This week on The Walk Thru, Byron was joined by Keeping Current Matters President David Childers, Katie Day – the realist agent of Real Brokerage (“Move Me to Texas”) and Tim Macy, also of Real Brokerage but based in San Antonio.
The Broke Agent, who usually co-hosts this podcast, was absent due to his 57th wedding of the year.
Compass’ Cash Balance
Mike Del Prete wrote a blog on Compass Consulting Group: “Compass’ Cash Burn Problem.”
The graph below shows the steady decline of the company’s stock valuation and their cash balance.
Byron pointed out that, just looking at the real estate landscape, companies out there are in acquisition mode. He asked whether we should expect a brand like Compass or RedFin to be acquired – a la Elon coming in and taking over.
Katie Day believes there’s definitely a potential for that to happen. If they don’t have money coming in, or if they aren’t able to cut their expenses in some way, they may be ripe for the picking.
Byron quoted the DelPrete article on Compass approaching a critical juncture, where they’ll either need to raise more money or reduce expenses. He added that the brokerage model, given the amount of money they lose, is not sustainable.
David Childers believes we’re in the beginning of a shift from a white hot market into maybe just a hot market.
“Now they’re stuck in this spot where what they’re gonna have to do is raise fees… or decrease expenses or both. And right now, in brokerage… I think agents are gonna be looking for a better deal. That puts Compass in a really tough spot.”
Tim added that brokerage is a “continually decreasing market game,” agreeing with Byron’s earlier comment on its lack of sustainability.
Katie added that a lot of the average estate agents that don’t have long-term contracts with Compass are likely to leave if fees go up.
Byron does see a big acquisition coming. He wouldn’t change the Compass brand feel because it has a slickness to it that attracts agents.
But, from an operational standpoint, change might be in the cards.
Mortgage Rates in Decline
According to a CNBC article, weekly mortgage demand from homebuyers has dropped 12% – and is 15% lower than what it was a year ago – mainly due to higher interest rates.
David Childers pointed out that, the prior two weeks to this, applications were up. He sees a couple things happening: inflation (affecting every one of us) and rising interest rates starting to moderate the market. He stated two things we can expect are:
- Some hesitancy on the part of homebuyers
- This will moderate and slow the appreciation of homes
He also pointed out how what’s happening now is essentially the realization of what we’ve been praying for the last two years: less demand in the market and a slowed rate of appreciation.
Byron asked Katie what they’re doing at Real Brokerage to educate their agents, specifically those who are less familiar with the history of mortgage rates.
“We’ve been putting out as much as we can on interest rates, showing the rates from the ‘70s dropping down ‘til now. So, even though it has a little uptick, we’re still, in theory, in a better place than the 1970s as far as rates go.”
As for buyers, Real Brokerage is ensuring their agents are able to educate them on the history of mortgage rates to allay their fears.
“At the end of the day, people are buying based on their monthly payment. They want to know that that monthly payment is under… whatever they’re comfortable spending.”
Byron asked Tim Macy what he was doing to help build confidence in the current rate.
Tim sees a tough couple weeks ahead for agents, but, as the new buyers come in, sudden drops in financing ability will likely fade, and he hopes we’ll see more of a normal market.
Looking forward, Byron mentioned the whole new segment of buyers coming in the second half of this year – and next year – who won’t have that scar tissue of the last two years.
David addressed a shift he sees with more people opting for adjustable rate mortgages (ARMs).
“The market’s looking for the Fed to get inflation under control. Inflation is the enemy of long-term interest rates.”
“The cost of mortgaging a home continues over the decades to come down, while the home values, the appreciation, continues to go up… If you own real estate in the long term, you are certainly going to do very well.”
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Millennials vs Boomers
Next up, Byron introduced the Fox Business article presenting millennials and boomers as part of a “triple threat” behind rising housing prices.
Pretium is the number one single family homeowner in America right now. CEO of Pretium Don Mullen believes the only solution to rising house prices is a healthy drop in the number of people trying to buy.
Here are the factors coming into play:
- The population growth rate is in decline.
- We’re building more and more homes.
- Boomers are staying put rather than moving (especially with COVID)
- The average age of people moving out of a SFH is 74 — up from 60 twenty years ago
- More millennials are entering the market as buyers
Byron asked Katie if she saw the uptick of buyers as the number one issue in this accelerating market. Katie believes it’s not the number one issue, though it certainly has an impact.
David pointed out how the meaning of home has changed for many people, especially with COVID. He agrees with the article, saying, “To slow prices, we need less demand.” He also added that people want to buy in today’s dollars.
Byron asked Tim Macy if he thought the values of homes are just way too high.
Tim believes we’re going to see some types of homes decreasing in value that are highly overpriced – namely $500-600K houses that jumped to $800-900K. He sees some of some of that softening up but thinks houses in the $300-500K range will keep demand and keep steady.
Katie hates to admit it but she agrees with Tim’s assessment and predictions for home prices in Texas. Under $400, demand is still plenty high with first-time buyers, investors, and funds.
Rex Homes Discount Brokerage Shut Down
Byron mentioned the shut down of discount brokerage Rex Homes and compared it to RedFin.
He asked David why, over the decades, discount brokers haven’t made it for a long, sustainable period of time with the big ones.
“The value prop there doesn’t meet what’s in the market.”
Put another way, the professional agents out there working with buyers trumps the discount brokerage model all day long.
Byron agreed that, while a discount brokerage gets people’s attention with their promises of saving money, this is, for many, the largest financial acquisition of a lifetime.
Katie mentioned an Inman article (2020 / late 2019) about Rex Homes not doing well in Houston and Houston agents not accepting the model and being frustrated because they didn’t pay buyer agent compensation.
“If you have this W-2 model where you’re paying agents a salary but then you don’t have revenue coming in… I can see why they shut down. The W-2 model is tough if you don’t have high volume.”
Tim pointed out the difference between RedFin and Rex Homes: RedFin agents still put an emphasis on providing some level of service to their clients.
“Service is needed to sell a house. You can’t digitize the entire process.”
The seller is one that feels the pain when their broker cuts back on service and passes the expenses on to the client – all to ostensibly save money.
Byron added that nine out of ten sellers prefer to work with an agent. Consumers want this service – to guide and advise them through the process. Automation can be a help to all parties involved, but not if it comes at the expense of the service consumers want.
“If they would have been focused in on the service (like the RedFin model) – and also taking down the real estate cartel as their secondary motive (rather than their main thing) – then they could have been a little bit more successful.”
Byron finished with his belief that big things are brewing in the landscape of real estate.
“Watch out, if Z tries to buy RedFin or something like that, we’ll have some serious content on these shows for a while.”
We’d love to hear your thoughts in the comments.
- Have you worked with Rex?
- Do you think there’s a big acquisition coming?
- What are you doing to educate your clients on the changing interest rates, inflation, etc.
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