To all the agents in the house,
Redfin and Compass each announced layoffs of hundreds of employees Tuesday, with Compass additionally stating it is planning for further brokerage cutbacks. What does this news mean, and how does it affect other brokerages?
What this news means
Analysis in the Wall Street Journal and elsewhere have come out in the past few weeks stating the Biden administration and Federal Reserve miscalculated how the COVID-19 pandemic would affect the economy. In short, federal officials thought there would be a demand issue, but instead there was a supply issue. The inability to quickly get supplies to the U.S. (including fuel and supplies to build homes) was exacerbated by China's COVID shutdown and the Russian invasion of Ukraine.
This is a simple concept, but one often lost in politically charged discussions: The U.S. is not a purely capitalist economy. It's a mixed economy of private enterprise and public input, in which the Federal Reserve has a tremendous amount of power to set interest rates. As my colleagues Georgia Kromrei and Bill Conroy have reported, meetings of the Federal Reserve's Federal Open Markets Committee can end with decisions that reshape and redirect the housing economy.
Presently, the Federal Reserve has decided to raise interest rates to fight inflation, even if it means a significant drop in the overall valuation of stock markets and even curbs major consumer purchases. Like homes.
These macroeconomic factors also force individual real estate companies to change course.
How does it affect other brokerages
As a journalist, I have to be cognizant of all of the above, but I also think companies have some ability to prepare for macroeconomic shifts. The classic example of this, in my time at HW Media, is Knock.
The so-called power buyer laid off almost half of its employees in March. Sean Black, CEO of Knock, said the company had a really wonderful plan, but the Omicron variant and Russian invasion changed everything.
I suppose the corollary is if fewer people had gotten Covid in winter, and Vladmir Putin tempered his anger about Ukraine aligning itself with the rest of Europe, Knock would have been able to put up cash to assist homebuyers in Tampa or Charlotte.
And that's how we get to Compass and Redfin. Exhaustive virtual ink has been spilled questioning Compass's path to profitability. Redfin is less of a bogeyman in the real estate reporting world, but one could argue their business model is equally shaky. Whatever the case, it's a fact that in 2021, when the housing market was rocking and other publicly traded brokerages were profitable, Compass and Redfin lost money.
Another fact is that Compass and Redfin also were the two publicly traded brokerages to make a significant number of layoffs when COVID-19 came to the U.S. in the spring of 2020.
Both points suggest these companies are especially vulnerable, and other brokerages might have more cash on hand to weather macroeconomic turns.
But we will see. The private company Side also announced a 10% reduction of its much smaller workforce. And REX Homes, which, like Redfin, has an agent-as-employee model, reimagines itself as broker to corporate landlords.
Agents, what are you hearing about layoffs at your brokerage? Are you worried? Or do you feel relatively confident about your place in the real estate market, and the brokerage where you hang your license?
Please email anonymously at mblake@housingwire.com.
Sincerely,
Matthew Blake
Senior Real Estate Reporter
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