Steve Murray talks about the anxieties about the market going forward, SoftBank investing, rapid growth of iBuyer models and what it means for traditional brokerage
From REAL Trends, the trusted source for real estate industry news, this is Real Trending, episode 18. We're breaking down the trends of the week and showing how they impact brokers and agents. I'm Steve Murray, president of Real Trends, and today we're discussing SoftBank investing in real estate, anxieties about the market, and the rapid growth of I-buyer models and what it means for traditional brokerage.
Let's tackle SoftBank. They invested several hundred million dollars in Compass months and months ago, a year and a half ago, almost, and just last week announced another round of investing. Total, Compass raised 400 million more. People have asked, "Why is SoftBank investing all this money in a company like Compass?" The key thing to know, first of all, is SoftBank is also investing in a number of other real estate endeavors, as well. Probably the number one reason is that in SoftBank's view, the real estate markets are very large, very large, and fragmented. $74 billion in gross commission income will be paid out this year, and yet the largest companies, largest franchise companies, RE/MAX and Keller Williams, each have only approximately 10 to 11% of the market, the largest wholly owned brokerage companies combined. Home Services, NRT, and Hannah together are less than 9% national market share. So it's still a very fragmented business. SoftBank sees that industry, and our industry, therefore, as a great opportunity to invest capital, to consolidate that business. And if they even get themselves a 5% market share, well, in today's dollars, for instance, that would represent a three and a half billion dollar business in gross revenues. They're looking at shared office space as another place they've invested money. So SoftBank, it's not that they necessarily love the real estate industry. They love the demographics, they love the characteristics of the market place, fragmented, undifferentiated, great opportunity, they think, for backing a new player with a new approach, to consolidate some market share and generate adequate returns down the road. They seem very prepared to continue to invest and wait for the returns at a later date. That's one good reason. You can't blame them, also, if they look out and see who it is is out there and among the companies that are out there is that famed investor, Warren Buffett, of Berkshire Hathaway, who himself has invested hundreds of millions if not billions of dollars in the residential real estate services industry and again appears willing to continue to invest for the long term, because he believes in the health of the housing market and he believes in the health of the residential brokerage industry. You could do worse than mimic investing with Warren Buffett. That's a very true statement. So SoftBank appears to be betting on our business. It's a very positive thing if you stop and think about it. We'll wait to see if that bet pays off in the years to come.
On another topic, there's a lot of anxiety about the housing market. Seven of the last eight months, existing home sales have fallen. Growth in new home sales seems to have stalled out, one month up, one month down, back and forth. We seem to have hit a plateau. We do notice that the 10-year treasury bill is now at a three to four-year record high. It's trading above 3% now, and that means mortgage rates will be up. They're pushing 4.65 to almost 5% in some markets. That is going to curtail some home buying. There's no question about it. NAR has made certain predictions about how many families won't be able to buy that might have wanted to buy but will not be able to afford to so. So we're seeing a leveling off of housing sales. We're seeing that the increase in housing prices is starting to come down. It doesn't mean housing prices are dropping. It means that the increases are not looking as large as they were a year ago at this time. Now, where you are will drive that number. There are still markets where we're seeing high single-digit increases in average housing prices. But we do note that even hot markets, Seattle, San Francisco, Denver, and other markets like those, Dallas, Phoenix, are starting greatly to calm down. But take heart. This does not mean disaster in the housing market. It does mean that there's going to be increased competition among brokerage companies and agents for a little bit less business volume. There are no indications of any collapse of the kind we saw back in '06 through 2010, nor something like we saw in the early '80s. It is more akin to what we saw in the 1988 to 1992 period with spotty regional weaknesses but generally a stagnant unit sales and price market. And when we get to that, the challenge for every brokerage and agent is to tighten their belts, get very, very focused on watching where they're spending their money, and focus on, of course, recruiting and developing talent. There's no indications anybody in any part of the economy, whether it's the chairman of the Federal Reserve Board, the treasury secretary, the head of the Mortgage Bankers Association, NAR, that anybody is seeing anything that talks about the kind of declines we've seen in past recessions, but rather just a cooling off people the housing market. And there's no reason to have high anxiety, but there are great reasons to be anxious at least a little. Most of this is brought on, of course, because of the lack of inventory and affordability challenges in a lot of markets.
On a last issue today, we want to talk about the I-buyer models. Everybody's favorite topic today is the OfferPad, OpenDoor, Knock.com, Zillow, Redfin, and now Realogy's Caldwell Banker unit, offering to buy homes direct from consumers as a means of providing liquidity to a family. We've written before that we really believe this is a positive development for consumers. Of course it is. It gives them an option if for whatever reason they need or want to get out of the home they're in quickly. It's a very good tool. But let's put it in perspective on the one hand. We have seven companies now offering some form of I-buyer program. They're making a lot of news getting credit lines of three, four, $500 million to do so. But let's do a hypothetical and give all seven of them a $2 billion line of credit to buy homes. And let's suppose they're very, very good at buying and selling and they turn those dollars four times a year in buying and selling homes. Well, that would be seven companies, $2 billion each, times four times a year, so that's seven times two, which is 14 billion, times four, which is 56 billion, and that's a lot of money and a lot of buying power. But let's keep in mind, the housing market this year will be in the vicinity of 1.7 to 1.8 trillion dollars in transactions, so it's actually a very small part of the market. Now, in places like Phoenix or Vegas or Denver or Dallas or Atlanta, it may be a higher share, but it's still not that threatening to the incumbent brokerages and agents, nor is it thought that every homeowner who might be eligible will accept the offers from these I-buyer home buying companies. We do know, however, on top of their offer to buy, obviously they put themselves in a position to also be referral agents for people who want to sell but may not want to take them up on their buying offer and accept the concurrent discount to fair market value that is priced into those transactions. So on top of their direct buying activity, it is very true that they can affect a broader segment of the market in terms of referring sellers to existing agents. And it could be any one of them that are not already in the brokerage business may well become full-service brokers and capture those leads for their own agents. On the flip side of this is to think the following. When you look back historically, RE/MAX, when they achieved 1% market share began to affect most commission plans with most brokers throughout the United States, the same could be said of Keller Williams. Not so long ago, they started impacting all kinds of brokerage companies and their commission plans for their agents, and yet at the time, they, too, had something less than just about 1% market share. So if the I-buyer companies and this phenomenon grows, even if they only have 1 to 2% market share in a given market, they will affect a broader scope, a broader portion of that market place. Here's the good news. There are a lot of brokerage companies that can develop their own I-buyer programs. Maybe not to the scale that these guys can, but certainly a moderate to large-size brokerage company is fully capable of entering this marketplace. We believe, as we've said before in print, that Berkshire Hathaway, Keller Williams and RE/MAX, in our belief, will ultimately also enter this market, either directly or with partners. It will be a very interesting time to see. The last thought we have on this is all of these companies have entered the market when housing markets are still very healthy, although we said earlier in this podcast, housing markets are softening. The question is, will any of them or all of them get caught in the equivalent of the game of musical chairs in the housing business and get caught holding thousands of homes when the market really softens and they can't recapture what they spent to buy those homes. We've seen it happen before.
So all three, SoftBank, investing in real estate brokerage, anxieties about the housing market, and the I-buyer phenomenon, all critical issues, but not urgently in your face right now. Focus on developing and recruiting talent, and watch your cost.
Learn more about industry trends, marketing and technology strategies, as well as listen to past Real Trending episodes on our website, www.realtrends.com/blog. This has been Steve Murray.
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