I've been predicting the demise of the traditional real estate agent/ brokerage for a couple of decades now. I got into the business 12 years ago because I believed that there was about to be an explosion of interest in alternative brokerage models. Yet, the future of the real estate industry has been slow to arrive as evidenced by the persistence of high real estate commissions. As I've explained before the consumer is reluctant to try newfangled concepts when it comes to their most valuable asset.
But there is a glimmer of hope for an enlightened consumer on the horizon. 3 1/2 years ago (it's been that long?) I wrote a blog post on how we could learn a lot about the future of real estate agents by looking at what happened to stock brokers. Now I'm looking at the stock market and seeing another flashing red light telling us that the traditional real estate agent and their brokerage are dying fast. I'm talking about the stock prices of companies like Realogy, Remax, Zillow, Redfin, and the private market valuation of Compass.
Let's start with Realogy (RLGY), which is the parent company of such well known real estate brands such as Coldwell Banker, ERA, Century 21, Better Homes & Gardens, Corcoran Group, NRT, and Sothebys - yeah those are all part of a single, giant corporate conglomerate. Those combined brands have a commanding market share across the nation.
Yet, as an investment, it's been a disaster as you can see in the stock price graph below. On Wednesday it hit a new lifetime low (it went public in 2012) of $6.41, giving it a market capitalization of only $737 MM. Granted, it is a highly leveraged company and the recent (meritless) class action lawsuit that names Realogy as one of the defendants in a commission fixing scheme doesn't help matters. According to analysts the risks to the company include the rising power of lead generation players such as Zillow, the rising power of realtors vs. brokerages - I've always maintained that traditional brokerages bring nothing to the party, and threats from all the emerging new business models such as ibuyers, discount real estate brokers, and new brokerages such as Compass.
Similarly, Remax (RMAX) is trading at the lower end of it's historic trading range with a market cap of only $558 MM. Actually, that market cap is not that much lower than Realogy's despite having a much smaller presence in the market. But by comparison Compass, which is still considered a startup and is not publicly traded, is believed to have a valuation of around $4.4 B, Zillow has a valuation of $9.8 B, and Redfin is valued at $1.6 B. Despite the fact that all 3 of these challengers are losing money it's clear where the investment community thinks the future of real estate is.
I get Zillow's valuation. They've basically inserted themselves in the consumer's decision making process for picking a realtor and they charge realtors for producing and forwarding those leads. They skim off considerable value from the real estate transaction for doing something that traditional real estate brokerages have been unable to do.
However, Compass' valuation perplexes me. On the surface their story is very glitzy and they are exceptionally skilled at promoting themselves and their real estate agents. However, even after having met with a business development guy at Compass, I don't see them doing anything special to help people buy or sell homes. They've basically just grown over night by stealing a lot of the top producers from other brokerages across the country.
Of course, as the co-owner of a full service, discount real estate brokerage, I can't help but believe that the low commission model is the real future of real estate. That's why I'm actually a bit surprised that Redfin's valuation isn't higher. Then again their growth has stalled recently - at least in the Chicago market - and this business model is not easy to pull off. It could just be that investors need to see more proof of the potential before attributing a greater value to their stock.
Gary Lucido is the President of Lucid Realty, the Chicago area's full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market or get an insider's view of the seamy underbelly of the real estate industry you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.