Real Estate Brokerages and the Changing Tides

As most of you know, I used to do in-depth updates for each of the publicly traded companies in the residential real estate sector. Since I’m not an investment analyst, my interest was always on what the public information these companies had to disclose signifies for the real estate industry as a whole. I still look at all of them, and have already published analysis of Zillow and Opendoor.

A strange thing happened though, as I was poring over Realogy, RE/MAX, eXp, Compass and even Redfin. I got profoundly bored. They all did really, really well in 2021. But they all did really, really well for the same reason: the housing market went to the moon, so anybody with a real estate license made a ton of money. None of them announced anything new and interesting, no one dealt with the big issues on the horizon, and everybody is telling the same story. There just wasn’t much to say on each company separately. (I may still do Redfin separately since they have a huge iBuying operation as well that might be worth a deeper look, and perhaps EXPI to explore the Metaverse implications.)

At the same time, weaving everything together, there is a looming threat to every single public company not named Opendoor (and maybe Offerpad, and maybe maybe maybe Redfin). I wanted to explore that, which meant lumping all of the public companies together a bit since all of their stories are more or less the same. That threat? Consumer demand is being replaced by investor demand, and none of them are ready for it.

Let’s get into it.

The Same Success Narrative

To set the stage, it is necessary to compare the narratives of the companies that have reported so far. They are remarkably similar.


Full Year 2021 Highlights

  • Generated Revenue of $8 billion, an increase of 28% or $2 billion year-over-year.
  • Reported Net income of $343 million and basic earnings per share of $2.95.
  • Generated Operating EBITDA of $902 million, an increase of $176 million year-over-year (See Table 5b).
  • Increased combined closed transaction volume 29% year-over-year with improvement across both Owned Brokerage and Franchise businesses.
  • Owned Brokerage agent count grew 6% year-over-year and continued to maintain strong retention levels.
  • Advanced new strategic partnerships designed to unlock future growth, including our RealSure joint venture with Home Partners of America, our planned title insurance underwriter joint venture with Centerbridge, and our new luxury auction joint venture with Sotheby’s.


Full-Year 2021 Highlights
(Compared to full-year 2020 unless otherwise noted)

  • Total Revenue increased 23.9% to $329.7 million
  • Revenue excluding the Marketing Funds1 increased 22.7% to $247.3 million, and was comprised of 11.8% organic growth2, 9.8% growth from acquisitions and 1.1% growth from foreign currency movements
  • Net loss attributable to RE/MAX Holdings, Inc. of $15.6 million and loss per diluted share (GAAP EPS) of $0.84
  • Adjusted EBITDA3 increased 29.3% to $119.7 million, Adjusted EBITDA margin3 of 36.3% and Adjusted earnings per diluted share (Adjusted EPS3) of $2.43
  • Total agent count increased 3.1% to 141,998 agents
  • U.S. and Canada combined agent count increased 1.4% to 85,471 agents


FY2021 Financial Highlights:

  • Revenue increased by 73% from FY2020 to $6.42 billion as transactions increased 56%.
  • GAAP Net Loss was $494 million, compared to $270 million in FY2020.
    • GAAP Net Loss margin was 7.7%, compared to 7.3% in FY2020.
  • Adjusted EBITDA3 was a positive $2 million, compared to a $(156) million loss in FY2020.
    • Adjusted EBITDA margin was 0.0%, compared to (4.2)% in FY2020.


Fourth Quarter and Full-Year 2021 Financial Highlights as Compared to the Same Year-Ago Period:

  • Revenue increased 110% to $3.8 billion in 2021 and increased 77% to $1.1 billion in the fourth quarter of 2021.
  • Gross profit increased 85% to $296.0 million in 2021 and increased 65% to $83.1 million in the fourth quarter of 2021.
  • Net income increased 162% to $81.2 million in 2021 and increased 101% to $15.5 million in the fourth quarter of 2021. An income tax provision benefit of $47.5 million and $14.2 million, respectively, is included in the full year and the fourth quarter 2021 net income.
  • Earnings per diluted share increased 143% to $0.51 in 2021 and increased 100% to $0.10 per diluted share in the fourth quarter of 2021.
  • Adjusted EBITDA (a non-GAAP financial measure) increased 35% to $78.0 million in 2021. Adjusted EBITDA was $13.1 million in the fourth quarter of 2021 compared to $16.6 million in the fourth quarter of 2020. Excluding a $10 million one-time legal settlement in the fourth quarter, adjusted EBITDA increased 52% to $88.0 million in 2021, and increased 39% to $23.1 million in the fourth quarter of 2021.
  • As of Dec. 31, 2021, cash and cash equivalents totaled $108.2 million, compared to $100.1 million as of Dec. 31, 2020. The Company repurchased approximately $172.0 million of common stock during 2021.
  • The Company paid a cash dividend for the fourth quarter of 2021 of $0.04 per share of common stock on Nov. 15, 2021. On Feb. 17, 2022, the Company’s Board of Directors declared a cash dividend of $0.04 per share of common stock for the first quarter of 2022 expected to be paid on March 31, 2022 to shareholders of record on March 11, 2022.


Full Year 2021

Full year revenue was $1,922.8 million, an increase of 117% year-over-year. Gross profit was $403.8 million, an increase of 74% year-over-year. Real estate services gross profit was $300.0 million, an increase of 28% year-over-year, and real estate services gross margin was 33%, compared to 36% in 2020.

Net loss was $109.6 million, compared to a net loss of $18.5 million in 2020. Net loss attributable to common stock was $116.9 million. Net loss per share attributable to common stock, diluted, was $1.12, compared to a net loss per share, diluted, of $0.23 in 2020.

“Fourth-quarter revenues and net income exceeded our expectations,” said Redfin CEO Glenn Kelman. “More importantly, Redfin is broadening its sources of customer value and corporate income, with title, mortgage, and iBuying now on track to generate gross profits, after years of being subsidized by our brokerage. Entering an uncertain market, Redfin’s pricing power and on-demand service will let us take share and improve operating margins.”

Sure, eXp and Redfin had enormous growth and eXp in particular looks like it won the quarter financially speaking, but all in all, everybody had a great quarter and a great 2021. It truly was a rising tide lifts all boats story.

Similar Strategic Stories

Strategically, everyone is pretty much saying the same thing.


And as a preview, I have consistently spoken about our strategic efforts in luxury, integrating title and mortgage in the transaction as we simplify the customer experience, our franchise expansion and technology. I want to give you a brand lens on our growth that actually ties those strategic objectives.


In addition to that, we believe we’ve got the opportunity to strongly expand in the mortgage business, and we are looking at, as others have, on other sides of the transaction that we think that we can bring value to our brokers and agents and to the company by determining, which avenues of those grows to go.


Our splits are improving and by summer, our aims will be able to service the entire real estate transaction on the Compass platform which drive agent productivity. As we turn our product development attention toward lowering the cost to serve our agents in integrating adjacent services to drive margin.


Yes, so success lending, we’re now licensed in probably about a dozen or so states. We’ve had our loans that are being closed basically as we speak through the success lending platform and the relationship that we built there.

So, it’s coming together. We — one unique piece is that we’re actually hiring local on-the-ground loan officers.

To be fair, EXPI executives didn’t focus on ancillary businesses to the extent that others did. They’re far more focused on recruiting more and more agents, delivering more and more value to those agents, and then letting the frothy real estate market keep on delivering revenues and profits.

I may deal with Redfin and EXPI separately, but let’s just say that Redfin’s big strategic push going forward is mortgage. They acquired Bay Equity and they’re really counting on that.

So taken together, the strategy is basically, recruit more agents, retain more agents, do technology for agents, add value for agents, agents, agents, agents… and oh yeah, we need to do ancillary services like mortgage, title and escrow to make money.

The Looming Threat

I know what you’re thinking. You’re thinking that the looming threat is Zillow with its Housing Super App thing. Zillow owns the consumer eyeballs, and they’re now talking about building the super app to take over the ancillary businesses. I wrote in depth about that already.

Sure, that is one threat… but that isn’t the looming threat I had in mind.

The looming threat I have in mind is the possibility that the United States is in the early stages of a full-on transition away from a homeownership society to #RenterNation.

Not one of these guys are even remotely prepared for that shift. Which means that the real estate industry as a whole is not prepared for that shift.

And every single one of these companies are in deep trouble if that transition occurs.

Rise of #RenterNation

I think I’ve been writing and speaking on this particular threat for a few years now. But let’s review starting with this Musings video I posted a couple of weeks ago:

More recently, we’re seeing strange numbers.

For example, Attom Data tells us that mortgages were down significantly in Q4 of 2021:

Total mortgages drop at fastest pace in three years

Banks and other lenders issued 3,266,907 residential mortgages in the fourth quarter of 2021. That was down 10.7 percent from 3,656,892 in third quarter of 2021 and down 13.5 percent from 3,775,894 in the fourth quarter of 2020.

The quarterly and annual declines were the largest since the first quarter of 2019 or the fourth quarter of 2018, respectively. The latest total also was 18.1 percent less than the peak hit in the first quarter of 2021.

That was before mortgage rates started its parabolic ascent thanks to the Fed announcing rate hikes and quantitative tightening in December of last year. As I write this, the 30 year rate is up to over 4.25% — and likely headed higher.

At the same time, CoreLogic is saying that January home prices were up 19.1% YOY:

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How they get to a 3.8% annual increase forecast in the face of a 19.1% increase in January is a bit beyond me… but whatever.

So we have mortgage rates going to the moon, number of mortgages plummeting, days on market continually falling, inventory heading lower and lower… and yet, home prices are going to the moon, and transaction counts are north of 6 million annualized. What explains this?

Here’s one explanation from one of my favorite housing analysts, Ivy Zelman:

“I don’t know what’s going to change the investor’s appetite.”

My theory, which I have laid out time and again on these pages, is that we are seeing a rotation of capital out of cash, bonds, and even equities into real estate because of inflation. The Fed will raise rates and engage in tightening, at least for a bit, but there’s no scenario I can imagine where the Fed raises rates to what it would need to be under the Taylor Rule (basically, 13.35% Fed Funds Rate). I mean… can you imagine a Fed Funds rate of 13% and what that does to mortgage rates, never mind what that does to the U.S. economy?

I can’t.

Therefore, 2022 is shaping up to be a year when consumers are priced out of the housing market, and investors will pick up that demand. The rotation of capital away from bonds into real estate suggests that buyers of homes will increasingly be investors (particularly institutional investors who otherwise would be funding mortgages by buying mortgage bonds) rather than consumers.

Real Estate Companies in #RenterNation

The looming threat then for all of the companies listed above, plus Zillow, is what happens to their record breaking revenues and profits if consumer demand falls off a cliff and is replaced by investor demand.

A small minority of real estate agents today know how to work with institutional investors. Almost all of them are your elite top producing agents with decades of experience. Many of those would have lived through the first Bubble when they were forced to work with REOs and vulture funds and such.

Furthermore, listings go disproportionately to the top producers. The phrase “list to last” did not come about because the part-time soccer moms doing real estate were dominating the listing game. In every market in the U.S. and Canada, if you dig into the data, you will find that the strong listing agents are almost always top producing agents in that market and vice versa. Newer agents, part-timers, low and mid-producers are almost always reliant on buyers for their income.

Finally, when the Bubble burst, agent teams existed and were growing… but they were nowhere near as dominant then as they are today. Today, there are markets where less than 10% of the agents are doing over 80% of the business. I know this because I’ve seen the stats. I just can’t share the stats as they belong to clients.

A collapse in consumer buyer demand disproportionately impacts the supermajority of agents. The elite top 10% or so will do just fine, as they’ll still get listings and to the extent that institutional buyers want to work with a local agent, those buyers are more likely than not to look for the top agent with the biggest team who is the most sophisticated. A private equity fund manager looking to purchase 5,000 homes doesn’t need to tour homes to look at the granite countertops; he needs an agent who understands cash flow projections and cap rates. Even if that manager doesn’t need the real estate agent to do asset portfolio analysis, he doesn’t want to deal with 5,000 agents to buy those 5,000 homes; he’d much rather have one large sophisticated agent team who can represent him in buying 5,000 homes with the kind of operational chops to get things done fast, fast, fast and do it for 75 bps.

Guess what kind of agent is the least profitable for real estate companies.

That’s right, the elite top producer with her own mega team, her own office building, her own technology system, her own transaction management team, her own operations team. That agent gets very little from her brokerage, and to the extent she hangs her license with a brokerage at all, it’s because of (1) personal loyalty, and (2) cheaper E&O insurance. Brokers and franchises have next to no pricing power with an agent like that.

Ancillary Revenues in #RenterNation

Add on the fact that if consumer demand goes off a cliff, then ancillary revenues also go off a cliff.

All of those brokerage-owned or brokerage-JV mortgage companies have fuck-all to do if the combination of 8% mortgage rates and 20% YOY price increases drives purchase mortgage applications off a cliff.

Title insurance is likely necessary for Mr. and Mrs. Jones to buy their forever home where they plan to raise a family. Is it really necessary for a sovereign wealth fund who can self-insure if it comes to it?

Escrow serves a role, for sure, but again… when the buyer is Black Rock or Fidelity or the pension fund of Norway… are those guys equally likely to take the buyer agent’s recommendation? Maybe. Maybe not.

On the other hand… cash-rich institutional investors might not be price sensitive at all for things like title and escrow, so who knows? Maybe they don’t give a damn and just hand out cash left and right for those services. I kind of doubt it, but who knows? I don’t know that I would want to build a strategy around the idea of rich hedge funds not giving a crap about title insurance premiums… but YMMV.

None of This May Happen

Let me point out that predictions are tough, especially about the future. Yogi Berra was a very wise man.

Nonetheless, macroeconomics are macroeconomics. The trends are clear. The data is public. It’s worth asking the CEOs of these public companies what their strategies are should this pivot away from homeownership and towards #RenterNation continues. None of them can actually affect things like interest rates, inflation, or institutional investor demand. Which means they simply have to react to market conditions and market changes.

For all I know, Realogy already has a task force assembled to figure out what they would do, where they would invest, and what changes they would make if they see consumer demand fall off a cliff. Redfin might have a team dedicated to working with institutional investors. I have no idea.

But maybe at the Q1 earnings call, some analyst or another might want to ask them about strategies beyond recruit more agents, retain more agents, build out mortgage, title, and escrow. Maybe the future won’t be determined by the latest CRM platform to help agents stay in touch with consumers, who are more and more unable to buy anything at all. Maybe the future will have a lot more to do with training agents to work with hedge fund managers with Harvard MBAs.


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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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