COVID 19 and Real Estate

I’ve been asked by many of you to offer my opinions on COVID 19 / coronavirus and how it will impact real estate. Obviously, I have zero expertise on infectious diseases, am not an agent on the ground, and have very little to add other than what everyone has been reading from the CDC and other actual experts.

So I’ve been reticent about commenting on the whole situation. But, you asked… and I do have an opinion (no matter how ill-formed and whatever the basis) on just about everything… so….

TL;DR: I do think COVID 19 will impact real estate negatively for at least a short while, and it will result in a bit of a shakeout depending on how long the current panic mood grips the nation. The long-term impact of COVID 19 on the industry will be very much like its impact on the population as a whole: the healthy companies will survive and likely emerge stronger than before, while sick companies will succumb. This being a Black Swan event, those who are prepared and have an antifragile organization will reap enormous rewards, while those who are not prepared will find it very difficult indeed.

General Thoughts

As I said, I’m not an expert on anything to do with infectious diseases. So I actually have no opinion beyond that on the disease itself.

I am far more expert on human beings, of course, and on that front… well… the words of FDR from his first inauguration ring true to me here:

So, first of all, let me assert my firm belief that the only thing we have to fear is…fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.

Sadly for all of us, human beings are fundamentally pack animals. Panic does have a way of spreading, and I suspect we are nowhere near the finish line just yet.

We all know about the run on toilet paper (of all things), water, bread, etc. We all already know about the canceled events not just in real estate but across the world — even the Houston Rodeo was just canceled, and that’s in a state and city that pride themselves on toughness.

Where my mind goes is how this ends up affecting the real estate industry, since that’s what y’all wanted to know.

Elites Will Benefit; Everyone Else Will Retreat

My take is that the elites, who have the financial resources and are not living paycheck to paycheck, will likely benefit enormously.

Most homebuyers are by definition elite in today’s economy, because they have the wherewithal for a down payment and qualify for a mortgage. But not all. Quite a few of them, especially the first-time homebuyers, are likely scraping together every penny, have been saving like crazy, and will have to stretch to buy a house. Those people, I think, will retreat from the market.

Why? It’s simple: the uncertainty caused by the virus and the attendant panic hits the working and middle class families the hardest. Consider my city: Las Vegas. We already know that major conferences have been canceled. We are expecting that tourist traffic will plummet as people who would otherwise book a weekend at Caesar’s Palace might think again about getting on a plane for fun in the sun. If you’re a local, and you’re employed by the hospitality industry here, how comfortable are you in emptying your life savings and getting into a 30-year mortgage right now? You might not have a job come next week.

Furthermore, most people have never prepped and most never will. We see this in every hurricane, every flood, every natural disaster. The line of people waiting to buy a generator two days before landfall always amazes me. The run on water with every disaster is puzzling, since it implies that they don’t have enough water already stored at home to survive for a few days. Yet, that’s the reality.

So, these people are going to have to start spending money to get prepped, whether that’s crates of toilet paper, or water, or food, or whatever else. And it isn’t the money necessarily, but the psychology of having to spend money they didn’t think about that will affect them. Will they still want to stretch for a new house right now? I don’t know about that….

On the other hand, those who are more financially comfortable might think this is a great opportunity to buy. We saw this recently with stocks, and we may see it with homes. Consider that mortgage rates are at 50-year lows, with the Fed action on interest rates. Competition for houses may slacken a touch as the working and middle class families hold off on getting into the market. Actual sellers with homes on the market may be influenced by the chaos and decide they ought to get what they can for their homes in case the bottom falls out.

So all in all, I think the impact is lower transactions and volume across the board, but with a small minority of elites finding great buys in the weeks and months ahead.

In support of that hypothesis, I present this:

An “instant reaction” survey is not the same thing as data. For that matter, I don’t know how much evidence this is. But it’s something, and not nothing, so there is that.

Longer Term Impact: Survival of the Fittest

This is a bit grim, but the latest reports are the COVID 19 is really a problem primarily for the elderly and those with existing respiratory conditions. That makes all kinds of common sense — the most vulnerable among us are the ones that the virus will take… but that’s true of just about every disease as well. Because the elderly are generally those who are not in the best of health, because that’s just how aging works, and those people who are in poor health for one reason or another are obviously, by definition, less healthy.

I think we’re going to see the same thing play out in the industry, as companies, and even individual agents, will make it through or not depending on their financial health.

How do we measure financial health? There are plenty of metrics, but there are two that make the most sense in the context of a Black Swan epidemic: balance sheet and diversity of income.

Balance Sheet

This one is easy to understand: the more money a company has in the bank, the more financially healthy it is. If there is a serious disruption to income, a company with billions in cash can survive it far easier than one with $300 in the checking account.

From that standpoint, looking at the five publicly traded real estate companies, we can make some guesses.

As of 12/31/2019, here’s the Total Cash (cash and cash equivalents + short term investments) for each of the five public real estate companies:

  • Zillow: $2.4 billion or $2,400 million
  • Redfin: $304 million
  • RE/MAX: $83 million
  • Realogy: $235 million
  • eXp: $35 million (Q3/2019)

Now, let’s put that into a bit of context. Obviously, income isn’t going to zero even with the direst impact we can imagine short of a zombie apocalypse type scenario where none of us is going to care about real estate, since we’ll be too busy defending our dwindling supply of water and toilet paper from roving bands of marauders. Furthermore, if income gets hammered, all companies will cut expenses accordingly. But it’s a thought experiment to look at financial health.

Zillow’s operating expenses for Q4 were $408 million, or $136 million per month. It can survive for ~18 months with zero income at the current spending rate.

Redfin’s expenses for Q4 were $46 million, or ~$15 million per month. It can survive for 20 months.

RE/MAX, with its $40.8 million in expenses (~$13.6 million per month) can survive for 6 months.

Realogy, with its $106 million in expenses (~$33.5 million per month) can survive for 7 months.

eXp did not report Q4 earnings (yet), so let’s go by Q3 numbers, which was ~$24 million, or $8 million per month in operating expenses. It can survive for about 4.4 months.

These are the public companies. Private companies, we have no data (obviously), but I do happen to know that quite a few brokerages are in extremely poor financial health. Their balance sheets simply cannot afford incomes going to zero (which it won’t, like I said) which would mean immediately closing their doors.  In fact, their financial health is so precarious that many of them might not be able to withstand losing 10% of the income (which the NAR instant reaction implies) without making serious and significant cuts to operating expenses… which makes them less competitive against companies that can go 6 or 7 months without making a dime.

I don’t know if those survive COVID 19 panic-induced market downturns.

The same goes for individual agents and teams as well. Those who are well-capitalized, have cash in the bank, can withstand the hits to income and still be competitive. Those that are not… who were living commission check to commission check… they might be in real trouble.

Diversity of Income

The other metric of financial health for Black Swan events is diversity of income. It’s kind of like a diversified portfolio.

If a company makes all of its money from one source — say commissions — then if that gets hurt, the entire company gets hurt. If, on the other hand, a company has multiple sources of income, like mortgage, title, escrow, iBuying, technology, whatever, then it might be able to buffer the hit somewhat. Better yet might be counter-cyclical income streams, such as property management (rental demand might go up) and sales commissions (as home buyer demand goes down).

Three of the five public companies have pretty well-diversified income streams. Zillow has Homes and IMT (and mortgage coming online at some point). Realogy’s portfolio is well-known, and Redfin is trying very hard to diversify into title and mortgage. RE/MAX and eXp, on the other hand, tend to have concentrated income streams: franchising in RE/MAX’s case, and commissions in eXp’s case. So I would rate those two as being slightly more vulnerable to pandemic-induced market conditions.

But again, we talk about those five because they’re public. Private companies from brokerages to franchises to technology companies all have varying levels of diversification in their income streams. Most of them are not all that well diversified, which makes them more vulnerable to massive unforeseen disruptions like COVID 19.

Bigger, Stronger, Faster

In the long run, I think COVID 19 will reward those companies who make it through its trials. They’ll be bigger (because they will have absorbed even more agents, market share, and revenues from those who did not make it), stronger (more diversified, less competition), and faster. This last point, I think might be important to stress.

As Charles Darwin was supposed to have said (although it appears he did not), it isn’t the strongest of a species that makes it; it’s the most adaptable.

Even if that’s a misquote, it’s worth thinking about.

Since none of us know what is actually going on with COVID 19, and none of us know (including the experts) what is going to happen going forward, the only thing that will really count is how quickly one can move to adapt to changing situations. Financial health certainly helps, because pivoting and changing takes money and resources. But strength and intelligence are not dispositive: preparedness, adaptation, and being able to make decisions quickly and act on them are far more important amidst chaos and uncertainty.

So to my friends in the industry, let me reiterate my advice of recent months: become antifragile. Get faster. Get better at making decisions with imperfect information. And get prepared. Embrace the prepper mindset, so that you have some resiliency.

As for myself, I have decided not to change too much about my routine. I’m not over 60, I’m in decent health, and frankly, I figure I take greater risks with my life simply driving to work in the morning than I do by traveling to events and gatherings. I won’t refuse to shake hands with you, if you want to, nor will I freak out. Part of it is that I’ve been mildly prepping since my days in Houston, when hurricanes were a real risk, so I feel like Sunny and I are reasonably well-prepared to ride out any real emergencies. But the biggest part of it is that I think I’m pretty adaptable, able to make decisions on imperfect information, and to act on them as necessary. And this trial will help me get even better at adaptability.

I am washing my hands far more often and for far longer, though. No sense in being stupid about the risks, even as I refuse to let the risks run my life.

Anyhow, for whatever it was worth, that’s my take on how I see things impacting the real estate industry. I hope and pray for all of your continued health, both physically and financially, and I hope to see all of you come through this better, stronger, and faster.



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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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