Well, I woke up Sunday morning
With no way to hold my head that didn’t hurt
And the beer I had for breakfast wasn’t bad
So I had one more for dessert…
— Kris Kristofferson, Sunday Morning Coming Down
I guess, if I have to be honest, I’ve been there.
Not in recent years, but there was definitely a time when I’d enjoy one too many steakhouse martinis, or an indeterminate number of backyard margaritas, and pay dearly.
I’d lose my head now and then. Because the pain of the come-down is easy to forget. But the reminder comes fast.
Funny how that is: You’re carefree and invincible, then very quickly made wretched.
The last two years have been a helluva party. Some lost their heads; some didn’t. Some will now have a breakfast beer and lay on the couch all day; others will wake up, work out, and go deal with the world those on the couch are too wrecked to join.
In proptech, the fast followers, goosed by investors operating an open bar, will also be on the couch, watching CNBC and trying to find a posture that eases the pain. The innovators who checked their guts, and their egos, and internalized the truth of our cyclical housing market, will endure.
The next couple years will be their time. The best among us will ride through the reset and come out better for it.
At least I hope that’s what happens, but I must acknowledge that recent history doesn’t support this. Because our industry welcomes fools, then suffers them almost indefinitely. This creates an interesting paradox: We are resilient because we are sloppy.
In September of 2008, with real estate and finance cratering, I wrote a post in which I said:
I won’t pretend to understand the complexities of our financial markets. And there’s something so large about this calamity, so shameful, so tangled with failures both moral and financial, that I want to simply tune out.
But the Raven at the door persists. It’s not going away. With what are we left, then, besides recriminations and diminished hopes for a healthy housing market?
Well, I think back to something my business partner Marc Davison wrote last summer during the first credit shock:
“The love is what comes next. The good stuff that’s already starting to emerge despite the news. It will come by way of an unspoken apology of change. The love will bring about an industry that’s better, truer, and smaller.”
Well, as we know now, things didn’t change all that much. Yes, Dodd-Frank happened, underwriting got severe, the CFPB was created, and 338,000 Realtors left the business between 2007 and 2012.
But by 2018, just six years later, those 338,000 Realtors were back on the rolls. Another 200,000 hopped on board between then and now. Cheap money and the spiraling appreciation it fueled masked cracks in the structure of organized real estate like botox vanishes worry lines.
For all intents and purposes, the real estate industry had reconstituted itself, structurally and attitudinally, much as it was in 2007, before the calamity.
And now here we are again, the party waning, another Sunday morning showing its first light.
What will happen?
Well, I am less idealistic in 2022 than I was in 2008. I don’t expect things to change through this turn in the cycle because they should. But I do think certain things are at play that make it less likely that we’ll pull through a contraction as unchanged as we did last time.
I think this for two reasons:
First, brokerage, MLS, and association consolidation was already well underway headed into this market shift.
Some of this was fueled by the Compass acquisition binge of 2018-2020, which has now abated, but the more significant undercurrent has been weakening brokerage performance and generational churn, which has caused many owners to look for the exits.
In MLS, the steady growth of CRMLS in the West and Bright MLS in the East has set the table for accelerated consolidation as smaller MLSs confront receding membership rolls and increasingly evident operational deficiencies. The steady decline in the number of local Realtor associations, which are, by nature, the most parochial and change-resistant component of the industry, was accelerated by new minimum standards requirements set by NAR a few years back.
All of this has taken place across a decade during which teams as a force in real estate reached their full maturity, an increasing amount of buyer business was channeled through portals and lenders, and more and more business has been concentrated within a few “nodes of production.”
The net of this? I think a market slowdown will further compress the industry’s structure, concentrate it, and thus make it more changeable.
This was not the backdrop in 2007.
Second, consumers have had a taste of real change in the past decade.
On May 14, 2007, at the end of the previous party, Redfin CEO Glenn Kelman was featured in a 60 Minutes piece titled “6%” in which he said, “Real estate, by far, is the most screwed up industry in America.” It ignited a firestorm and put Redfin on the map.
Less than two weeks later, on May 27, 2007, the Department of Justice announced that it had settled its lawsuit against the NAR over rules that impeded discount brokers, claiming the resolution would “…result in more choices, better services and lower commission rates for consumers.”
Of course, no such thing happened over the next five years. Housing came down hard and commissions rose, as they typically do in a buyer’s market. As of Q1 2022, 15 years later, Redfin’s national market share stood at 1.18% by volume, and RealTrends estimates that all discount shops have never topped 3-4% share. A handful of flat-fee or rebate companies like Homie have gained traction locally or regionally in recent years, but many others, perhaps most notably Purplebricks, have failed.
But it feels to me like the stage is set a bit differently this time. The force of change seems at once more diffused and more impactful, and rooted more firmly in felt consumer needs.
This started in 2015, with the launch of Opendoor, which introduced an entirely new way to sell a house that did not simply adjust the terms of the existing structure, but circumvented it altogether. This provoked Zillow to go all-in on the Opendoor model, to the extent that when Rich Barton said in 2019 that, “Ideally I would like to have the Zestimate be a live offer for every house in the country,” and the company began making that real for some homes in 2021, you kinda thought that the jig was up.
The Zillow moonshot was aborted, but Opendoor and Offerpad remain, as does the educational imprint left by the most far-reaching real estate brand on the planet touting this model for four years. The toothpaste is out of the tube. Some people can now move more quickly and easily, and will choose this path, meaning that a non-trivial number of homes will no longer be sold within the traditional system.
Opendoor also embraced iBuying’s concomitant model, Power Buying. Like iBuying, Power Buying deploys capital or assumes risk in order to surmount hurdles in the traditional transaction process. Many smart people I talk to think the cash or good-as-cash offers Power Buyers enable will be operative in half of all transactions in the coming years.
Some Power Buyers (Opendoor included) employ their own agents (which I have referred to as “push button” agents), while others (notably Homeward, Knock, and Ribbon) allow buyers to work with their own agent. To the extent that the former succeed, more and more people will experience a very different kind of real estate agent.
This nascent but significant structural change was not at play in 2007.
Either, or, or both
I’ve learned in my 25 years watching the residential real estate industry that it’s dangerous to make sweeping predictions, or assume that things will go this way or that, one way or another.
This is more of a “yes, and” world. Zillow can become a household name without driving agents and brokers out of business; a boutique real estate movement can happen alongside consolidation; companies that passionately believe commissions are too high can succeed while commissions overall move hardly at all.
So, look, my rumination on what the next couple of years will bring is just that — me more or less thinking out loud. I think the market shift we are now experiencing will have greater long-term effects on the shape of the industry than similar periods in the past. But, hey, I’ve been wrong before.
Enjoy the weekend. (But not too much!)