortgages to Opendoor-owned homes than it is to Zillow-owned homes. Just let that sink in.

This bizarre fact underscores how difficult it is to attach mortgage to an iBuyer home for sale; most prospective buyers are already pre-approved. It's too late in the buyer journey to introduce and attach a new financing option.

Which is why the smart money is on companies -- I call them Power Buyers -- focused exclusively on attracting buyers earlier in the process with products like cash offer and buy before you sell. Examples include Homeward, Orchard, and Knock, and initiatives like Opendoor's Cash Offer and Zillow's video tease of it helping a Zillow Offers seller secure financing for their next purchase.

There are a multitude of companies attempting to sell mortgage and other adjacent services to their customers in an effort to increase profits. For the time being, the Power Buyers are in the lead with mortgage attach rates approaching 80%, with the iBuyers pivoting their models to catch up. Zillow's experience shows that it's a long, slow road, requiring big investment, patience, and a smart, consumer-first approach.

Zillow and realtor.com Battle for Traffic and Revenue Growth

According to the latest company results, it appears that Zillow's longstanding traffic lead over realtor.com is diminishing. In an industry where metrics like this move slowly if at all, it's fascinating. But it's also insignificant in terms of competitive advantage and revenue uplift -- and may simply be an artifact of pandemic browsing patterns -- but it does reveal a deeper truth around portal monetization.

Zillow's traffic advantage hasn't changed in years -- consistently hovering at three times the average monthly visitors compared to realtor.com. However, beginning in Q1 2020, that lead begins to erode.

The timing suggests that this is likely a result of the pandemic. Perhaps Zillow has less upside, while realtor.com is benefiting from more consumers willing to visit multiple sites to see all available inventory in a high-demand, low-supply market.

A Corresponding Revenue Uplift

Across the board, the increase in portal traffic has resulted in an increase in revenues. Like Zillow, realtor.com experienced an unprecedented pandemic bump in lead gen revenues -- the first time in years.

But in this case, a rising tide lifts all boats. Both companies experienced a proportionally identical increase in lead gen revenue; Zillow's revenue lead remains unchanged at 2.5 times higher than realtor.com.

The data above is an apples-to-apples comparison of each company's lead gen business: Zillow's premier agent vs. realtor.com's "real estate" revenues.

Strategic Implications

As I outlined in a recent analysis on challenger portals, there is a non-linear correlation between market share (traffic) and value (in this case, revenue). Time and again, it's "winner take most" for the #1 portal.

What I find fascinating is that despite all of the activity of the major portals, the monetization ratio has remained constant. Like the speed of light, there's an immutable law of portal monetization at play with an upper limit, unchanged despite:

• realtor.com's $210 million acquisition of Opcity

• A new CEO and senior management team at realtor.com

• Zillow launching Zillow Flex and qualifying leads

And it's not just the U.S. In Australia, the top two portals have a similarly static monetization ratio despite years of intense investment and competition.

At its extreme, this suggests a sort of monetization nihilism -- that nothing matters. Product improvements, senior management changes, business model shifts, global pandemics, and nine-figure acquisitions are, in the end, meaningless in terms of portals outperforming each other. There's a premium for being #1, and it just doesn't change.

What Zillow's Results Reveal About Its Momentum Towards Zillow 2.0

The coverage of Zillow's latest results is fantastically uninspiring. Lots of big numbers, devoid of context. But when the dots are connected they reveal a rich story about the business's evolution to Zillow 2.0.

Perhaps most impressively, Zillow just had its third consecutive profitable quarter! For a business that's basically operated at a net loss since inception, this is a noteworthy achievement.

The move towards profitability is driven by Zillow's premier agent program -- the engine room of the company -- which is firing on all cylinders and back to impressive growth (fueled by record-breaking demand during the pandemic).

On an absolute revenue basis, Zillow's premier agent program has set a succession of all-time record quarters for the past 12 months. Zillow is generating more money from its premier agent program than ever before, which is especially noteworthy after the program ground to a halt in early 2019.

Zillow's iBuyer business is back to growth mode, purchasing and selling houses at pre-pandemic levels, and still operating at a loss. But the net loss per home has dropped to its lowest level yet, a reflection of improving economics at scale.

Last week I looked at the Ecosystem Disruption in Mortgage, and how global leaders Zillow and REA Group have spent hundreds of millions of dollars expanding into mortgage through the acquisition of broker-heavy, 20 year old traditional businesses -- and not technology companies.

Zillow's mortgage business continues to grow, but it is being driven by refinancing (90%), and not new purchase (10%), business. To fully believe the one-stop-shop Zillow 2.0 narrative, new purchase volumes should grow in the future.

But while overall mortgage revenues increased, the business remains unprofitable. This is another sign that mortgage is hard, difficult to scale profitably, and tough to "reinvent" with technology. Like the Zillow Offers business, Zillow Mortgage appears to be another high revenue, low margin operation.

The evidence reveals a business -- in my humble opinion -- that is still in the early innings of reinventing real estate. Zillow is clearly benefiting from the current red-hot real estate market, with its premier agent program leading the charge and funding the evolution to Zillow 2.0.

But the promise of new, adjacent services is still an aspirational goal. The various pieces are being built, but still need to be assembled in a credible way that reinvents the transaction at a meaningful scale. Momentum is on its side, and Zillow's evolution continues.

Portal Wars: CoStar vs. Zillow, Boomin vs. Rightmove

Across the globe, there are efforts underway to unseat leading real estate portals. In the U.S., commercial real estate behemoth CoStar has spent over $400 million to acquire residential listing portals Homes.com and Homesnap. And in the U.K., start-up Boomin is raising an additional £25 million to directly compete with Rightmove.

The primary value a real estate portal provides its customers is exposure to the most potential homebuyers and homesellers. In the U.S., Zillow's traffic lead over CoStar's recent acquisitions is astronomical.

Homeowners want to advertise their biggest asset in the one place buyers will definitely look. Zillow is that place: From a traffic standpoint, Zillow has a reach 23 times larger than Homes.com, making it exponentially more effective and valuable.

Attempting to directly compete with market-leading real estate portals is an incredibly difficult proposition, with success unlikely. The unique challenges include:

• Incremental gains in market share don't equate to incremental gains in value.

• Getting listings is the easy part. Building traffic is hard.

• Product differentiation means little. The main value to users is reach.

The CoStar Strategy

CoStar doesn't need to unseat Zillow to build a valuable business. Zillow's customers are real estate agents -- premier agents -- that pay Zillow for leads. However, Zillow only works with about five percent of real estate agents in the U.S., leaving a large addressable market for CoStar to tap into.

The narrative that CoStar is attempting to compete directly with Zillow is simply that: a story designed to rile up agents and generate buzz. The actual battle isn't about consumer eyeballs; it's about a real estate agent's wallet.

Strategic Implications

The challenger portals are succeeding with the easy bit: securing listings. Traffic is the hard part.

Through the years, the top portals have maintained their lead against billion-dollar, multinational media organizations (Zillow vs. realtor.com, IS24 vs. Immoweb), industry-backed, publicly listed upstarts (OnTheMarket vs. Rightmove), private-equity backed #2's (Zoopla vs. Rightmove), and publicly listed competitors (Domain vs. REA Group). Hundreds of millions of dollars have been thrown against the top portals for years with no effect on their dominant position whatsoever.

Past evidence shows that it is exceedingly unlikely that this new batch of challengers will dethrone the top portals. The smart challengers understand this game and how it’s played; not trying to overtake the leaders, but instead building a viable business on its own merits.

A Deeper Dive

Check out the articles below to dive deeper into the massive advantages that incumbent portals possess and the challenges around trying to disrupt them.

• Millions More Buyers: A Real Estate Portal’s Competitive Advantage

• Why incumbents can't beat Zillow (and the power of network effects)

• Why investing in OnTheMarket is a horrible idea

• A Real Estate Portal's Path to Market Power (A Zillow Case Study)

Ecosystem Disruption in Mortgage Looking Exceedingly Traditional

Last month, Australia's #1 real estate portal, REA Group, announced the $244M acquisition of mortgage broking business Mortgage Choice. This is the latest move by global leaders Zillow and REA Group to spend hundreds of millions of dollars expanding into mortgage through the acquisition of broker-heavy, 20 year old traditional mortgage businesses -- and not technology companies.

Real estate portals are moving closer to the transaction, and there is a battle brewing in adjacent services. For portals, it's a path towards revenue growth and a seamless customer experience. For new models like iBuying, it's the only path to profitability.

But: mortgage is hard. The underlying economics demonstrate how difficult it is for portals to grow these businesses. Financial services is still a small segment of REA Group's entire business, representing less than three percent of total revenue. It is, however, profitable, with margins just under 40 percent. But overall revenue growth has stalled and moved backwards since the acquisition of Smartline.

By comparison, Zillow's mortgages segment (which includes Mortech and its mortgage lead gen business, in addition to the Mortgage Lenders of America broking business), has seen strong revenue growth but is much, much less profitable.

Zillow acquired Mortgage Lenders of America (MLOA) in June 2018, which was followed by a modest revenue uplift. However, it appears the driver of FY20 growth was the pandemic and record low mortgage rates in the U.S.

Zillow's mortgage business was unprofitable leading up to the MLOA acquisition, and subsequently became much more unprofitable. It wasn't until the massive growth during the pandemic that the segment eked out a profit.

The evidence suggests an underlying business that is expensive to run and difficult to make profitable. Getting adjacent services right and running a successful mortgage broking business -- and in REA Group's case, growing it -- is hard work.

For all the money being invested in this space and the hype around a digital ecosystem, it's noteworthy that the real estate portals see their path to growth via traditional brick-and-mortar brokerage businesses, and not high-flying, scalable tech solutions. Mortgage is not an industry that can be disrupted with technology alone.

Strategic Analysis: The Top Threat to Real Estate Portals

Real estate portals occupy a dominant position across the industry. Jealous of that power, potential competitors have long tried to challenge the status quo, with limited effect. But now a new threat emerges that, while still a long shot, possesses the greatest potential to disrupt the dominant position of the portals.

The Competitive Strength of Portals

Real estate portals benefit tremendously from network effects, which is the key factor that gives them unprecedented market power and an impregnable moat to repel competition.

Network effects is the phenomenon whereby a service becomes more valuable when more people use it. Online marketplaces and social networks such as Facebook, eBay, and Craigslist are classic examples of businesses with network effects.

Businesses that have the benefit of network effects are incredibly difficult to displace. Even if a new entrant’s product is objectively better, a smaller audience of potential buyers and sellers results in an inferior consumer proposition. Sellers want to advertise to the biggest audience possible, and buyers want the largest selection possible.

Real estate portals like REA Group in Australia and Zillow in the U.S. have a dominant competitive position because they have millions more buyers than any other platform. This key attribute, enabled by network effects, results in leading portals easily maintaining their leadership position against well-funded competition.

The Rise of Exclusive Content

In the past, various competitors have tried a variety of strategies to displace the dominant portals: product differentiation, massive media spend, brokerage alliances, and more. But time and again these strategies have failed.

There is one significant risk -- an achilles heel -- to portals: they don’t control their inventory. Disintermediating the flow of listings to the big portals, through exclusive content, is their greatest threat.

To illustrate this concept, look no further than video streaming services. Netflix, Disney+, Amazon, and AppleTV are investing billions into creating exclusive content. And this content -- available on only one streaming platform -- is the key differentiator that draws consumers to the service.

When it comes to browsing for real estate, consumers want access to all of the available inventory. If a certain portion of listings are held off-market, available exclusively on another platform, consumer eyeballs will naturally follow.

More than any other strategy, exclusive content has the potential to draw consumer eyeballs away from the dominant portals. But ultimately, while the move is pro-disruptor and anti-portal, it is also potentially anti-consumer, putting the benefits of a company ahead of consumers.

Industry Fragmentation and Consumers

For consumers, exclusive content creates a fragmentation of the search and discovery process. It forces buyers to visit more than one site, with no direct benefits. For sellers, it fragments and artificially reduces the number of possible buyers.

The only beneficiary is the portal disruptor -- the organization creating and promoting the exclusive content. By bringing more consumers directly to their web site, it creates a realignment of power from the portals to the disruptor.

What real estate portals brought to the market was transparency: easy access to all available listings. In the U.S., they democratized the search process by eliminating the information asymmetry between consumers and real estate agents. Fragmenting inventory across multiple platforms is a step backwards into the dark ages of real estate, where consumers no longer have easy access to all available listings.

Case Studies

The following case studies illustrate examples of exclusive content being leveraged to break the monopoly powers of portals. And some portals are fighting back, directly and indirectly, by promoting themselves as the most effective place to advertise a home for sale.

There are three case studies of real estate portal challengers attempting to disrupt the top portal: two large brokerages, and one challenger portal. The analysis concludes with a case study of what one top portal is doing to push back against exclusive content.

Case Study: The Challenger Portal

OnTheMarket is an upstart, industry-backed portal meant to challenge the dominance of Rightmove and Zoopla in the U.K. It launched in 2015 and has faced a slow, uphill battle to achieve relevance.

One of the legs of its strategy is around exclusive listings: “thousands of new properties a month, 24 hours or more before they are advertised on Rightmove or Zoopla.” According to OnTheMarket, this amounts to between 2,500 and 10,000 properties each month.

The strategy is credited with increasing the portal’s traffic, but after years its traffic is still a fraction of the dominant portals in the market. It has helped the challenger portal grow and build relevancy in the market, but has done nothing to dent the dominance of Rightmove.

Case Study: The Traditional Brokerage

Howard Hanna is the fourth largest brokerage in the U.S., with over 100,000 transactions closed in 2019. In June of 2019, it launched the Find It First program, where new listings are available only on the company’s web site, HowardHanna.com, for a set time before being published on the multiple listing service.

The service launched in an effort to increase traffic to the company’s own web site by leveraging exclusive content not available anywhere else; a fact highlighted by the company.

The benefit to potential home buyers is clear: register on HowardHanna.com to receive updates on exclusive content before they are posted anywhere else. The benefit to sellers is less clear. As the company says, “...it creates an urgency for their property to be offered first to highly motivated buyers, who are most likely to bring an offer.” But the pool of buyers is a fraction of the entire market: 2.1 million visits in July 2019 compared to over 700 million visits on Zillow.

Howard Hanna’s program offers another benefit for sellers, which is less about exclusive content and more a ding at Zillow’s business model: prospective buyers should be connected directly with the listing agent, who knows more about the property than anyone else. The benefit to consumers finding a property on HowardHanna.com first is that a connection to the listing agent can be made directly, without any intermediaries.

But the program is small. In September 2020 there were less than two dozen listings across the Northeast and Midwest. In February 2021, with over 20,000 listings in the Northeast, only 13 Find it First properties were found.

Case Study: The Tech-Enabled Brokerage

Compass is the fifth-largest brokerage in the U.S., with over 80,000 transactions closed in 2019. As mentioned in my 2019 strategic analysis of the business, Compass has an active history of promoting exclusive listings, either coming soon or private exclusives.

What sets Compass’ exclusive content strategy apart from others is its traction and promotion. Compass is not shy about promoting exclusive listings on the compass.com web site: it’s featured on the header and is highlighted immediately below the search bar.

All search results pages highlight private exclusive listings, which are only available to home buyers that contact a Compass agent. The fact that there are more listings that can be shown is dangled in front of consumers in a very prominent way.

Clicking through for more information on private exclusives makes it clear that to see more, you need a Compass agent. The additional listings are not available on “home search websites.”

The concept of a private exclusive listing is not new; what’s new is the degree of in-your-face marketing applied to the program by Compass. In comparison, consider Sotheby’s International Realty, which has no mention of nor listings of private exclusives or coming soons. Sotheby’s is not leveraging the power of exclusive content, while Compass is -- in a big, aggressive way.

That fact is sprinkled throughout the Compass web site, subtly and overtly. On the search results filter page, visitors are reminded that a large amount of listings are “only on Compass.”

The value proposition for home buyers (which, by the way, are how the U.S. real estate portals monetize their traffic) is quite clear: exclusive content not available anywhere else.

The value proposition of a coming soon listing for home sellers is less specific: increase exposure, generate buzz, and deliver market insights. Again, all to a smaller audience than what the national real estate portals deliver.

With regards to the seriousness of Compass’ program, the numbers paint a clear picture. According to compass.com, in September of 2020 Compass had over 17,000 listings nationally -- with over 2,800 as exclusive content (either Coming Soon or Private Exclusive). These 2,800 listings (16 percent of Compass’ total inventory) were only available on compass.com or via a Compass agent; none were on Zillow.

And the percentage of listings exclusively on compass.com is increasing. As of February 2021 there were around 12,000 Compass listings nationally, with 2,800 “only on Compass” -- or 23 percent. Nearly a quarter of Compass’ listings are exclusive content. In one of Compass’ biggest markets, San Francisco, 504 out of 913 total listings were exclusively on Compass, a massive 55 percent.

The concept is perhaps best illustrated in Compass’ own words, through this LinkedIn post by a Compass agent. Note the key phrase: “I have inventory on our platform that will never get listed on Zillow or Redfin. Get a Compass agent...or miss out.”

Case Study: The Incumbent Real Estate Portal

REA Group operates the dominant Australian portal, realestate.com.au, which also happens to be the world’s most profitable real estate portal. The team at REA understands the value of network effects, and has built marketing campaigns around having “Millions More Buyers” than the competition.

REA faces a challenge in the Australian market: property owners that wish to sell their homes “off market.” Similar to Compass’ exclusive listings, these properties never get advertised on a national property portal, and reach an audience through existing networks and word of mouth.

REA has met this challenge -- and the associated risk to its market-leading position -- head on with a series of direct-to-consumer TV advertisements.

The rhetorical message to consumers is clear: why would you not advertise your biggest asset in the one place buyers will definitely look?

Power Moves

The move towards exclusive content is about power. The organizations affecting this change are companies looking to grow revenues and maximize profits. The benefits of a potential shift in consumer eyeballs will accrue to these for-profit companies, at the expense of real estate agents and consumers.

There may be a short-term benefit for real estate agents, by reducing their reliance on a national portal, but that reliance just shifts to a different company. And it is that company, and no one else, that becomes the distributor of consumer eyeballs and leads to agents. The power remains with a company, and not with an agent.

Ultimately, the consumer may be the biggest loser. The creation of new advertising channels, especially in markets outside of the U.S., means that homeowners will need to pay an additional fee to advertise on those new channels. And, in the words of Compass, if listings “never get listed on Zillow or Redfin,” millions of potential buyers may never see them, which could lead to less demand and a lower price for a property, a cost paid for by homeowners.

Generating and publishing exclusive content appears to be one of the most effective possible strategies against the portals’ dominance. It is a relatively new, active battleground in the evolving war for the future of real estate. But as these billion dollar behemoths battle for supremacy of the real estate industry, with agents as their unwitting pawns, consumers may be left paying the price.

Zillow's Brokerage News and the 2 Megatrends of Real Estate Tech

Zillow recently announced that it was hiring its own agent employees to service its iBuyer business. At face value, the news is a relatively small shift, but is a clear reminder of several megatrends occurring in real estate tech.

An Unsurprising Move

If Zillow's announcement caught you by surprise, you haven't been paying close enough attention. For years, real estate portals around the world -- including Zillow -- have been moving closer to and getting involved in more of the transaction.

Zillow's move is a logical next step in this journey. Bringing agents in-house, as opposed to relying on a network of partners, moves Zillow closer to consumers and closer to the transaction. This megatrend -- which has been slowly occurring for years -- is covered at length in my 2018 Global Real Estate Portal Report. 

Ignore At Your Own Risk

With this latest news, some are suggesting that traditional agents fundamentally ignore it and focus on their own business. In other words, don't worry about the competition -- in this case, Zillow -- and just focus on providing the best service possible to your customers and clients.

That strategy is only half right. Ignoring what Zillow is doing brings its own peril; just ask travel agents and video store owners (both industries that Mr. Barton has had a hand in disrupting).

For the traditional industry, sitting still is not an option. To quote my State of the Industry presentation from January 2020:

The industry is moving so slow you can look around and think nothing is changing (or get caught up in the hype and think everything is changing). That’s why now – more than ever before – is the time to stay informed, understand the scope of change, and react appropriately.

Agents as Employees

Zillow's move is a clear reflection of a megatrend in real estate: agents as employees. Hiring agents as full-time, salaried employees (a model pioneered by Redfin) provides a number of benefits, all centered around greater control:

• A consistent consumer experience

• Greater operational efficiency

• Better economics

The benefit is perhaps best illustrated by Redfin's agent efficiency, a metric that consistently stands out among its brokerage peers.

Full-time, salaried agents also lead to higher attach rates for services like mortgage and title. Next-gen brokerage models like Orchard and Homie, which also employ agents, are seeing mortgage attach rates of 80+ percent. This is only possible with an integrated end-to-end experience, powered by employees, and not a loose confederation of independent contractors.

Zillow and Redfin are not alone. Other disruptors like Opendoor and Offerpad are hiring agents for new brokerage services. With the exception of Compass (who is stuck in the matter), all of the largest real estate disruptors are moving in this direction -- that's nearly $35 billion in enterprise value pushing in this direction. It's a megatrend that's possible, but not advisable, to ignore.

Covid-19's Effect on Global Real Estate Portal Revenues

Earlier this year I outlined the ways in which the world's leading real estate portals were reacting to the pandemic, including significant customer discounts. The results are in, and the revenue impact to portals is quite varied.

Taking a Hit to Revenue

Top of the list is Rightmove, the U.K.'s leading portal, which saw a massive 37 percent drop in revenue for the first six months of 2020 compared to the same period in 2019. That's ten times greater than any other portal. The others saw more modest revenue drops of a few percentage points, with some, like Germany's ImmoScout24 and The Netherlands' Funda, managing to grow revenue.

In absolute dollar terms (and in local currency), Rightmove again tops the list, with revenues dropping a massive £38 million year-over-year. Zillow lost a substantial $15 million, but from a much larger revenue base ($450 million vs. Rightmove's £105 million in H1 2019).

Rightmove as the Outlier

The evidence clearly shows Rightmove as an outlier, while other portals managed to weather the Covid-19 storm relatively unscathed. Why?

One critical component of the answer is the severity and length of lockdown. My earlier research (featured in this Financial Times article) highlighted the U.K. as having one of the most restrictive lockdowns around the world, with a correspondingly severe drop in new listing volumes.

The second critical component is business model. Australia's portals generate most of their revenue from vendors, not agents. The U.S. portals generate revenue from selling buyer leads. Rightmove generates revenue from agents advertising houses for sale -- and if new listings drop 90 percent, there are 90 percent fewer houses to advertise.

A combination of the U.K. lockdown's severity and length, coupled with Rightmove's business model, made it especially susceptible to Covid-19. It was forced to offer its customers deep discounts for many months while the lockdown was in effect.

The pandemic affected all real estate portals -- but not equally. The more severe the lockdown, the more significant the revenue drop. 

A Note on Data Sources

To create a true apples-to-apples comparison, the data used is from the period beginning January 1 2020 and ending June 30 2020. The six months reveal a complete picture of the start, middle, and recovery from the pandemic and associated lockdowns.

The data is from each portal's residential real estate segment: Zillow's Premier Agent revenue, realtor.com's real estate revenue, Scout24's residential real estate revenue, Rightmove's agency revenue, REA Group's Australian residential depth and subscription revenue, and Domain's residential real estate revenue.

What Happens When Two Top Real Estate Portals Merge?

Zillow and Trulia in 2014. Immowelt and Immonet in 2015. When massive real estate portals join forces, it is for one reason: market power. These mega-mergers of leading real estate portals highlight the power of market dominance through greater reach, greater pricing power, and accelerated revenue growth.

Germany: Immowelt and Immonet

In 2015, Axel Springer brought together Immowelt (IW) and Immonet (IN), the #2 and #3 real estate portals in the German market. The combined entity managed to increase ARPA (average revenue per advertiser) 40 percent over the following two years, with only 5 percent customer churn -- a noteworthy achievement.

The merger allowed the combined entity to nearly double the pace of ARPA growth from €6/quarter pre-merger to €11/quarter post-merger.

The key to Immowelt's success was a strategy of forcing customers to adopt a more expensive DUO bundle (one contract, two portals), whereby listings appear on both sites. After 18 months, an impressive 85 percent of customers had adopted the DUO bundle, rising to 99 percent a year later -- all with minimal customer churn.

In 2018, Immowelt began converting customers to a more expensive DUO5 (five listings) bundle. Over the subsequent two years, customer churn increased to 19 percent while ARPA growth remained high at 33 percent.

Supercharging Zillow's Revenue Growth

The merger of Zillow and Trulia was the catalyst for strong revenue growth at the combined entity. In the two years following the merger -- and after consolidating the revenues of both businesses -- revenue increased a massive 52 percent.

In the case of Zillow and Trulia (and similar to Immowelt and Immonet in Germany), post-merger revenue growth was driven by ARPA and not an increase in paying customers. In the year following the merger, and after the customer bases were consolidated, the number of paying customers dropped by 11 percent while ARPA increased 42 percent.

The merger increased the market dominance of the combined entity, and allowed Zillow to increase its pace of revenue growth over the following three years.

The slope of the line -- the increase of revenue coming into the business, not as a percentage, but in absolute dollars -- materially shifted post-merger. Pre-merger, Zillow added an average of $5.9 million in new revenue each quarter; post-merger it averaged $9.6 million.

(And just for fun, here is realtor.com's corresponding revenue growth after its acquisition by News Corp in 2014, adding an average of $2.8 million in new revenue each quarter. There's a premium to being the market leader.)

More Money, More Value

The mergers allowed both groups to materially grow revenue, primarily through ARPA increases, at an accelerated pace.

While prices did increase after the mergers, it came with a corresponding increase in customer value. The combined entities were able to deliver more exposure and more leads for their customers. Zillow's increasing ARPA was closely matched by an increase in leads.

While ARPA increased 42 percent in the year after the merger, it was coupled with a 48 percent increase in total leads and an 11 percent decline in customers. The net result was a drop in the average price per lead.

Zillow's customers were paying more, but they were paying more for increased value.

The case was similar in Germany. Internal research showed that, on average, customers that advertised on both sites saw the number of leads per listing more than double. Customers were paying more, but were deriving more value.

The merger of two real estate portals consolidates market and pricing power within one organization -- allowing it to quicken its pace of growth. But in the cases above, an increase in prices was accompanied with a corresponding increase in value, arguably a good deal for customers and consumers.

The Pandemic’s Varied Effect on International Real Estate Markets

The pandemic affected international real estate markets in strikingly different ways. Markets with stringent lockdowns saw new listings plummet by 90 percent, while other markets saw no change. And as the world begins to recover, the data suggests that the longer and more severe the lockdown, the faster the initial recovery.

New Listings

The number of new listings coming to market is a key indicator of a healthy real estate marketplace, representing high-intent seller demand and available inventory. The decline in new listing volumes across seven countries has varied wildly, from no change to a 90 percent drop, depending on the market and its associated lockdown.

Unsurprisingly, the drop in new listing volumes is tightly correlated to the severity of lockdown imposed by national and local governments. Of the nations analyzed, Italy and the U.K. had the most stringent lockdowns, with many real estate activities deemed non-essential and severely limited. The drop in new listings was greatest in these markets: between 75-90 percent.

The Australian, U.S., and Canadian real estate markets were less restrictive, and the drop in new listings reflects that: 40-50 percent at a national level. In the U.S., that number varies greatly by state, with some markets (Pennsylvania, Michigan, and New York) mirroring the severe drop of up to 90 percent seen in the U.K. and Italy.

Most surprisingly, some markets were barely affected. The Netherlands and Sweden imposed “intelligent lockdowns” far less restrictive than many other countries. As a result, The Netherlands in particular hasn’t seen a significant drop in new listings; rather, it’s enjoying annual highs. Interestingly, new listing volumes in Sweden have seen a limited, delayed decline -- about a month after most other markets -- of 20 percent.

Portal Traffic

Web site and mobile traffic to real estate portals suffered an expected drop, but quickly recovered in most of the markets analyzed. 

Once again, markets with “intelligent lockdowns” -- The Netherlands and Sweden -- saw less of a drop and are currently experiencing annual highs. Australia and the U.S. quickly recovered and are up from last year, while the U.K. lagged behind due to its stringent lockdown (why browse when the market is closed).

A less restrictive lockdown doesn’t directly affect someone’s browsing behavior. But the closer to “normal” a lockdown is, the more consumers will continue their normal portal browsing behavior.

A Fast Recovery

Based on the evidence from the U.K. and Italy, it appears that the longer and more severe the lockdown, the faster the recovery. Both countries have seen a surge in new listing volumes after restrictions were lifted, a signal of strong pent-up demand. The following chart shows the rise in new listings after the U.K. reopened the housing market on May 13th.

That market behavior is similar to two of the hardest hit U.S. markets -- Pennsylvania and Michigan -- which prohibited most real estate activity and saw new listings drop 70-80 percent. After easing restrictions, Michigan’s Detroit and Grand Rapids saw an immediate surge in new listings come to market -- similar to Italy and the U.K. 

The evidence suggests that once restrictions are lifted in the hardest hit markets, new listings rebound quickly. However, new listings are only one component of a full market recovery. Buyer demand, leading to completed real estate transactions, will come over time -- and it’s unclear how long that recovery will take.

A Note on Data Sources

This analysis uses previously unpublished data from a number of international real estate portals and organizations: 

• Hemnet (Sweden’s top real estate portal)

• Funda (The Netherlands’ top real estate portal)

• REA Group (Australia’s top real estate portal)

• Zoopla (U.K.’s #2 real estate portal)

• Fourwalls and rennie (Canada)

• A top Italian real estate portal (Thanks!)

• Redfin’s Data Center (U.S. new listing volumes)

• Zillow’s quarterly shareholder letter (U.S. traffic volumes)

Thank you to the leading real estate portals and other organizations around the world that collaborated with me to produce this first-of-its-kind international analysis. How does your market compare? Let me know!

An Analysis Of Pending Sales, A Proxy For Buyer Demand

Much of my market research has focused on new listings coming to market, a strong proxy and indicator of seller demand. Now I've turned to pending sales -- offers being made and accepted on a home -- as an equally strong proxy for buyer demand.

As expected, the number of pending sales is beginning to rebound in some markets as restrictions ease.

Pending sales -- representing increased buyer demand -- are increasing in a number of cities like Tampa, Chicago, and Seattle. Following a significant dip around the end of March, the number of pending sales has steadily increased throughout April, in the all-too-familiar checkmark shape.

However, not all markets are recovering. Several major East and West Coast metros, including New York City, Philadelphia, San Francisco, and Los Angeles, are still in their lows and have yet to see the number of pending sales recover.

Comparison to Last Year

The analysis above simply looks at the number of pending sales over time. Given the seasonal nature of real estate, a second, important dimension to consider is year-over-year performance: How does 2020 compare to 2019?

An annual comparison shows many markets down between 20-80 percent compared to the same time last year, with some recovering, and others still flat.
 

Some markets, like Austin, have recovered quickly with pending sales at the same level of last year -- highlighting strong buyer demand. While it is recovering, Seattle is still down a significant 20 percent from last year, with New York and San Francisco still down 60-80 percent from 2019 volumes.

The advantage of plotting data over time is the ability to reveal momentum. Markets like Nashville, Raleigh, and Charlotte are all trending lower; buyer demand is not picking up as quickly as last year. Not all markets are in recovery mode.

Key Takeaways

The data suggests that buyer demand (as represented by pending sales) has been significantly effected by the pandemic. Volumes are down over 35 percent nationally, with some markets down as much as 60-80 percent compared to last year. Buyer demand is beginning to recover in some markets, but not all.

Try it Yourself

I was recently quoted in an article on Curbed: "No matter what narrative you have you can support that story with data. You can find data to support any story you want, whether it’s everything is fine, it’s the end of the world, or something in between.”

My goal with this analysis is to replace uncertainty with data, and to give you the tools to explore the data directly: try it out with my Real Estate Market Tracker.

(It's worth noting that while the data comes from Redfin, it's not perfect. Several markets, including Atlanta, Dallas, and San Antonio were removed from this analysis because of significant data issues. I hope to include them in the future.)

Growth Challenges: Zillow vs. realtor.com

Last week both Zillow Group and News Corp’s realtor.com announced quarterly financial results, revealing two companies in starkly different periods of growth. Zillow is growing, realtor.com is not, and the latter is making significant moves to change course.

Differing Growth Trajectories

The largest revenue driver for each business is selling leads to real estate agents: Zillow’s Premier Agent program and realtor.com’s real estate revenues.

In the most recent quarter ending March 31, 2020, Zillow’s premier agent business grew by $24 million (11 percent) compared to the same period in 2019. By comparison, realtor.com’s real estate revenue did not grow at all. In the quarter before that, Zillow’s premier agent program grew by $12.5 million (6 percent), compared to $4 million (4 percent) at realtor.com.

Over the past six months, Zillow's real estate lead gen business has demonstrated solid growth while realtor.com's has struggled.

Leadership Changes

Over the past two years, Zillow’s premier agent program has certainly had its challenges, with growth slowing significantly for a period of time before reaccelerating. The decline -- and resurgence -- in growth pivoted around a leadership change in February 2019, with Rich Barton taking the reins as CEO.

Annual revenue growth at realtor.com has fluctuated over the past two years, dipping into negative territory on a number of recent occasions. In the past year, revenue growth has only been positive in one out of four quarters. Similar to Zillow, a leadership change occurred in the midst of the decline, with the departure of the CEO in June 2019.

Both companies have struggled with revenue growth, and investors -- along with corporate owners -- clearly don’t like stagnation. Chief executives were replaced in both companies when revenue growth stalled.

The recent strategy at realtor.com reflects a significant effort to correct its past lackluster performance. This year, a permanent CEO was appointed in January, several longtime execs were replaced by a pair of Opcity leaders in April, and significant layoffs were enacted in May. These are all bold moves made in an effort to restore growth.

International And U.S. Markets See 50-75% Drop In New Listing Volumes

As the pandemic and associated effect on the real estate market spreads, one of the best leading indicators of a decline in transaction volumes -- new listings -- has dropped an average of 63 percent in the earliest hit markets. Seattle, the Bay Area, and New York City -- along with Italy and the U.K. -- were among the first markets hit, and are the best examples of what comes with strict lockdowns.

Declining Market Activity

In Seattle (King County), the number of new listings is down 54 percent on a weekly basis, and continues to trend lower.

On a weekly basis, new listings in the East Bay market of California are down 70 percent since the start of shelter in place orders. Listings typically increase at this time of year.

In Santa Clara county, which went on lockdown March 16th, new listings are down 48 percent on a weekly basis.

In New York City, new listings are down a whopping 78 percent across Manhattan, Brooklyn, and Queens, and continue to trend lower.

Many shelter in place orders took effect in mid-March, so we’re just starting to see the effect on the housing market.

International Peers

The trend is similar in a number of international markets. According to Zoopla, the #2 portal in the U.K. (which exclusively shared the following information with me), new listing volumes are down 70+ percent across the country. It’s a shocking decline that will have ramifications across the industry for the rest of the year.

In Italy, a top portal shared with me that new listings were down 60 percent from normal volumes during the third and fourth week of lockdown.

It's important to note that this appears to be the bottom; after 2-3 weeks of lockdown, new listings were down 60 percent and have not dropped any lower.

A drop in new listings directly correlates to the severity of lockdown. Some international markets, like Germany, the Netherlands, and Sweden -- with less stringent lockdowns -- have not seen a dramatic drop in new listing activity.

The Ability vs. The Will To Buy A Home

When evaluating the pandemic’s effect on the market, it’s tempting to focus on the legal, logistical, and practical aspects of transacting real estate: is it an “essential” business, can open homes take place safely, and can closings occur online?

But that analysis misses an important psychological piece: Will consumers buy homes? Given the incredible market uncertainty, job uncertainty, and health and safety considerations, will consumers choose right now as the ideal time to buy or sell a home, or will they wait? Just because they can, doesn’t mean they will.

A Mild Case of Confirmation Bias

Many markets have yet to experience the full effect of the pandemic and lockdowns on home sales. Assuming it takes 90 days to sell a home, from listing to close, it will take several months to see the effects of a drop in new listings.

Given that inherent delay, there’s plenty of data available -- especially in markets that have yet to be hit -- that everything is fine. Homes are selling, listings are coming to market, and buyer demand remains strong. 

Confirmation bias is the tendency to search for, interpret, and favor information in a way that confirms one's prior beliefs or hypotheses. It’s quite easy for a real estate professional, who believes their market won’t be affected like the others, to find evidence to support that belief.

Evidence from international markets such as China, Italy, and South Korea, plus leading indicators from the first markets to be hit in the U.S., clearly shows the effects of strict lockdowns. The key criteria as the pandemic and lockdowns spread is timing; just because the tidal wave hasn’t hit yet doesn’t mean it won’t arrive.

Real Estate Portals See Up to 40% Drop in Traffic, Leads

The spread of the coronavirus -- and associated lockdowns, quarantines, and travel restrictions -- have caused a dramatic drop in traffic and leads at the world’s top real estate portals. These metrics are critical indicators of a top of the funnel slowdown in the real estate market.

A Global Overview

The data below is from a handful of leading real estate portals around the world: SeLoger in France, Zoopla in the U.K., Funda in The Netherlands, Zillow in the U.S., and a European portal and a U.S. portal that wish to remain anonymous. The evidence is clear: on average, portals are seeing around a 30 percent drop in traffic (as a weekly moving average) as a result of the pandemic.

The data shows a similar, although slightly higher, decline in the number of leads being generated by the portals -- ranging from 28 to 50 percent, with an average of 33 percent.

The spreading pandemic is clearly affecting the world’s top portals. They are generating less traffic and considerably less leads, which is a reflection of a slowing property market. 

U.K. Snapshot: Zoopla

Zoopla is the U.K.’s second-largest portal by traffic, and is on the front lines of up-to-date data analysis. Over the course of March, it has seen a 30 percent drop in traffic (interest) and a 40 percent drop in demand (leads generated through the system).

Interestingly, Zoopla is seeing a slight rebound in traffic over the past few days -- likely as consumers adapt to their new reality, shut themselves indoors, and turn to the portal as a form of browsing entertainment. The trend is similar in The Netherlands, where leading portal Funda reports that traffic is slowly growing back to normal levels.

U.S. Snapshot: Zillow

During an earlier conference call, Zillow stated its traffic was down 20 percent from last year. Considering its traffic was up 10 percent annually in the previous quarter, the weekly decline is closer to 30 percent -- which matches the stated decline in connection requests, or leads, through the system.

Another large U.S. real estate portal (not a publicly traded company) was willing to anonymously share its traffic and lead statistics. The 30 percent traffic drop in March is clear (and most likely reflective of the other U.S. portals).

This same portal reports a corresponding drop in leads of 28 percent, closely matching the drop in traffic, and nearly identical to category leader Zillow.

True Discounts

Earlier this week I conducted an analysis of how the top real estate portals around the world were reacting to Covid-19, primarily by offering customer discounts. For agent and broker customers of these portals, it’s worth understanding that a reduction in fees comes along with a reduction in leads.

For example, Zillow is offering its premier agent customers a 50 percent discount, but for 30 percent fewer leads. 

Assuming a hypothetical situation where a customer was spending $10,000 for 100 leads, that customer is now spending $5,000 for 70 leads -- the true discount is closer to 29 percent.

Top of the Funnel

A drop in portal traffic -- and the associated leads generated through the system -- is the ultimate, top of the funnel measure of a slowdown in real estate transactions. Consumers are reducing their visits to real estate portals, which is a more passive interaction with the market, and significantly reducing the number of lead forms filled out to inquire about a property, which is a more active measure of intent.

A drop in leads will ripple through the entire real estate ecosystem. Less leads for agents means less business, and less business means less transactions. The key questions to watch in the coming weeks (and months) are: Does the drop in leads go any lower, how long does the decline last, and how long will the recovery be before we’re back to normal levels?

Further Reading and Thanks

I've published several analyses of the massive changes occurring in the real estate industry since the COVID-19 pandemic:

• Survival of the Fittest: The Real Estate Pandemic Survival Guide

• How Real Estate Portals Are Reacting to COVID-19 (New!)

• iBuyers Pause Purchases During Pandemic

• Unintended Advantages: iBuying in a World of Social Distancing

I have deep gratitude for the portals that shared their data for this analysis -- either publicly or directly with me. Making this information available helps us replace uncertainty and fear with a growing certainty and resiliency. Thank you!

How Real Estate Portals Are Reacting to COVID-19

As the coronavirus pandemic and the associated impact upon global economies spreads, the world’s leading real estate portals are all making big moves in response. Significant discounts are being rolled out for customers, new products are being launched, and sobering revenue projections are being shared.

The Leading Portals React

Strict quarantines, market uncertainty, and travel restrictions are causing plummeting real estate transaction volumes in many markets. Portals are facing -- and will face in the coming weeks -- a significant drop in traffic and leads. In France, top portal SeLoger noted a 40 percent drop in traffic, while in The Netherlands, leading portal funda noted a 35 percent drop in leads (more on this in a future analysis).

The drop in traffic and leads, in a market where transaction volumes are dropping by up to 80 percent, is causing portals to roll out significant discounts for their agent customers. 

In the U.S., leading portals Zillow and realtor.com announced deep discounts on agents’ next monthly bills, with Zillow cutting 50 percent and realtor.com 60 percent. While a welcome savings to an agent’s bottom line, it comes at significant cost, with Zillow estimating a $40–$50 million hit to revenue. It’s unlikely the crisis will be over in a month, so there’s a good chance the discount may be extended beyond April.

The leading portals in the U.K. are following a similar approach, but with deeper and longer-lasting discounts. Rightmove is slashing 75 percent off agent bills for four months -- at a cost of £65–£75 million. For a business that booked £289 million in revenue during 2019, that’s a material hit.

The #2 portal, Zoopla, is being even more aggressive with its discounts. Agents can get 3–5 months completely free, or nine months free if the customer leaves Rightmove and commits to an 18 month contract.

In Australia, leading portal REA Group is postponing its July price rise (8 percent), and offering free re-listings of premium depth products. 

Germany’s Scout24 is offering to defer one month’s payment for up to nine months, and is offering free private listings for consumers. And in France, SeLoger is deferring March fees and making April fees free. Both Scout24 and SeLoger are also offering free premium products to agents at the end of the crisis.

Product Improvements

In addition to discounts, some fast-moving real estate portals are making product improvements in response to the dynamic situation. Sweden’s Hemnet rolled out live streamed open house viewings for its agents last weekend, and is working on further product improvements to streamline transactions with limited direct human interaction.

In The Netherlands, funda kicked off a week-long hackathon to respond to changing customer needs. The focus is on providing fresh data and insights for customers, and enhanced support for remote viewings.

Observations and Strategic Implications

I note a few key takeaways from the evidence above:

• The discounts will cause a huge impact on revenue. Rightmove is projected to take a £70 million revenue hit -- or 27 percent of total revenue in 2019. Zillow’s revenue hit could approach 10 percent (of premier agent revenues) or more. These revenue hits don’t include customers that cancel their subscriptions or simply go out of business during the year.

• There is a significant spread of discounts being offered, from simple deferments to multiple months completely free. The more competitive the market, the more competitive the offers are in order to retain or attract customers. The discounts are deepest in the U.K.

• Certain markets, including Australia, Sweden, and New Zealand are vendor-funded, meaning the homeowner pays the portal listing fee, not the agent. The portals in these markets have not yet offered discounts, but will still feel a revenue hit when new listings drop.

It’s a fast-moving, dynamic time in the portal industry. The major players are all making significant moves to retain their agent customers and ease their upcoming financial burden.

What to Expect When You’re Expecting Revenue Growth: Rightmove’s Strategy

Rightmove’s annual financial results were released on February 28th, revealing a business whose revenue growth has dropped to an all-time low. This analysis focuses on several key charts -- all about growth -- that are absent from Rightmove’s annual report, but are critical to understanding its strategy.

Declining Revenue Growth

Rightmove’s revenue growth in 2019 was the smallest it's ever been -- 8 percent -- the low point in a multi-year decline.

The primary driver of Rightmove’s revenue, representing 72 percent of total, is the core agency listing business. This consists of fees that estate agents pay to list properties for sale on Rightmove. The growth rate of this business has dipped to 4 percent, less than half of last year, and the lowest rate in years.

Rightmove has saturated the U.K. market. Every estate agent that could possibly be a customer generally is. Therefore, the only way to increase revenues in the agency listing business is by raising prices, evidenced by the following chart from Rightmove’s annual report.

The vast majority of Rightmove’s revenue growth -- 84 percent -- came from raising fees. However, Rightmove’s ability to raise prices -- or, as I like to say, to charge customers more money for the same service -- is diminishing. Average revenue per advertiser growth, or ARPA, continues to decline year after year. 

Responding to Slowing Growth

Rightmove’s revenue growth is slowing, and investors may have a growing curiosity about the source of future growth.

In the U.S., Zillow underwent a similar slowdown in its core lead generation business, the flagship Premier Agent program. During the second half of 2018 and 2019, revenue growth in the business significantly slowed and nearly stopped, illustrated in a chart not too dissimilar from those above.

What does a business do when growth in its primary revenue stream slows? Launch new revenue streams, of course.

In the midst of Zillow’s growth slowdown, it launched several new initiatives: Zillow Offers, its iBuyer business, in mid-2018, a new pricing model, Flex Pricing, in October 2018, and in November 2018 it acquired a mortgage company.

Zillow Offers and Zillow Home Loans offered completely new revenue streams for the business to grow, and Flex Pricing offered its customers a new way to utilize its core service with a different pricing model, and not just higher prices. In the face of growth headwinds, Zillow acted decisively to diversify its business model.

Rightmove's Strategy

Measured by traditional financial metrics, Rightmove is a fantastic business. It is a category leader in the U.K., with an enviable profit margin of 74 percent on revenues of £289 million. But as a public company, it naturally faces pressure to grow -- and that growth has steadily slowed over a number of years.

But even with slowing growth, Rightmove has maintained its commanding traffic lead over rivals (as illustrated in my strategic analysis of real estate portal leadership). Rightmove does not appear to be at risk of losing its market dominance.

What Rightmove is demonstrating -- consistently, year after year -- is a unique strategy in the world of real estate portals. While other portals are vertically integrating, diversifying their services, or getting closer to the real estate transaction, Rightmove maintains a conservative and focused approach.

Time will tell if this approach is sufficient, or if Rightmove will also need to act decisively to diversify its model to satisfy shareholder demands to grow.

Millions More Buyers: A Real Estate Portal’s Competitive Advantage

REA Group, Australia’s leading and the world’s most profitable real estate portal, recently unveiled a new advertising campaign theme that succinctly sums up a portal’s competitive advantage: Millions More Buyers.

Real estate portals benefit tremendously from network effects, which is the key factor that gives them unprecedented market power and an impregnable moat to repel competition. This analysis looks at international portal leadership across three markets, and explores the challenges of competing with a leading portal.

The Power of Network Effects

Network effects is the phenomenon whereby a service becomes more valuable when more people use it. Online marketplaces and social networks such as Facebook, eBay, and Craigslist are classic examples of businesses with network effects.

Businesses that have the benefit of network effects are incredibly difficult to displace. Even if a new entrant’s product is objectively better, a smaller audience of potential buyers and sellers means an inferior consumer proposition. Sellers want to advertise to the biggest audience possible, and buyers want the largest selection possible.

Real estate portals like REA Group in Australia and Zillow in the U.S. have a strong competitive position because they have Millions More Buyers than any other platform. This key attribute, enabled by network effects, results in leading portals easily maintaining their leadership position against well-funded competition.

Rightmove vs. Zoopla vs. OnTheMarket in the U.K.

In the U.K., Rightmove is the long-standing dominant real estate portal, Zoopla number two, and OnTheMarket the industry-backed upstart.

For all the cyclical uproar aimed at Rightmove over its ever-increasing fees, its traffic dominance shows no signs of waning. It remains the undisputed best place to advertise properties for sale, with Millions More Buyers than its closest competition.

All three portals reported higher January traffic than the two previous years. And while the percentage gains sound impressive for the smaller portals, it’s from a smaller base.

Of more interest is the net gain of new visits: 9 million for Rightmove, 8.3 million for Zoopla, and 6.5 million for OnTheMarket. Rightmove captured the most new visitors, with Zoopla close behind, while OnTheMarket captured 28 percent less new visitors. Rightmove’s lead in absolute visits to its web site is growing.

Rightmove’s traffic lead over its next closest rival remains strong and fundamentally unchanged over a number of years, despite several companies attempting to challenge its dominance.

Even after Zoopla’s $3 billion acquisition by private equity firm Silver Lake in 2018, and OnTheMarket raising and spending tens-of-millions of pounds to compete with the leading portals, Rightmove’s traffic dominance remains intact.

Zillow vs. realtor.com in the U.S.

Zillow’s arch-competitor in the U.S. market is realtor.com, owned by News Corp. Zillow’s reach is massive: In Q4 of 2019, Zillow’s average monthly unique visitors clocked in at 173 million compared to realtor.com’s 59 million. That lead has remained consistent over a number of years.

A more granular examination of traffic between the two portals shows the seasonal nature of visits throughout the year, with Zillow maintaining its lead.

Like its international peers, Zillow’s traffic lead has remained consistent over the past several years. Even after realtor.com’s $950 million acquisition by News Corp in 2014, when the case could be made for further resources being invested into the business, Zillow’s traffic lead has remained steady: Zillow has Millions More Buyers.

REA Group vs. Domain Group in Australia

Australia’s REA Group, which is also majority owned by News Corp, is the world’s most profitable real estate portal. Its lead over rival Domain Group has remained consistently strong over the past several years, and appears to be increasing.

Domain Group threw off the shackles of a more traditional and risk-averse owner, Fairfax Media, when it was spun out and went public in November 2017. Part of the rationale was to deepen the investment in the business to fully capitalize on the opportunity in front of it. But that deeper investment hasn’t made a dent in REA Group’s traffic lead.

Furthermore, REA Group has consistently turned its traffic lead into a revenue-generating lead as well. Not only are its revenues exponentially higher than Domain Group, but it is growing them faster than the runner-up portal. 

REA Group’s Millions More Buyers turns out to be more than a slogan; it’s also a valuable service that advertisers are willing to pay a premium for -- significantly more than other advertising channels. There is a premium for advertising a property for sale on the country’s most popular platform.

Happy in Second Place

In 2018, News Corp CEO Robert Thomson, referring to realtor.com, said, "Obviously we’re in a competition, long term, to be number one..."

News Corp has been a major investor in Australia’s REA Group for two decades. More than most, it understands the power of network effects and how expensive and futile it can be to unseat a market-leading portal.

It’s unlikely that News Corp realistically expects to overtake Zillow in the U.S. Attempting to overtake Zillow would be incredibly expensive with an uncertain outcome, and the resulting marketing war would drain huge amounts of cash from both companies.

It’s a similar story in the U.K, with runner-up portal Zoopla’s CEO saying, “We want to be the portal of choice for agents and consumers.” It’s clearly an aspirational goal, but being the portal of choice is difficult when your competition has Millions More Buyers. And so far, over the past three years, Rightmove’s traffic dominance has remained intact.

Being the underdog and striving to overtake the market leader is a great story and good for morale, but it’s an unlikely business strategy.

Misplaced Motivation

Attempting to compete directly with a leading portal is at best expensive, and at worst futile.

The evidence suggests that it is nearly impossible for a runner-up portal to overtake the leader. In fact, there is no evidence that the all-important traffic leadership metric between the top two portals can be budged even a small amount.

Which begs the question: Why are upstart portals attempting to displace leading portals? OnTheMarket launched in 2015 to challenge the duopoly of Rightmove and Zoopla in the U.K. It was founded by a broad consortium of traditional real estate agencies who didn’t appreciate the market and pricing power enjoyed by the existing portals. According to its CEO, it was founded to provide an “alternative search platform” for consumers.

When brokers banded together in the Hamptons to launch a portal to compete with Zillow, the rationale was to “create something that’s owned by the brokers." These organizations, with Millions Less Buyers, are launching portals that are good for themselves, not consumers.

Traffic Growth vs. Revenue Growth

Traffic leadership does not equate to revenue growth. Just because a top portal has a dominant traffic lead over its competition does not necessarily mean that portal can continue to grow its revenues.

Leaders like Zillow and Rightmove have experienced this firsthand. Although both portals retain strong traffic leadership positions, both are experiencing or have experienced a slowdown in residential advertising revenue growth.

Growth in Zillow’s Premier Agent business slowed significantly in late 2018 and 2019, while Rightmove is experiencing a continued slowdown in its Agency listing business.

Network effects lead to insurmountable traffic leads for the top real estate portals, but don’t guarantee unchecked revenue growth. To grow, portals still need to provide new, value-added services to customers, and not simply raise prices.

Millions More Buyers

Late in 2019 I sold my house in New Zealand and experienced firsthand the value of Millions More Buyers. The country’s leading property portal, Trade Me, delivered over 10 times the clicks to my property listing than the runner-up portal — 3,100 vs. 300 (read my full analysis).

Attempts to compete directly with the leading portals — from both upstarts and financially strong runner-up portals — have met with limited success. Having deep pockets and a better or differentiated product makes little difference. The ultimate competitive advantage — powered by network effects — is Millions More Buyers. And it turns out that’s what consumers care about most.

Download this strategic analysis as a lovely, nine-page PDF.

The Zillow Revenue Growth Fallacy

Conventional wisdom is that revenue growth is good, and is an important benchmark to measure a company’s success. But total revenue and revenue growth are misleading metrics for iBuying; they’re simply a proxy for how much capital the company has available to purchase houses. 

To increase revenue, Uber needs people to request rides, Airbnb needs travelers to book stays, and Netflix needs consumers to subscribe. iBuyers simply need to buy more houses, and the more houses they buy, the more houses they sell. 

It takes no great skill to enter a market with a lot of money and start buying houses. But it takes a great deal of skill to resell those houses and generate a profit.

Zillow is currently losing money on each house it buys and resells. Overall losses in its Homes segment (Zillow Offers) are mounting: a $100 million net loss in Q4 2019, and a $312 million net loss in 2019.

Looking at the unit economics of each home, which includes the purchase price, sale price, agent commissions, interest expense, holding and renovation costs, Zillow lost over $6,000 per home it purchased and resold. That number has fluctuated over the year, but is rising.

(What's driving the loss? Since Q1, the average holding cost per home is up $1,000 and the average interest expense per home is up $1,000 -- both signs that it's taking longer to resell homes.)

After all business expenses are factored in: sales and marketing, technology development, employee salaries, office space -- everything -- Zillow is losing $56,000 for each home it purchases and resells.

Zillow’s entry into the iBuyer market is still in the early stages. The fact that the business is unprofitable should come as no surprise. The hope -- and it is really just hope at this stage -- is that profitability will come with scale and adjacent revenue streams like title insurance and mortgage.

What’s unclear is not Zillow’s strategy nor rationale for being an iBuyer. Rather, it is why Wall Street, or any other investor or media outlet, is rewarding Zillow for “beating” its revenue guidance. Not only is Zillow able to generate revenue at will by buying more houses, it loses more money with each house it buys. In effect, Zillow is being rewarded for losing more money than originally planned.

The Real Story: Premier Agent Growth

What Zillow should be rewarded for is bringing its Premier Agent Program back to growth. After a precipitous decline in 2018 and all growth grinding to a halt earlier this year, the program is back to growth mode -- albeit small. 

Time will tell if Premier Agent growth will continue as Zillow continues to roll out its flex program, but the early signs are encouraging.

Choose Your Data Carefully

Zillow is investing heavily to grow a new business line, and its ability to sustain losses is reflective of how big it sees the opportunity. My hope -- and it is really just hope at this stage -- is that more sophisticated industry observers will stop putting so much emphasis on pure revenue growth as a metric for success.

A Real Estate Portal's Path to Market Power (A Zillow Case Study)

Zillow’s drive to dominance in the greater New York City real estate market — via rental listings on StreetEasy and its hyper-local Hamptons portal Out East — reveals the path to market power of real estate portals around the world.

The Path to Market Power

All real estate portals follow a simple formula for national domination: acquire listings, build consumer traffic, and monetize. Comparatively, the first step is easy, the second hard, and the third inevitable.

Building a huge consumer audience and achieving traffic dominance — which can take a decade — is the critical step. After that step comes power: The power to monetize, the power to push out competition, and the power to force adoption of your platform by recalcitrant customers.

(Upstart portals, such as OnTheMarket in the U.K. and Bomero in Sweden, don’t seem to fully recognize the difficulty of building traffic dominance — frequently believing that “if you build it, they will come.” The importance of acquiring listings is overstated while that of building traffic understated.)

Battleground New York

Zillow acquired StreetEasy, New York City's leading real estate portal, in 2013. Four years later, it announced it would begin charging for rental listings: $3 per listing per day. The rationale was that it would enable StreetEasy to "continue to fuel innovation, technology and resources to support a robust rental marketplace,” but it was also the inevitable outcome of achieving listing and traffic dominance in the market.

The pricing change caused a drop in listings — by some accounts, more than half — but StreetEasy still had the most listings and, more importantly, traffic dominance. This dominance allowed StreetEasy to announce a fee increase of 50 percent to $4.50 per listing per day in 2018. And again a year later, in 2019, StreetEasy announced a fee increase to $6 per listing per day.

There’s a fantastic, self-correcting system at play here — call it a free market — where the platform keeps increasing its prices and its customers keep paying, as long as there’s a positive return on investment. While price rises never feel good, it's hard to argue with, or effectively replace, the advertising reach a portal provides.

Monetization Strategies

Real estate portals around the world employ differing monetization strategies. Outside of the U.S., portals act as the de facto multiple listing service (a national database of all properties for sale) and monetize on a pay per listing basis. Within the U.S., Zillow has adopted both pay per listing (StreetEasy rentals) and, where a multiple listing service is already in place, pay per lead (Premier Agent).

Both strategies have their advantages. In some countries, the average revenue per listing can be thousands of dollars, while the price of a lead can range between $50-$100. The U.S. portals, Zillow and realtor.com, are pushing out a new, success-based fee structure in favor of pay per lead (read my analysis here).

Out East

While the battle for rental listings is well-advanced in New York City, the struggle is at an earlier stage for Zillow’s hyper-local portal in the Hamptons, Out East. Launched in 2018, Out East is in the early stages in the path to market power: acquiring listings and building traffic.

A group of local brokers launched a competing portal, HamptonsRE.com, to challenge the dominance of Zillow and Out East. While not seriously threatened (HamptonsRE.com only has 1,800 listings vs. 2,500 at Out East), it is a critical time in the path to market dominance.

Zillow’s recent decision to move from a pay per listing subscription to a free model for agents is a step backwards in its monetization journey. But it is only a tactical retreat designed to give Zillow a long-term, strategic advantage. Any by allowing agents to post new listings directly — for free — Zillow's move effectively circumvents the brokerages and handicaps their portal.

Key Takeaways

Viewed through a strategic lens, the moves and countermoves in the New York market highlight a number of key takeaways:

• Traffic is king. Once traffic dominance is achieved, there’s really no stopping a portal from moving down the monetization path at will.

• Play the long game. In the Hamptons, Zillow’s power gives it the ability to turn off an existing revenue stream in order to solidify its market position for the long term, with the inevitable monetization coming later.

• Consumer first. An interesting observation: when brokers band together to launch a competing portal, they rarely talk about the consumer. To wit: "The impetus for the site was to create something that’s owned by the brokers." These are companies launching products that are good for themselves, not consumers.

Property Portal Pricing Is Irrational (A Case Study)

I’m selling my house in New Zealand. As part of the process, I'm advertising the property on the major property portals as well as Facebook and Google. It's a perfect opportunity to evaluate the pricing and performance of the various advertising channels, and reveal -- in a real world scenario -- how irrational the system can be.

Background

In New Zealand there is no MLS system that has all properties for sale. That job falls to the real estate portals, and the business model of those portals is pay-to-list. New Zealand (in addition to Australia) is also a vendor-funded marketplace, meaning the homeowner pays the advertising costs, not the real estate agent. And for this transaction, I'm using a Tall Poppy real estate agent, the company where I’m an independent director.

Cost per Channel

When listing my house, I was presented with several advertising options. Trade Me (where I used to work) is the leading real estate portal and realestate.co.nz is the #2 portal. Facebook and the Google Display Network (GDN) are alternative advertising options, and in the world of real estate portal strategy, I’m curious to evaluate their effectiveness (i.e. are they truly competition to the portals?).

There is a significant cost difference between the #1 and #2 portal; Trade Me is over five times more expensive, but is it five times as effective?

Clicks to Listing

The easiest measure of advertising effectiveness are clicks to the property listing. In this case, as is the case with many real estate portals around the world, the top portal is absolutely dominant. At the time of analysis, Trade Me generated over 10 times the clicks to my property listing than the runner-up portal -- 3,100 vs. 300.

(It's worth noting that the Tall Poppy web site generated more clicks for my listing than the #2 portal, reinforcing the continued importance of a real estate agent's web presence to advertising listings.)

Cost per Click

To measure the overall cost effectiveness of the advertising options we review the cost per click.

Trade Me, the top portal, is not only the most effective but also the most cost effective -- by a wide margin. While Trade Me is over ten times more effective than the runner-up portal, it is only 5.5 times more expensive.

Assigning a value per click of $0.30 (the blended average), Trade Me delivered $936 of value for $549, while the runner-up portal only delivered $89 of value for $99 -- a negative return on investment.

It turns out that Facebook is a legitimate advertising channel, but it doesn’t come close to replacing the portals as the primary advertising channel -- in terms of clicks and cost effectiveness. GDN is simply not cost effective.

Findings

Real estate, and real estate advertising, is a non-rational system. Decisions are made based on emotions, not facts. And this transfers to the world of real estate portals and pricing strategies.

A portal's pricing doesn’t always align with its effectiveness. There are more systems at play that influence -- and restrict -- a portal’s pricing strategy, namely the risk of alienating customers by aggressively raising fees, and pressure from competitors.

For the time being, the top portal in each market -- Zillow, Rightmove, REA Group, ImmoScout, Trade Me -- commands a dominant position. Being the place where "everyone goes to search for property," even with alternate options, most often yields exponentially more effective results than the competition.