REAL Trending Episode 55
Housing Market Factors, Compass Capital, Direction Of Technology
REAL Trending Episode 55
Housing Market Factors
Important factors in the housing market in The Wall Street Journal articles the week of July 29—the median age of a home buyer is now 46, which is the oldest since NAR began keeping records on that in 1981, almost 40 years ago. Why? What’s happening? Well, the average price of lower-priced homes rose by 64% from early 2012 to late 2018 according to CoreLogic, while the price of higher end homes just rose 40%.
This is intuitively known to every brokerage in the country. But here’s some factual evidence. The demand and the prices resulting from that demand in the lower quartile are going up far faster than the upper end. Another thing to keep in mind, the median price of a home grew 21% since 2000. So, from 2000 to end of 2018, median price of homes across the United States grew 21% while the median household income only grew 2%.
These numbers are inflation adjusted of course, but it points out the fact that we have a mismatch between housing inventory, housing prices, and household incomes. So, it’s not surprising that a record number of 20 and 30 year olds are still living with their parents according to the Census Bureau. There is a huge opportunity for brokers and agents to focus on 20 and 30 year old households therefore to help them navigate a way to get into the housing market.
As one economists said, the problem is, if you don’t get young families into home ownership between their mid 20s and mid 30s, you’re going to affect long-term economic growth period. We all know about this struggle. But here’s the challenge and the opportunity. What are brokerage companies and agents doing in an organized fashion to find where all of the potential down payment assistance programs are, or special mortgage programs? Whether they’re Fannie, Freddie, or even private banks which are proliferating.
How are we going to help young families who want to get into home ownership get into home ownership? Where is the focus on that as a huge demographic and business opportunity? So, keep that in mind. All of these facts are interesting and of course we need to pay attention to them, but it’s actually what we should do about them that matters the most. Here’s the question. What are you doing about that opportunity? Particularly if you’re a 25 to 40 year old new agent looking to build a practice.
More capital for Compass. In the last week of July, Compass announced they had raised another $370 million to go with the $1.2 billion it had already raised in previous rounds. This most current round values Compass at $6.4 billion. Well, that’s kind of interesting. And we at REAL Trends have heard numerous comments, emails, texts, and phone calls about, how can a company with 13000 agents be worth $6.4 billion when Realogy and RE/MAX, who combined have a quarter of a million agents combined have equity values of less than 1.1 billion.
A lot of people, doesn’t make any sense. But a lot of people don’t think about the world that Compass lives in. The world Compass lives in is not a world of EBITDA multiples to determine the value. The world compass lives in, the technology world, is multiples of revenue. As Robert Reffkin told me in several conversations, he wishes he could get partnerships and ownership stakes jointly with all major brokers because then they can take and create a company valued at three to four times gross revenues.
And what a dream that would be for any residential brokerage company in the United States of America. But that is Robert Reffkin’s dream. That is his goal and his objective and that of his investors. So, you almost need to ignore the concept that Compass has to make money today. What they’re doing is ramping up growth. They’re investing hundreds of millions of dollars in technology. Their own source says they have almost 300 engineers now employed to continue the build out of their complete one-stop platform for agents.
I know from conversations with Compass people also that they firmly believe that they can build a platform that is so good and so encompassing, no pun intended, that agents would find it hard to leave the brokerage because of the benefits of the platform they would leave behind. We’re going to talk about tech in our third segment today, but for the moment, let’s talk about Compass.
They brought in, in addition to the existing, some of the existing investors put more money into this G round of fundraising. And some new ones, particularly of note a company called the Dragoneer Investment Group and the Qatar Investment Authority the sovereign wealth fund of that company. In at least one article in the Wall Street Journal about the Compass fundraising round, experts inside Dragoneer and/or Compass and/or people familiar with the deal said that they believe the involvement of Dragoneer would indicate that a public offering may be in the offing.
Well, there’s no comment from Compass about that and that’s immaterial. At some point, yes, Compass will launch and do a public offering of their shares. That’s how these business enterprises work. They’re going to do it when they’re still growing at 20 to 30% or more per quarter in gross revenues. Their investors clearly don’t care whether they’ll have earnings at this point or not. What they care about is growth and that somewhere down the path there is a tech-driven real estate services organization that is superior to others in the space.
We’re not commenting whether we think they can actually achieve that or not. That’s the farthest thing from our minds. The point being is that Compass is here to stay for the time being. They’ve proven their stability by raising another $370 million. Brokers who have to compete with them, as we’ve said before on these podcasts and in our newsletters, you must be prepared for vigorous competition. And we know it will continue.
Direction of Technology
Lastly, the question, where is tech taking us? Well, from our prior story about Compass investing hundreds of millions of dollars in technology, and by the way we know that Keller Williams is investing hundreds of millions of dollars in technology. Keller of course takes the position, we already have a platform. This editor has seen and interacted with that platform and can attest to the fact we’ve seen numerous tools already on the Keller platform that are extremely interesting and useful at connecting consumers with agents, and providing a useful benefit in that connection.
And probably that’s where a lot of this is heading. We actually heard Josh Team, the president of Keller Williams Realty International and the architect of the platform say very clearly at the gathering of eagles, “If you’re not building a platform that’s meant to provide benefits to consumers and that that is your focus, then you’re going to lose.” We tend to agree with that.
We interact with a number of tools that aren’t just normal every day update of listings and prices, but very interesting tools like Home Bought, the company we featured at this year’s gathering and which is a tool that yours truly uses every month. And I love getting it and it’s very useful and very helpful.
But where is tech taking us? It is about on the front end, if you will, building a useful relationship with the consumer and providing things of value to them in a means that’s convenient for the customer and is tailored to the customer. Picture Amazon and how many things they know about what you bought, when you bought it, things that are related to what you bought that you might like.
It’s that kind of ethic that technology in our industry should be focused on. Yes, we need transaction management. We need online forms. We need back office systems for accounting and listing and sales management and operations management, but the big investments that people need to be focused on are, what can we deliver to consumers on behalf of our agents and our company that will create great value.
On a kind of side note, the Amazon Realogy deal, talking to some industry insiders over the last few days, we were guessing at other things that Amazon and Realogy could do today. For instance, in the artificial intelligence and big data arena. Imagine, if you will, Amazon with all of the information they have about people’s buying habits, matching up their consumer data with Realogy’s selling and buying of home data and coming up with algorithms that alert both Amazon and Realogy when purchases on Amazon might signal someone’s intent to want to buy a home or to sell a home.
All the people that talk about big data and artificial intelligence, that’s going to be very, very important. No doubt about it. But of course what it’s going to require is that any output from those are, in fact, as we said earlier, tools that are meaningful and useful and inobtrusive to housing and other consumers.
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. Hope your summer’s been a good one. Until next time.