Observations on the U.S. Market Recovery

The U.S. real estate market is in the midst of a recovery. Important lead indicators are up from their lows of the past several months, and nearly every graph is moving up and to the right. But a high-level snapshot does not paint an accurate picture; a deeper look reveals the varied nature of the recovery rollercoaster.

A National Look

Redfin does an excellent job of presenting an up-to-date and accurate picture of the U.S. market. Starting at the top of the funnel -- new listings -- the recovery is clearly visible. New listings coming to market are swiftly rising, and are currently down only 18 percent compared to the same time last year (and yes, it looks like a checkmark).

Pending home sales took a big hit in April and May, but are recovering just as quickly as new listings, a sign of strong buyer demand (likely driven by low mortgage rates). Pending sales are nearly at the same level they were last year.

Home sales lag all other indicators -- it can take one to three months between a new listing coming to market and a home being sold. Transaction volumes will recover, but it may take many months.

National data paints a straightforward, if over-simplistic, picture of a real estate market in recovery. A market-by-market analysis shows the varied nature of recovery.

Market-Specific Analysis

There are many different markets in the U.S., and each is recovering differently. Utilizing my Real Estate Market Tracker (which is an interactive tool; give it a spin), it's clear that all markets are seeing an uptick in pending sales, but at different rates.

Looking at the data on a year over year basis reveals an interesting trend: Half the markets surveyed are up compared to last year, while half are down significantly.

For example: Pending home sales in Austin and Tampa are up 30–40 percent after a quick recovery, reflecting very strong buyer demand. In the major coastal cities like L.A. and NYC, pending sales are still down 30–60 percent compared to last year.

The picture of recovery in King County, Washington (Seattle) is common in many markets: Gradual. New listings coming to market, which were down 50 percent in March, have slowly increased over the span of three months, and are still not at historical levels.

New York City saw the most severe drop in new listings -- down 85 percent -- and is finally seeing an uptick (call it a surge?) in new listing volumes after three months of real estate lockdown.

But the big question for NYC is: What happens to the missing three months of new listings? It's a massive volume. Will they come to market now, over the next few months, or will it remain a giant hole in 2020 transaction volumes?

The Key Takeaway

Looking at only the national numbers paints an over-simplified version of the U.S. market recovery. It looks like a smooth, predictable rollercoaster that has gone down and is steadily heading back up. In reality, there are ten thousand different rollercoasters moving independently of each other, all at different speeds and at different points on different tracks. Not all markets will recover the same.

---

If you enjoy data as much as I do, give the Real Estate Market Tracker a spin. Compare any number of markets in the U.S. I also highly recommend visiting Redfin's Data Center and Zillow’s Weekly Market Report for national and market-specific data.

The Real Estate Market Tracker

iBuyers Turning Into Brokers Turning Into iBuyers

The biggest evolution of the iBuyer business model in four years quietly occurred last week: Opendoor and Offerpad launched traditional brokerage listing services. Both companies will now list homes directly, alongside their core instant offer business, underlining the growing convergence of iBuyers and the traditional industry.

The Value of Seller Leads

One of the biggest opportunities in iBuying is monetizing seller leads (consumers that request an offer but don’t sell to an iBuyer). At scale, converting even a portion of these high-intent leads to a traditional listing could be a billion dollar opportunity.

iBuyers only buy a small fraction of homes from consumers that request offers. In 2019, Zillow bought 6,500 houses of the 264,000 consumers that requested an instant offer (about 2.5 percent). The remaining 257,000 homeowners didn’t sell to Zillow, but many -- upwards of 40 percent -- eventually sold via a traditional listing.

Historically, iBuyers have struggled with converting seller leads. Zillow farms these leads out to its Premier Agent network, and Opendoor has a network of Partner Agents.

It’s a difficult process. Connecting consumers who are interested in an instant sale to a real estate agent feels like a bait-and-switch, and because the partner agents are independent contractors, there’s an inconsistent experience and misaligned incentives.

Launching a listing service is an effort to make a sale on every consumer that enters the funnel. It moves from a “take it or leave it” product choice to presenting consumers the illusion of choice (would you like the instant offer or the traditional sale?), a common sales tactic to increase conversion.

The Lines Between Traditional and Disruptor Are Blurring

It’s not just iBuyers that have evolved their business models. Traditional brokerages are adopting new, disruptive models, and making them their own.

Traditional agents and brokers are providing instant offers and “buy before you sell” services alongside their listing services, utilizing start-ups like zavvie and Homeward. A growing list of brokers have raised capital and have launched their own iBuyer programs -- Lamacchia Realty, Matt Curtis Real Estate, and 8z Real Estate -- while industry behemoths have launched programs like Keller Offers, Redfin Now, and Realogy’s RealSure.

Over time, by adding these new tools to their toolboxes, traditional agents are slowly turning into iBuyers themselves -- or at least offering their full range of services. New ideas are not the exclusive domain of start-ups and disruptors; the best ideas are being co-opted by the traditional industry.

Strategic Implications

With this move, Opendoor and Offerpad have achieved feature parity with traditional brokerages. They are no longer an option to be considered as an alternative to a traditional listing; they’re a complete solution for any homeowner.

Both Offerpad and Opendoor are acting as their own listing agents, utilizing salaried employees to list and sell homes (exactly how they currently sell thousands of homes purchased from consumers). In some markets, Opendoor is also using partner agents for this new service.

The tendency of disruptors to utilize internal, salaried agent employees is noteworthy. Employees offer a consistent, controlled experience, which yields higher conversion rates for converting seller leads and ancillary services (which is why Redfin’s agent productivity is exponentially higher than the industry average, and why fixed-fee brokerage Homie has an 85+ percent attach rate on its mortgage product).

Ultimately, this new service -- which is in the early stages and not fully rolled out -- represents a way for iBuyers to make money without having to actually buy houses. After four years and billions of dollars invested into iBuying, it’s a significant adjustment to the core business model.

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.

Research Study: Measuring Compass’ Agent Productivity

It’s not easy to measure agent productivity. There’s no magic number to compare one agent against another, nor measure one brokerage against another. True agent productivity -- selling more houses, for more money, faster than the competition -- is multi-dimensional and nuanced, influenced by technology, the market, and brokerage operating models.

Compass has invested tens of millions of dollars into technology over the years and has claimed its agents are more productive than its peers, in no small part to its technology platform. “One of Compass’ competitive advantages is that every employee has a singular focus on agent productivity,” its CEO told Barron’s in 2018, while later claiming agents saw a 25 percent boost in transactions in their first year.

Using four methods of analysis, this research study aims to provide a deeper look at Compass’ agent productivity compared to its industry peers.

Research note: This analysis utilizes data from the REAL Trends 500, which ranks the largest real estate brokerage firms in the U.S. by sales volume and transaction count, in addition to my own independent research. To be fair to Compass and account for its massive growth during 2019 (8,000 to 15,000 agents), this analysis uses a midpoint agent count (11,500) for all 2019 calculations.

Defining Productivity

Agent productivity is a function of two inputs -- the number of transactions closed and the average home price -- which produces an agent’s sales volume (the total value of homes sold in a year).

Average home price is a variable that’s difficult to change, and is highly dependent on the market. The number of transactions per agent is a result of many factors; one would expect efficiency gains made through technology to show up here. To measure productivity, we must look not only at sales volume, but the number of transactions an agent closes.

Method #1: Production

The most commonly accepted method of evaluating -- and comparing -- the relative productivity of real estate agents is sales volume: the total value of homes sold during a period of time. This metric, called production, translates directly to income, paid as commissions. The more revenue an agent generates, the more productive they are.

The following chart looks at the 20 largest U.S. brokerages by total sales volume during 2019, ranked in order of average sales volume per agent. On a per agent basis, Compass ranks near the top for average agent production.

Evaluating agent productivity based on sales volume provides a broad basis for comparison, but misses several nuances. As outlined above, total sales volume is heavily influenced by the type of market an agent operates in. Agents operating in a luxury market can sell fewer houses and achieve a high sales volume.

Sales volume per agent is a great metric to track how much revenue an agent generates -- and arguably what a brokerage cares about most -- but it doesn’t fully capture the efficiency nor productivity of an agent. Those factors, which can be enhanced by technology or a unique operating model, requires deeper analysis.

Method #2: Transactions

The number of transactions an agent closes in a year is another measure of agent productivity. One could argue that a more efficient agent -- supported by technology -- would be able to close more deals, faster.

The following chart looks at the 20 largest U.S. brokerages based on total transaction count, ranked by the average number of transactions closed per agent. Redfin, with a unique operating model employing salaried agents, is the clear outlier. Compass is in the middle of the pack with an average of 7.4 transactions closed per agent in 2019.

Benchmarking Compass against the average number of transactions closed per agent at the 20 largest brokerages, the 20 largest brokerages excluding Redfin, the four largest brokerages, and the two largest brokerages, shows Compass agents slightly below average.

Simply looking at transaction counts fails to account for the relative price points of homes in different markets. While an agent in a high-end market may close less transactions, it may be a result of higher priced homes that take longer to sell, rather than overall efficiency.

Plotting both the average number of transactions and the average sales volume per agent again reveals Redfin as the outlier, while Compass is clustered with its high-end peers.

Compass agents clearly produce a high sales volume, but overall efficiency as measured by transactions per agent reveals Compass agents to be slightly lower than the industry average.

Method #3: High-End Peers

The average sales volume per agent is heavily influenced by average home prices. High-end agents, doing fewer transactions each year, have a disproportionately higher sales volume due to high home prices. This makes it difficult to compare productivity at a high-end brokerage like Compass, with an average home price of $1.1 million, to a mid-market brokerage like Howard Hanna, with an average home price of $225,000.

One method to solve for this is to “freeze” the average home price in our equation, by only comparing Compass to its high-end peers. The following brokerages have average home prices similar to Compass, +/- $200k in value.

The average sales volume per agent at these five brokerages shows Compass in the middle of the pack in terms of agent productivity. On average, Compass agents are neither more nor less productive than their up-market peers.

Looking at the other measure of efficiency, the average number of transactions per agent, similarly reveals Compass to be in the middle of the pack. On a per transaction basis, compared to its high-end peers, Compass agents are on average...average; neither higher- nor lower-performing.

Method #4: Itself

Ultimately, perhaps the best peer comparison for Compass is itself. If “every employee has a singular focus on agent productivity,” one would assume improvements being made over time.

Between 2018 and 2019, the average sales volume per agent (using the same midpoint agent count calculations for each year) at Compass declined, from $9.1 million to $7.9 million.

Was Compass alone with dropping sales volumes per agent? The evidence suggests it (almost) was, with three out of its four high-end peers increasing their average sales volumes per agent during the same period.

Summary of Evidence

It’s undeniable that Compass agents have a high average sales volume; more than twice that of industry behemoths Realogy and HomeServices of America. But it begs the $6.4 billion dollar question: is it because of the agent, or because of Compass.

There’s no easy answer when the question is agent productivity. The evidence above -- coming from four different angles, and using all available information -- suggests the following:

• Compared to the industry average, Compass agents generate a high sales volume.

• The high sales volume is driven by high home prices, rather than agent efficiency.

• Agent efficiency and productivity improvements, as a result of a sizable technology investment, have yet to materially manifest themselves.

Timing is a final, important consideration. As I outlined in an earlier analysis, The Three Eras of Compass, it was not until 2019 that the company’s technology investment truly matched its rhetoric. Unrivaled technology investment to boost agent efficiency has been a key component of the Compass narrative and an important recruiting tool, but — through the end of 2019 — remains an aspiration rather than a clearly demonstrable reality.

Introducing the U.S. Real Estate Market Tracker

New analysis shows a significant decline in new listing volumes across all major U.S. markets, but at vastly different rates and timing. Major metros like Los Angeles, New York City, and Chicago were affected the earliest, while Denver and Phoenix didn't experience a significant decline until 15-20 days later.

The drop in new listings varies widely between 40 and 80 percent. New York, Pennsylvania, and Michigan have been the hardest hit markets, which is a reflection of more stringent lockdown measures. 

Possible recovery appears to begin after 30-35 days of decline as homeowners begin listing their homes on the market again. San Francisco, Los Angeles, and Seattle have all recovered from their lows. However, many markets are still at the bottom of the curve, and some, like Phoenix and Denver, may not yet have hit the bottom.

The speed of decline varies across markets. Listing volumes dropped twice as fast during the first ten days in New York City, Philadelphia, and San Francisco, compared to a more gradual decline in Dallas, Phoenix, and Atlanta.

Spotlight on iBuyer Markets

The country’s major iBuyers -- Opendoor, Zillow, Offerpad, and Redfin -- do most of their business in Phoenix, Atlanta, Dallas, and Houston. Like the rest of the country, those markets have seen significant drops in new listing activity, down between 40 and 50 percent.

Houston and Dallas appear to have hit bottom; both markets have been at their lows for about a week. However, Phoenix and Atlanta are too early to call. They may be at their lows, or there may be a further decline in listing volumes ahead.

All four markets have yet to see signs of recovery. New listings are still coming to market, and while a 50 percent drop in activity is significant, it’s not as severe as other national markets like New York City and Philadelphia.

Spotlight on Compass Markets

Compass operates in large metro areas, which have been the hardest hit. Compass’ biggest market and the nation’s worst hit market are the same -- New York City -- with a year-on-year drop in new listing volumes of over 80 percent.

All of Compass’ biggest markets have been hit hard, but the good news is that they all appear to have bottomed out. It’s unlikely to get worse, and it’s possible that early recovery may have begun in Washington, D.C. and San Francisco.

Compass’ revenue is a function of the number of new listings its agents secure and then sell. Given its market concentration in some of the hardest hit national markets, it appears likely that Compass will see a disproportionately higher revenue hit than other national brokerages.

The Real Estate Market Tracker

These charts are all from a new interactive tool that I’ve launched, the Real Estate Market Tracker. Thanks to my friends at Tryolabs for help developing it, and to Redfin for access to national market data. Give it a try and let me know what you think!

U.S. Markets Suggest Checkmark-Shaped Real Estate Recovery

Past analysis has shown that the Covid-19 pandemic and associated lockdowns will cause a significant dip in real estate activity. The latest U.S market data shines a light on what the dip and recovery will look like -- a checkmark shape -- with an immediate drop, 3-4 weeks at the bottom, and a slow recovery period.

Recovery in the Front Line Markets

The effects of the dip are clearest in early-hit markets like Seattle in King County. It took approximately one week to hit the bottom, with another two weeks at the bottom before a rebound began. As expected, new listings are down 50 percent for the month compared to 2019, with a slow, 20 percent recovery each week.

It is a similar story in California’s East Bay market. Once shelter in place orders were issued, it took only one week to hit the bottom. The dip lasted 2-3 weeks before a rebound in activity began. Like Seattle, the recovery is slow and gradual, with new listing volumes still down 50 percent from the previous year.

Dropping Activity in Secondary Markets

Markets like Austin and Portland experienced a different dip in activity. These cities were not on the “front lines” of the pandemic outbreak, and shelter in place orders followed behind the first hit metros like NYC, San Francisco, and Seattle.

Austin wasn’t hit with an extreme weekly decline of new listings, like Seattle and the Bay Area, but experienced the absence of an expected seasonal increase in activity. The result is 31 percent fewer new listings over the past four weeks compared to the same period last year. The nature of the dip is different from other markets, but the timing is similar: a week to get to the bottom, and 3-4 weeks at the bottom (so far).

Activity in Portland is similar. There is a noticeable weekly decline in new listings, coupled with a lack of seasonal growth. As with the other markets, it took about a week to get to the bottom of the dip, with 3-4 weeks at the bottom. New listings over the past four weeks are down 38 percent from the same period last year.

The New York City real estate market (specifically Manhattan, Queens, and Brooklyn) was especially hard hit. While the dip to the bottom occured in about a week, activity has remained bottomed-out for five weeks and counting, with no recovery in activity.

A Checkmark-Shaped Recovery

The dip occurs quickly. It only takes one week, maybe two, to hit the bottom of the curve in new listing volumes. The good news is that if you’re in a market that has seen a drop in new listing volumes, the first few weeks are as bad as it should get.

The stay on the bottom of the curve isn’t long. Most markets begin to see a recovery after 3-4 weeks. The exception occurs in markets like New York City that have more restrictive shelter in place orders.

Given the staggered timing of the pandemic, some cities are ahead of others in their recovery. This gives us a glimpse of what is likely to come. Please remember: Not all markets are equal, and the severity of the drop will vary wildly between them.

The recovery is not immediate; it is a slow, incremental recovery of 20-30 percent each week. It is too early to know for sure, but recovery to 2019 levels could take anywhere from 8-16 weeks. Markets in recovery mode are still down 30-50 percent from 2019 levels.

Rather than a V- or U-shaped recovery, the current evidence supports more of a checkmark-shape. It begins with a severe, immediate drop, lasts 3-4 weeks, and is followed by a gradual recovery.

Opendoor: Down, But Not Out

This week Opendoor announced it was laying off 35 percent of its workforce, or around 600 people. The move, designed to give Opendoor more runway, increases its chances of survival, but comes at a competitive cost -- and is far from the largest layoff the industry will see in 2020.

A Tactical Retreat is Not a Defeat

The biggest mistake anyone can make is confusing this move with the failure of the iBuyer business model. Pausing new home purchases, controlling costs, and reducing headcount are all sensible strategies in the current environment. Common advice to business leaders during uncertain situations is simple: conserve cash.

The strategies taken by iBuyers are signs of a smart business trying to survive a market downturn. Blindly pushing ahead, regardless of a rapidly changing environment, is not a smart strategy. And a tactical retreat to reassess the situation and reallocate resources is not a defeat.

The Biggest Layoffs Have Yet to Come

Massive layoffs are occurring across the real estate industry. The ones that involve full time employees generate press: Opendoor, Redfin, and Compass. But those pale in comparison to the largest “workforce reduction” that will occur in slow-motion over the next six months -- real estate agents.

Real estate agents are independent contractors that work for themselves. They don’t issue a press release when they’re out of work; they simply disappear from the workforce.

In 2019, there were about 1.3 million real estate agents in the U.S., supported by about $70 billion in commissions (that’s $54,000 per agent). If the total number of transactions in 2020 drops as expected -- perhaps up to 50 percent -- there’s $35 billion less in commissions to support those agents. During the financial crisis of 2008, the industry lost about 25 percent -- or 300,000 -- active agents.

Just because Opendoor, Redfin, and Compass are announcing layoffs is not a repudiation of their business models; it’s a reflection of their employment models. Layoffs will hit the traditional industry just as hard; it just won’t be in a press release.

Deep Pockets Win

While Opendoor claims it is well capitalized and in a healthy financial position, it’s not in a healthy enough position to completely avoid layoffs (as is the case with arch-competitor Zillow, which outlined cost-cutting measures that didn't include layoffs). 

Opendoor’s move buys it time to weather the storm, but at the expense of weakening the business. Saying goodbye to 35 percent of a well-oiled team puts it at an executional disadvantage to pre-covid Opendoor. And to Zillow.

In my Inman presentation from February 2019, I said that companies with deep pockets will win. Opendoor’s deep pockets allow it to weather the current storm and remain intact (albeit smaller). Zillow’s deeper pockets allow it to weather the storm and keep the team together, giving it a potential advantage in the coming recovery.

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.

Survival of the Fittest: The Real Estate Pandemic Survival Guide

My recent presentations usually start with this message: The industry is moving slowly, but it’s never moved this fast. That has never been more true than today.

International and historical data shows that as the pandemic spreads and more stringent lockdown measures are put in place, the volume of real estate transactions will drop significantly -- up to 90 percent. While the drop is temporary, only the most agile and resilient businesses will survive.

Transaction Volumes Will Drop

The available data from China, South Korea, and Italy shows that the current pandemic will likely cause a temporary, but dramatic, drop in overall real estate transactions.

The following chart shows property transactions in China during the early stages of the outbreak. Transactions dropped significantly -- nearly 100 percent -- during a number of weeks during the crisis, and are now growing again (but still down over 50 percent from last year).

There are similar results in Italy, with a top portal telling me that they expect transaction volumes to be down 20–40 percent in February and 70–90 percent in March. Another source cites that visits to apartments for sale in early March were down more than 50 percent compared to a year ago.

In South Korea, national deal volume was down 80 percent in the first nine days of March, and down 90 percent in the nation’s capital of Seoul.

Zillow’s recent research on pandemics shows a similar trend from Hong Kong during the SARS outbreak in 2003: Transaction volumes fell by 33-72% as customers avoided human contact (“avoidance behavior” like avoiding travel, restaurants, and public gatherings). After the epidemic was over, transactions snapped back to normal.

The drop in transactions is immediate and severe, but appears to be temporary. The data suggests that it may take up to six months (or more) for transaction volumes to return to normal levels.

Virtual Tours Won’t Save Your Business

It’s likely that we’ll see plummeting transaction volumes in other international markets as the pandemic spreads. There will be more than a predisposition for social distancing; it will be a temporary halt to a large portion of the real estate market (as evidenced by the data above).

Virtual tours won’t stop the decline; they are no replacement for an actual in-home visit. If transaction volumes drop by 80 percent or more -- driven by market uncertainty, quarantines, travel restrictions, and shelter in place orders -- no amount of virtual tours or clever online outreach will make up for that decline.

Long Term Consumer Behavior Changes

The pandemic may very well leave behind a number of long-lasting changes that impact the world of real estate in its recovery.

Social distancing may lead to the accelerated adoption of services that facilitate streamlined real estate transactions. Once more consumers experience the benefits of selling a home without dozens of open home visitors, iBuyers may see increased adoption. Once home buyers experience a closing with an online notary, more will expect it next time.

New products and services, including iBuying, online notaries, and virtual tours may become a new customer requirement in a world of increased social distancing. It’s an evolution of consumer needs, not a solution to a pandemic. And those individuals and firms that best meet changing consumer needs generally win.

Survival of the Fittest

Using the data above as a reference, it appears likely that the current pandemic will cause a significant drop in transaction volumes for a period of time, after which activity will resume and approach normal -- but only after many months.

The most important strategy for businesses and agents alike becomes quite simple: make sure you’re around for the rebound.

It’s nearly impossible to pivot to a new businesses model during an economy-shuttering pandemic. Virtual tours won’t save your business when transaction volumes drop 80 percent. The alternative strategy is to weather the storm -- cryogenically freeze yourself -- ready to emerge when the recovery begins.

All real estate businesses will be moving quickly to adapt to the changing environment. It’s those that are able to move the fastest, adapt gracefully, and have the strongest foundation and balance sheet (survival of the richest) that will survive and thrive in the recovery.

The Real Estate Pandemic Survival Guide

With the evidence and hypothesis outlined above, I conclude with the following Real Estate Pandemic Survival Guide.

Step 1: Be Around for the Recovery. There is a temporary period of pain to get through. You must survive. Lower your expenses and conserve cash to give yourself the longest runway possible. Virtual tours won’t save your business.

Step 2: There is No Step 2. Survival is everything.

---

The industry -- and the world -- is moving incredibly fast, and I find it difficult to keep up with all of the changes.

Like many of you, I'm working outside of my comfort zone (and in my house surrounded by my family). I have less time to collect data, analyze evidence, and present thoughtful insights -- and I'm doing my best.

I am prioritizing releasing new data and insights as quickly as possible, to help guide us all through these uncertain times. Expect more in the weeks and months ahead.

iBuyers Pause Purchases During Pandemic

The world moves fast. In the past 24 hours, both Opendoor and Redfin announced a temporary halt to their home buying operations.

Pausing Home Purchases

The current pandemic is truly a Black Swan event, and more significant and complex than a housing market correction. The iBuyer model was designed with counter-measures to counteract a correction, including raising fees, slowing purchases, and anticipating a slowdown before it hit.

The current situation is more extreme and uncertain. There are extensive public health considerations at play and varying degrees of lockdown and shelter in place orders, which may make all real estate transactions untenable for a period of time.

Redfin pausing its home buying activity is notable, but not nearly as big of a deal as Opendoor’s announcement. Redfin has many other sources of revenue; Opendoor does not. Opendoor was purchasing about 40 times the number of homes as Redfin.

While iBuying has certain advantages in a world of social distancing, those advantages don’t carry over to a pandemic or mass quarantine.

A Temporary Drop in Transactions

The data available shows that the current pandemic will likely cause a temporary, but dramatic, drop in overall real estate transactions.

The following two charts show property transactions in China during the early stages of the pandemic. Transactions dropped significantly -- 80 to 90 percent -- during a number of weeks during the crisis, but are now growing again.

Zillow’s recent research on pandemics shows a similar trend from Hong Kong during the SARS outbreak in 2003: Transaction volumes fell by 33-72% as customers avoided human contact (“avoidance behavior” like avoiding travel, restaurants, and public gatherings). After the epidemic was over, transactions snapped back to normal. 

The drop in transactions is immediate and severe, but appears to be temporary.

Opendoor's Glide Slope

By temporarily pausing the purchase of homes, Opendoor has shut off its only source of revenue; there’s no iBuying without buying. The effect is akin to an airliner losing both engines while in flight.

With no revenue -- Opendoor’s engines -- the company will glide until it either manages to once again generate revenue, or it runs out of money. Opendoor is not alone in this predicament; many businesses across a number of industries face the same challenge.

Opendoor won’t sit still. There are many smart people at the organization that are likely working around the clock to pivot, adjust, and invent new ways of doing business in this rapidly changing environment. When you have a business with over 1,000 employees on the payroll, waiting and hoping isn’t an option.

Unintended Advantages: iBuying in a World of Social Distancing

It’s unlikely a global pandemic is what Opendoor and Zillow had in mind when they launched iBuyer businesses. The core benefits of the model -- speed and certainty -- were meant to improve upon a notoriously long and sometimes painful process. But the iBuyer business model is uniquely positioned to thrive in a world of social distancing, where people are putting a premium on the ability to conduct business while limiting direct human contact.

Unintended Advantages

While iBuying launched with specific consumer benefits in mind, it’s becoming evident that the model has several unintended advantages in a world of social distancing. At its core, the model allows consumers to sell and buy homes with limited human interaction -- a fact that had niche appeal in a normal market, but may become more popular in today’s uncertain market.

Today, those advantages include:

• No Open Homes: Homeowners have the advantage of selling their homes directly to an iBuyer, without needing to hold open homes with dozens of people walking through their house.

• Self-Guided Home Tours: Prospective home buyers can tour homes owned by iBuyers on their own, without an agent present, and outside of a crowded open home.

• No In-House Repairs: Selling to an iBuyer removes the necessity of homeowners having external contractors in a house to conduct pre-sale repairs.

Most importantly, selling a home to an iBuyer provides certainty in a time of uncertainty -- and we are definitely in a time of uncertainty. The advantage of selling a home instantly has never been demonstrated in a more dramatic fashion.

Tracking Fee Changes

Since the day Opendoor launched in 2014, people have wondered how the model fares in a down market. One argument in favor of the iBuying model is that in times of uncertainty, consumers would be willing to pay a higher fee for the certainty that an iBuyer provides.

The data is still coming in, but a quick sample of several dozen iBuyer offers from last week (March 9–13) across 14 markets shows no change in the average fee charged to consumers.

It is likely a fee increase will come, to account for the higher risk and uncertainty in the market (iBuyers generally charge a higher fee when there is more market risk). But for the moment, fees remain low, likely in an effort to keep up purchase volumes so as not to exhaust inventory.

Declining Purchase Activity

In the weeks ahead it will be worth paying attention to overall iBuyer volumes.

There are already early signs of a slowdown in the Phoenix market, the birthplace and epicenter of iBuying. Whether driven by inventory shortages, global market uncertainty, or iBuyers mitigating their risk, significantly less homes are being bought each month in Phoenix.

Total iBuyer purchases in Phoenix for February are down 30 percent year-on-year; Zillow in particular is down 63 percent from the same time last year.

Compared to the previous month, January, purchase volumes are down from 368 to 315, or 14 percent. At the same time, iBuyer home inventories are at an all-time low: at current monthly sales rates, Opendoor has two months of inventory and Zillow just one month. The iBuyers are clearing their inventory quickly by selling almost two homes for each home they purchase.

Implications for iBuyers and the Industry

In the months ahead, I would expect iBuyers to react appropriately to a slowing and uncertain market:

• Raise fees to account for increased market risk and houses potentially taking longer to sell, driven by less overall consumer demand.

• Reduce inventory, by purchasing less homes each month (Phoenix as an example) and continuing to clear existing inventory with appropriate price reductions.

The current state of the market will finally shine a light on how the iBuyer business model reacts to slowing consumer demand. On the one hand, the iBuyer proposition becomes stronger for consumers looking for certainty and to limit direct human interaction. But on the other hand, iBuyers are at-risk in a market slowdown by holding hundreds or thousands of unoccupied homes on their balance sheets.

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 Three Eras of Compass

Compass is a disruptive force in real estate. I believe it to be the world’s most well-funded brokerage, with over $1.5 billion raised, and as a result, the world’s fastest growing brokerage with annual growth rates of 150 percent.

As the company navigates a large, complex industry, and attempts to find its own place in the world, its growth strategy has evolved. Looking back several years, the company has clearly gone through three distinct eras of growth.

Era 1: Agents (2018)

Compass’ first era -- 2018 -- is marked by an exponentially growing agent base after raising an unprecedented amount of venture capital.

The era kicked off in November and December of 2017, when Compass announced a massive $550 million capital raise. Subsequent to that, it announced an additional $400 million raise in September 2018. All told, Compass raised nearly $1 billion in venture capital in less than 12 months.

That venture capital fueled the growth of its agent count, which quadrupled from around 2,000 agents at the beginning of 2018 to 8,000 agents by the end of 2018. Compass also embarked on a brokerage shopping spree, acquiring 12 seperate brokerages during the year. Over 40 percent of Compass’ agent count growth, or 2,563 agents, came from those brokerage acquisitions.

Era 2: Tech (2019)

In the same way Compass’ first era was all about agents, its secord era was all about tech. Compass has always been a self-styled “tech-enabled” brokerage or “real estate tech company,” but it was not until 2019 that the company’s investment truly matched its rhetoric.

The era started in December 2018 with the hiring of a new CTO, Joseph Sirosh. Prior to Compass, Joseph was the CTO of AI at Microsoft. His hiring signaled Compass’ intent to move into the technology big leagues, and kickstarted an active 2019.

Compass wrote several large checks in 2019 when it acquired real estate CRM company Contactually in February and AI company Detectica in November. Both companies, with 21 and five tech employees respectively, bolstered the company's growing tech resources.

Compass’ tech team exploded (in a good way) during 2019, growing to a team size of 451 by the end of the year -- up 3.3 times from 138 at the start of the year. As a percentage of total full-time employees (FTE), tech staff increased from 10 percent to 22 percent, a significantly large portion of the company.

Compass also opened a pair of new engineering centers during its era of tech. In September it launched a new 21,000 square foot tech center in Seattle for up to 170 staff, right across the street from Amazon’s headquarters. And in November, it opened an Indian tech hub, with intent to hire up to 200 staff.

In September, Compass also unveiled a new website, the culmination of many months of work and a critical prerequisite to its long term ambition of building an end-to-end software platform for consumers and agents.

Era 3: Making it Work (2020)

Which leads us to Compass’ current era: Making it all work. For Compass, 2020 must surely be about delivering on past promises, and successfully evolving from a brokerage into a tech-enabled brokerage. The stakes couldn’t be higher: Compass must justify its massive $6.4 billion valuation, which only makes sense if the company can harness technology to deliver an exponentially superior consumer and agent experience -- with associated productivity gains and scaling efficiencies.

To date, Compass has yet to definitively deliver on its promise of agent efficiency. The seeds were planted in 2019 -- its era of tech -- with a new web site, the acquisition of Contactually, and a massive tech hiring spree. With fuel in the tank, all eyes are on execution for 2020.

CEO Robert Reffkin’s annual company letter perfectly sums up the company’s strategic intent: “In 2020, we are going to align the whole company around the singular goal of growing your business.” Growing the agent’s business means one thing: closing more transactions.

Closing more transactions comes down to higher efficiency and productivity, which can only be manifested through technology. To deliver on this promise, Compass must deliver more leads to its agents, while enabling them to close more deals with less work in a shorter period of time.

The foundations have been laid in 2018 and 2019. The key question is: Can Compass make it all come together in 2020?

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.