Real Estate in the Time of Cholera: The Aftermath, Part 1 – Brokerages

So here we are in the Brave New World of quarantines, lockdowns and barely contained (?) panic. May it be short, as it is simply unsustainable over the long haul. Activity will be grinding to a halt if it hasn’t already. We all know the main stories in the news — stock market plummeting, the Fed cutting rates to zero, various states announcing emergency measures, etc.

With such a fast-moving Black Swan situation, it is impossible to say where things are headed in the next few weeks. But that doesn’t mean we can’t use this time to think some things through.

What I wanted to do with you, my VIP members, is to engage in a bit of rational speculation. This entire series will be just that: speculation about how the coronavirus Black Swan event might change things permanently, but informed by what we know about the state of real estate in recent years. Much of the benefit is to me personally, as I don’t know what I think until I’ve read what I have written, but perhaps some of this will be useful to you as well.

In this part 1, we tackle the fundamental building block of the industry as it is today: the brokerage.

Set the Stage: Where Brokerage Was Before COVID-19

Let’s start by thinking about where real estate brokerage was before the pandemic. Keep in mind that much of this is based on the sparse publicly available information, and that 99%+ of brokerages out there are private companies who reveal very little.

The general thesis here at Notorious for years has been:

  • Traditional split-based brokerage is dying;
  • The next wave is the 100% fee-based NextGen Brokerage model;
  • The ultimate destination is the W2-based institution.

The flag-bearers for each might be Realogy for the traditional, HomeSmart for the 100%, and Redfin for the W2-based institution.

Since there is no publicly traded 100% brokerage (although Fathom filed its S-1, which we’ll get to), we can compare Realogy and Redfin over the past few years. I’m going to limit the chart to end of December, 2019, before things started getting a bit nutty:

Here’s Realogy over the past 3 years, compared to the NASDAQ as a whole:


And here’s Redfin over the same period, although Redfin went public in mid-2017:


It makes sense that Redfin, being a startup that has not generated a profit, is volatile as hell. But the real story is RLGY over the same period.

And we know why: agent commission splits, problems with the old recruit & retain model (especially once new competition came on super aggressively), the inverse correlation between agent productivity and brokerage profitability.

Now, while there is no 100% NGB that is publicly traded, I think EXPI shares many of the characteristics of a NGB, such as explosive growth, culture of freedom, and competition on cost, despite being a split-based less-expensive version of Keller Williams with a video game instead of offices.

So here’s EXPI since it went public in 2018:

Now, I happen to know a few 100% brokerages, their financials, and what’s going on with them. And EXPI’s growth story looks a whole lot like theirs.

The key value proposition of the 100% shops is, of course, cost. This is an ad from one of the fastest growing 100% NGB’s in the country, JP & Associates (“JPAR”):

They have been making major inroads into established brands and companies under the radar, with much of the industry’s attention focused on Compass and its former ways of buying talent.

The Growth of Agent Teams

The other major trend over the past several years that I have been covering and talking about is the growth of agent teams. This is one of the most important development in the industry that really has gone almost completely ignored. But with Zillow’s more recent stances on Premier Agent, Zillow Flex, and IMT in general, it has become impossible to overlook.

My thesis on agent teams is that they are basically W2-based institutional brokerages, like Redfin. (This is the inverse of my take on Redfin as a giant agent team with a website instead of a rainmaker agent with a huge book of business.) That they are violating labor law all over the place is widely known in the industry, and at some point, the .GOV will intervene on that front. But that won’t change the fundamentals of the agent team, which are:

  • Control over leads
  • Control over the workforce
  • Superior service delivery
  • Guarantee of quality
  • Very healthy profit margins (35/65 splits are not uncommon)
  • Money to invest into systems, tools, admin staff, marketing

The simple fact is that the properly managed and operated agent team provides the consumer with a superior experience. You don’t go days without hearing back from your agent, because someone on the team will get back to you. If you have a bad experience with someone on the team, you can call the team leader and demand accountability. With their systems and resources, the team doesn’t drop the ball on important filing deadlines, documents, inspections, etc. etc. And someone on the team will continue to stay in touch long after the transaction is closed.

There are individual agents who also provide superior service, but they can’t scale up the way a team can. Which means that the teams have been growing, are growing, and will continue to grow their market share… which all comes at the expense of other agents in their local markets, given that real estate is a zero-sum game.

Time of Cholera

With that as background, let’s look at/think about the pandemic and its impact.

I received notification that Zillow Research published a paper on past epidemics and their impact on housing, which can be found here. The key takeaways:

  • During epidemics such as the 1918 influenza or the 2003 SARS outbreaks, economic activity fell sharply during the epidemic (a 5-10% temporary hit to GDP or industrial production over the course of the epidemic) but snapped back quickly once the epidemic was over.
  • This pattern differs from a standard recession, which is a situation in which economic activity falls for 6-18 months and then recovers more slowly.
  • During SARS, Hong Kong house prices did not fall significantly, but 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 volumes.
  • During the current episode in China, early news reports indicate that home prices have so far not fallen but transactions have nearly ceased.
  • During standard recessions, home prices and transaction volumes may fall but this is not always the case (e.g. the 2001 recession).
  • Before February 2020, leading economic indicators (job openings, the yield curve, interest rate spreads, and sentiment indicators) were giving mixed signals about the risk of a standard recession this year, with betting markets (PredictIt, 2020) giving probabilities ranging from 30% in December 2019 to 15% in January 2020, rising to 44% as of March 1. PredictIt defines a recession as at least two consecutive quarters of falling GDP.
  • It is difficult to precisely forecast the probability of an epidemic-related downturn and/or how such a downturn could provoke a standard recession because this depends on how COVID-19 progresses and how this progress interacts with preexisting recession risks and policy responses (ranging from doing nothing to shutting down entire cities for months at a time).

While nobody knows exactly what the economic impact of COVID-19 will be, since we don’t know if/when we’ll get things under control, everybody knows it won’t be good. But if we’re able to control the spread of disease, “flatten the curve” as it were, and get out of this quickly, the likelihood seems high that the housing market will come back and come back strong. The hope is that the pain will be sharp, but short-lived.

As many people, including NAR’s Lawrence Yun pointed out, this downturn is nothing like the Bubble collapsing. And prior to the coronavirus thing hitting the world hard, U.S. economic data was pretty good, with low unemployment, low interest rates, and so on.

Furthermore, with the latest Fed action, it seems pretty clear that the government will do everything in its power to avoid a serious recession. Whether they will be successful or not, we can’t know, but they’ll use every arrow in the quiver to avoid it — especially since this is an election year.

Combine all of the above, and what it suggests to me is one of three possible outcomes:

  1. Short recession, demand stays strong but pushed out in time. This is what everyone is hoping for today, and frankly, expecting to see happen.
  2. Medium recession, demand dampens due to unemployment. Even if the quarantines and emergency measures do halt the growth of the virus, there is the possibility that the short-term recession becomes a medium-term problem as companies that are losing enormous amounts of money are forced to lay people off, which then results in reduced spending, which then results in even more companies laying people off, etc. A terrible negative feedback cycle that no amount of monetary policy can fix.
  3. Long and painful recession, possibly tipping into depression-type situations. This scenario implies that the government’s quarantines and actions are relatively unsuccessful, the quarantines are forced to be far longer than we had hoped for, our healthcare system is more or less overwhelmed (see, e.g., Italy) which kills economic activity across the board. In that scenario, we end up with something like a Lost Decade type situation as the entire world struggles to get back on its feet after the devastation of a pandemic and massive economic dislocations.

I suppose there is the possibility that the world ends, but there’s really no point in thinking too hard about a zombie apocalypse scenario as none of us would care about anything beyond fighting off bandits for food, water, and fuel. So I’m not going to entertain the idea that we descend into some Mad Max Beyond Thunderdome type of scenario.

The thing I try to keep in mind is that in all three scenarios, housing is a basic need. People can cut their cable TV, stop eating out, and stop going to sporting events, but they do have to live somewhere. So housing demand isn’t going to crater; demand to buy houses might, but not housing itself.

So with all that said, here’s how I see things playing out for real estate brokerages.

Scenario 1: Short and Painful

If we have a sharp, extremely painful, but ultimately successful taming of the disease, then the most important impact will be on the psychology of buyers and sellers.

There may be some layoffs, especially among lower-income service industry workers — e.g., waiters, bartenders, etc. But many will be hired back within weeks, perhaps a couple of months. Businesses will need to take out short term loans to stay afloat, and we already know SBA and other government agencies will step in to make sure they’ll survive. Thing is, hourly wage workers are normally not home sellers or buyers, so the actual impact on housing will be muted.

Demand will get shifted to the late spring or early summer timeframe, and things will get back to something approaching normalcy.

But the psychological trauma of COVID-19 will remain etched across all of our minds, in much the same way that 9/11 changed all of us who lived through it.

In the mid-term, even if the authorities announce that the lockdown measures worked after a mere two weeks, and we have arrested the exponential growth rate of the virus, until we have widespread proof of a vaccine or a cure for COVID-19, people are going to be nervous and wary about crowds, about shaking hands, about a variety of things we all took for granted. And since COVID-19 is a coronavirus, a large family of viruses that includes the common cold, I wouldn’t bet on a cure.

The psychological impact, I think, is for everyone to avoid personal contact with people they don’t already know. Just because the growth of the virus has stopped doesn’t mean that the person you’re meeting for the first time isn’t contagious, after all. You can call it caution, you can call it paranoia, but I don’t see social life going back to normal on April 15th or May 1 or whatever. It’s going to take longer. Think about how dating changed when HIV/AIDS hit the scene and how long it took for things to get back to “normal,” and we all redefined what “normal” means afterwards.

The most immediate impact on housing will be the traditional method of selling homes. Open houses might be an artifact of history. Having 50 random people walk through your house on one tour after another? That might also be a thing we used to do. There may be new rituals in showing houses: thorough wipedown of all surfaces, etc. There may be new contingencies invented, such as “offer contingent on physical tour” to enable buyers to make an offer after a virtual tour, but contingent on actually setting foot in the house.

Two consequences are likely then, even after the emergency measures are lifted.

Boomtime for Market Makers

First, iBuyers are going to have a banner year. Nobody sells a house for funsies. They do it because they have to. Divorce, death, new baby, new job — some kind of life event is the precipitating factor in most home sales. In that situation, if you don’t want 50 strangers walking through your house and touching things, selling to an iBuyer makes all kinds of sense: only one, maybe two, visits from professionals looking to price the home… then you’re outta there.

The limiting factor on the growth there is that the iBuyers have a buy box, and it’s relatively small. They don’t have infinite capital, so may not be able to grow as fast as they could.

But if something like coronavirus is going to change seller behavior, I could easily imagine that the ultimate end of market makers arrives sooner than I had imagined. Sellers taking less money, just to avoid having possible exposure to disease, and buyers far more willing to tour empty houses that have already been cleaned and disinfected, means that market makers may be able to buy-and-sell houses without having to put in as much of the repairs, the maintenance, and all of the things they have to do today.

Agent Teams Dominate More and Faster

Second, agent teams are going to gain even more market share faster.

They’re already providing a better service experience, but if the new post-pandemic real estate practice involves a lot of things like virtual tours, 3D cameras, virtual open houses, etc., then they are the best setup to take advantage of that new environment.

Consider a listing appointment with two agents:

Team Leader: “And if you list with the Smith Team, we have a full-time marketing specialist who will come out with our MatterPort camera, do a full 3D tour so buyers can walk around, and then put all of those online. Plus, if a buyer is really interested, we have team members who can walk them around with our virtual tour technology, until they make an offer. That’s their job, so they’ll never be too busy to conduct a virtual tour.”

Seller: “That sounds pretty great! You can’t be too careful these days.”


Top Producing Agent: “And if you list with me, I will provide the most personal attention and treat you like family!”

Seller: “Do you do 3D tours?”

Agent: “Well, I could, yes. I know a photographer who has one of those cameras. Plus, I could use the new Zillow app on my iPhone! I’m sure it’s easy to learn how to use one of those app things.”

Seller: “What about virtual tours? Can you do that?”

Agent: “Of course! Unless I’m on another appointment, or working with another buyer, of course I can walk them through your house with Facetime!”

How does that play out, do you think? Hence, agent teams will accelerate their already impressive growth rates with the changed psychology of the buyer and seller.

Individual agents have to train themselves on how to use all this new technology and 3D cameras and apps and whatever else? While they’re trying to land listings and show buyers around? The competitive disadvantage is significant.

Brokerages can step into that gap in service and technology capabilities, by providing the marketing people to do things like 3D tours, and by providing showing agents who can conduct virtual tours. But how many can and will?

Most brokerages in the U.S. are already struggling to make ends meet. It isn’t clear that they can even keep their doors open if the quarantine-type scenario goes on for more than a few weeks. They’re going to go hire staff and buy the gear and the technology to do all this for agents? Maybe. The ones with some capital can and will, and charge a higher split to pay for all of that; they’ll actually emerge stronger than before. Realogy might be able to turn its commission pressure narrative around with smart investment into that kind of support.

But many won’t be able to. Those brokerages are headed for extinction, and the agent team is perfectly positioned to step into the vacuum. I expect to see extraordinary growth out of such super agent teams.

Scenario 2: Shock Leads to Unemployment, Unemployment Leads to Longer Recession

If we get Scenario 1, I think that’s likely the best case outcome for the industry, for the country, and for the world.

The real danger is that the shock lasts for longer, and companies are forced to start laying people off. And not just the low-wage hourly workers, but the higher-income salaried professionals. With lower tax revenues, governments will need to start thinking the unthinkable (for them): laying off non-essential public employees.

The only thing that dries up homebuyer demand faster than a natural disaster might be unemployment. Nobody is eager to empty his savings account and take on a 30-year debt load if he’s not sure if he’ll still have a job next week.

If this is the case, then it might take a couple of years for the American economy (indeed, the global economy) to recover. And I say a couple of years instead of a Lost Decade because I believe the government (whoever wins in 2020) would act swiftly to repatriate quite a lot of manufacturing back to the U.S.

One of the most shocking pieces of information I did not know was that China manufactures most of the drugs that American use every day. From Politico, back in December:

Last year, China accounted for 95 percent of U.S. imports of ibuprofen, 91 percent of U.S. imports of hydrocortisone, 70 percent of U.S. imports of acetaminophen, 40 to 45 percent of U.S. imports of penicillin and 40 percent of U.S. imports of heparin, according to Commerce Department data. In all, 80 percent of the U.S. supply of antibiotics are made in China.

There is no scenario I can imagine where a government based on the idea of “America First” would let this state of affairs stand. In fact, I doubt that a Biden or a Sanders administration would be comfortable with letting a foreign country, never mind our top rival for global hegemony, control our drug supply.

Continue thinking about the supply chain in general, and I think most Americans would come to the conclusion that it’s one thing to outsource the manufacturing of toys, clothing, shoes, and so on and another thing altogether to become entirely dependent to other countries for things we actually need to survive.

My expectation is that no matter who wins in November, I do think we’ll see a real focus on American manufacturing going forward. We should see serious well-paying jobs come back to the U.S., albeit with higher consumer prices, and the housing sector will benefit from that. But that situation won’t materialize for years; it isn’t like you can just start up a pharmaceutical manufacturing plant with some coders, after all.

So we’re looking at a couple of years, at least, of suppressed buyer demand. Housing demand will stay as strong as ever, but renting rather than buying will be the order of the day. Which means….

Take everything I wrote about the short term, then amplify it by an order of magnitude or two. Because now it won’t just be the smaller brokerages without capital that start to go out of business, but larger ones who can go 6 months while losing money, but not a year. Even if they were to lay off a bunch of staff (managers, brokers, admin staff, etc.), they still have to deal with occupancy costs: leases, maintenance, utilities, etc.

And they have to do this while more and more transactions (at lower price points) are being done by fewer and fewer agents: the super agent teams get even more super as competition fades away.

If brokerages started adjusting to the new reality today, they might be able to survive. But the answer to that likely depends on what their leases look like. And the answer is complicated by the fact that the virtual offices like eXp (which are sure to explode in popularity after the quarantine puts experience with remote working in the hands of millions of people) and the 100% NGB’s are not going anywhere.

Meanwhile, with a longer timeframe during which the incumbent traditional companies are struggling to adapt, and a new psychological reality for consumers, I can easily see companies like Redfin, REX, Houwzer, and others who have a very different model grow explosively. The future, after all, belongs to agent teams… and those companies are, for analytical purposes, giant agent teams.

The positive is that on the other side of the medium-term recession, we might actually see real economic growth here as the repatriation of manufacturing and all of the economic activity required to support that (restaurants, marketers, lawyers, etc.) could fuel a boom in 2-3 years’ time.

The question is which brokerage companies will be around to enjoy the good times. I’m going to guess the answer is, “Not many” and those that will be around will look very different from the dominant incumbent brokerages of today.

Scenario 3: (Next to) Worst Case Outcome

Let us suppose, instead, that the emergency measures do not work as well as we all hope. We do the quarantine, but it’s too late. We flatten the curve, but not enough. Everyone gets infected, and most survive, but some 3-5% of the population does not. That’s 9 to 15 million Americans.

The economic impact would be dire.

Even moving manufacturing back to the U.S. would not necessarily address the unemployment problems, and the monetary policies being pursued by the Fed results in inflation instead of growth. Say hello to stagflation, and we end up with a Lost Decade, similar to the 70s.

The only silver lining to this thundercloud is that we would see the largest transfer of wealth maybe in history. It’s morbid as fuck, but look, the coronavirus is the most lethal among the elderly, because all diseases are most lethal among the elderly. Here’s a story on how Millennials stand to inherit some $68 trillion in wealth by 2030. COVID-19 could accelerate that timeframe significantly. Combine that wealth transfer with depressed housing prices, both due to the economy as a whole and the fact that millions of units of inventory would come on the market (morbid, I know, I know), and we could see one of the greatest buyer markets in history.

So within real estate, it might not be a lost decade; it might actually be laissez les bon temps roulez. At least, it could be for some companies. Because the issue will be housing prices collapsing, while transactions rise. The 100% NGB’s would love such a market, and the W2-based agent teams and brokerages would find a way. But the traditional model with its split-of-commissions is dependent on Sales Volume (price x transaction sides).

So those companies with capital, business models that support the new reality, and extremely nimble (and ruthless) leadership would still be around to enjoy that booming buyer’s market.

Let’s Wrap Up

This is getting long, and I have other parts of the series to think about and write.

So what does the aftermath look like? Considering the possible scenarios, I think we are looking at an acceleration of the past trends that have taken years and years to develop.

At a minimum, in the best case scenario, changes in consumer psychology gives a boost to iBuyers and agent teams, but the impact of that will take many more years to manifest. The slow decline for traditional brokerages continues.

In the (second to) worst case scenario, we are looking at a bloodbath… but the brokerages that survive through a mix of smart adaptation, capital, systems, processes, and business model stand to benefit enormously when the market turns again, as it always has, as it must, and as it will.

In the middle, where the pandemic is contained, but we have a major economic hit and a surge in unemployment as a result of the steps we needed to take to deal with the virus… we may be looking at a real thinning of the herd, combined with the strengthening of all of the alternative models as well as the supercharging of already super agent teams.

Of course, all of this could be not just wrong but dead wrong. Anyone writing in March of 2020 in the midst of a quarantine that he knows what the future holds is either a con man or a fool. And while consultants are often called con-men for a reason, I have made a habit of calling it like I see it, no matter the consequence.

Well… at least I now know what I think. Thanks for coming with me on this journey, all 4,200 words of it.

Be safe, be healthy, be smart and considerate. Let me know if there’s anything I can do to help you or your business in this time of need even if it’s just to talk through possible scenarios.


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Rob Hahn

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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4 thoughts on “Real Estate in the Time of Cholera: The Aftermath, Part 1 – Brokerages”

  1. This from Redfin seems relevant to my post:


    To protect the health of our customers, agents and communities, we’re canceling open houses for all homes listed by Redfin’s brokerage, and limiting private in-person tours of all listings to two customers per tour. We’re still serving thousands of buyers and sellers each day, but with new rules and new technologies.

    We’ve Spent a Decade Preparing for This Day
    No brokerage has invested more in preparations for virtual open houses, virtual tours, virtual contracts and closings. The coronavirus has just made the future we’ve been preparing for come sooner.

    Three-Dimensional Scans on All Homes Listed by
    Our listing customers shouldn’t worry about canceled open houses. Since we publish interactive, three-dimensional scans of all homes listed by Redfin agents, buyers can still explore every nook and cranny of a home for sale without creating a public-health risk. We run a digital-marketing campaign for every listing to bring plenty of folks through your home online.

    Video-Chat Tours of Any Listing, Including Homes Listed by Other Brokerages
    Homes listed by other brokerages can be toured in person or virtually, via a video chat. On a video-chat tour, a Redfin agent broadcasts what we see on a walkthrough of the home, responding to your requests to pan left or zoom in. Schedule the tour as before, but follow the online prompts to ask for a video-chat tour.

    • The only two types of real estate that can be bought and sold online without physically touching anything? Vacant land and teardowns.

      Thanks for that ROB 🙂


  2. ROB,

    It’s nice to have a pure Internet business in this “no-touch” environment eh? It’s also good to hear your rational thinking now as well. 🙂

    However, I can’t let a good crisis go by without a little iBuyer push-back. As we’ve seen recently in the stock market, the market makers are selling. The brokers are selling. People are selling and we can drive a truck through the bid/offer spreads (this can all change tomorrow).

    Picking a bottom is really, really hard. Holding something in a down or sideways market is painful.


    We’ll see….

    Stay well.


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