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The dominos fell fast Tuesday morning.
Then, almost at the exact moment the Compass news went live, Redfin also announced it was eliminating hundreds of jobs. Between the two companies, nearly 1,000 real estate professionals would be newly out of work by the end of Tuesday.
The layoffs came after more than a dozen other real estate companies, many of them in the mortgage sector, embarked on their own cuts this year. Taken together, the picture emerging is one of an industry that, coming off one of its best years in decades, is now taking a beating.
Part of what’s going on has to do with issues unique to the companies involved. But according to some industry observers, the spate of recent layoffs may also hint at a turning point in which the heady days of the past decade are winding down. In short, the housing industry may be poised to purge a multitude of jobs.
The weak economy
First things first, the most straightforward explanation for all the recent layoffs is that the economy is weakening. Compass founder and CEO Robert Reffkin said as much in his email announcing the job cuts Tuesday, noting that the “economic environment has consistently worsened over these last few months.” Redfin CEO Glenn Kelman similarly pointed to economic challenges in his own layoff announcement, saying that “with May demand 17 percent below expectations, we don’t have enough work for our agents and support staff.”
In the lending space, mortgage rates surged past 6 percent Monday. The jump was just the latest in months of spiking rates, and the resulting dip in demand has contributed to layoffs at companies such as Mr. Cooper, LoanDepot and Better.
All of this is happening against a backdrop of the stock market entering bear territory, and as a consensus has emerged that the housing market has shifted.
More hard times to come
With a recent spate of layoffs, the present moment looks somewhat similar to the beginning of the pandemic, when a wide array of companies also let employees go. Fears at the time of a housing downturn proved to be unfounded, however, and many companies soon rehired workers.
But industry experts told Inman Tuesday that what’s going on now is something different. Among them, Russ Cofano — former president and general counsel of eXp World Holdings and current CEO of Collabra Technology — said he believes home prices have peaked, while at the same time there’s a growing realization that “we’re going to have fewer transactions” going forward.
“That is going to impact the top line revenue of brokerage companies,” Cofano added.
In other words, the layoffs of early 2020 were a blip, but the shift that’s driving the current round of job losses is something deeper and more fundamental. Cofano specifically pointed to recent Fannie Mae data forecasting a 22 percent decline in transactions, and noted that such a drop would bring the number of deals down to 2012 levels. Prices are higher now, of course, but not high enough to keep 2021 levels of money flowing through the system.
The end result, Cofano argued, is that the layoffs at Redfin and Compass are likely not the end of the story.
“I think you’re going to see it across the board,” he said, “with brokerage companies decreasing headcount.”
Victor Lund, founder and CEO of real estate consulting firm WAV Group, made a similar point. In an unpublished blog post he shared with Inman, Lund wrote that “the number of real estate agents and loan officers in the industry today is more than double what is needed for the transaction volume we are seeing.” He went on to predict “a lot of volatility between now and the November election.”
Lund added in an email to Inman that there are likely more layoffs coming, adding that he sees the number of Realtors falling down to around 1.1 million. Such a drop would be a major decline from the 1.5 million members that the National Association of Realtors currently has on its books.
A major dip in the number of agents could be especially painful for brokerages. Cofano said many brokerages make most of their money from “the marginally producing Realtor” rather than from top producers. However, such marginal producers are the most likely to wash out of the industry in a downturn.
“What I think is going to happen is we’re going to see a lot of fringe people that have gotten into the industry leave. I think we’re going to see a pretty significant exodus,” Cofano said. “How many I don’t know. But they’re going to leave. And it’s not going to be 10,000. It’s going to be a more substantial number of people. That is going to trickle down into the make up of the brokerage industry.”
Challenges for fast-growing companies
Industry observers were divided on what the layoffs specifically mean for Compass, which is notable for having grown over the course of a decade into the largest brokerage by sales volume in the U.S. Greg Robertson, a general manager at Lone Wolf Technologies and blogger at Vendor Alley, told Inman Tuesday’s layoffs appear to be a reaction — and possibly an overreaction — to a weak stock market and rising rates.
“I think the fundamentals of these businesses are still strong,” he added.
However, not everyone was as bullish.
Scot Campbell, managing broker of Coldwell Banker Campbell Realtors argued to Inman that scaling up — as Compass has done — doesn’t save money because “you have the same supports, the same escrows, the same labor on everything.”
“If you were losing hundreds of millions of dollars in the best real estate market I’ve seen in the last 30 years, how are you going to make money when things get difficult?” Campbell asked.
Thad Wong, co-founder and co-CEO of brokerage and franchisor @properties made a similar point, noting that Compass lost nearly $500 million in 2021. He added that with such significant losses during a good year, it’ll be tough for Compass to cut expenses in the comparatively more difficult environment of 2022. And cutting expenses will also make it difficult, or impossible, to maintain the rapid pace of growth that Compass is known for.
“There’s no way to gain market share and decrease your spending right now,” Wong added. “It’s just impossible.”
In fairness, both Wong and Campbell work for companies that compete with Compass.
But Cofano, whose current company doesn’t directly compete with Compass, also said the mega brokerage and other fast-growth firms could face hard times in the current economic environment. One issue, Cofano noted, is that Compass and rivals such as eXp have baked stock-based compensation into their business models. But with the stock market posting losses daily, that compensation becomes less and less enticing to agents.
“When you have continued pressure on stock prices,” Cofano said, “that will have an impact. How big I don’t know yet.”
All of which is to say that if the industry continues to shed jobs, if the new normal is fewer overall transactions, and if the stock market keeps dropping, the hammer may not fall on everyone equally.
“I believe the one known thing is that the number of industry participants is going to go down because the economics will not support them,” Cofano said.
For now, though, it’s still early days. Redfin, Compass and many others laid employees off at the beginning of the pandemic, and pretty much every company ultimately ended up recovering. In Compass’ case, the recovery brought it to the top of the real estate heap. It’s impossible to say, then, how significant Tuesday’s layoffs will look in hindsight.
For his part, though, Reffkin remained bullish on his company Tuesday despite the layoffs.
“I remain absolutely committed to and more optimistic than ever about the future we are building together,” Reffkin wrote in his email announcing the layoffs. “Being decisive and responsible when it comes to our business will help us not only emerge stronger, but continue to keep us all focused on helping Compass agents continue to be the best in the industry.”