Brokerage focuses on closing house-flipping venture, enhancing search profile
Fourth quarter results for Redfin – chiefly a 25% drop in revenue – closely mirror the housing market slowdown exacerbated by inflation and consequential volatility in interest rates.
The Seattle-based residential real estate brokerage still managed to beat Wall Street expectations in posting $479 million in revenue for the quarter, but its shares immediately fell by 2% following the disclosure. During its earnings call, the company said investors purchased about half as many homes during the last quarter as compared to the comparable period in 2021. Moreover, home purchases fell more than 40% from last year.
The results came as no big surprise given the sporadic layoffs the company had undertaken in preceding months. In November, the firm announced the gradual end of RedfinNow – a home-flipping initiative – that resulted in a layoff of more than 860 positions representing 13% of the total workforce.
CEO Glenn Kelman also outlined a net loss countering revenue gains: “Redfin generated $480 million of fourth-quarter revenue, exceeding our projected range of $430 million to $459 million in revenue, mostly on the strength of RedfinNow sales,” he said. “Our net loss of $62 million included a $57 million gain from repurchasing at a discount $143 million of debt due in 2025. The adjusted EBITDA loss of $63 million was near the favorable end of our $58 million to $71 million guidance.”
He detailed reasons for the drops from past years: “Earnings mostly exceeded expectations, but comparing the fourth quarter of ‘21 and 2022, Redfin lost two basis points of market share, in part due to layoffs and the loss of RedfinNow-driven demand,” he said. “As we compete better for online real estate traffic and improved sales execution, we expect share gains to accelerate in the second half, especially when we’re no longer comparing our sales to a period of aggressive spending on agent hiring and home purchases. It will be a major achievement to take share in a year where we’re also improving annual profits by nearly $200 million, driven by higher gross margins, lower spending, and the closure of money-losing businesses. We couldn’t be more excited about the year ahead.”
Are home flippers in trouble?
The RedfinNow venture is slowly coming to an end, he suggested: “Two months into 2023, we’re still on course to earn an adjusted EBITDA profit for the full year and on schedule to sell our last RedfinNow home in the second quarter,” Kelman said. “For the property segment that includes RedfinNow, the gross profit losses in the fourth quarter were at the favorable end of our range. The full-year gross profit losses for this segment were $23 million, and the 2023 gross profit losses should be… a few million dollars or less. Only 19 homes originally purchased by RedfinNow for $12.2 million had neither been sold nor accepted an offer to be sold.”
The closure of RedfinNow, he said, is part of a broader shift to higher margins and less cyclical revenues: “The percentage of homebuyers served by our partner agents instead of our employees will increase from 37% in 2022 to a projected 42% in 2023,” he said. “We decided to sell more demand to partners after accounting for costs that aren’t directly tied to a sale, but that still grow with the number of agents we employ, like the cost of human resources support and training for agents. This decision will not only increase 2023 profits but also limit layoffs and losses in future downturns.”
He outlined strategies for future growth: “The primary way we’ve grown is by reaching more people through our sites and mobile applications,” he said. “Comparing the fourth quarter of 2021 and 2022, the average monthly visitors to Redfin’s website and mobile applications declined by 2%. But over that same period, searches on Google for homes for sale declined 33%.”
He added that the difference between these two numbers indicates why the company likely increased Redfin’s share of online real estate traffic. “ComScore, which lets us compare ourselves to other sites, reported a 6% fourth-quarter decline for Redfin compared to 22% for realtor.com,” he noted. “According to comScore, we started keeping pace with Zillow in December despite a second- budget for TV ads that was a quarter of the size of Zillow’s. To improve our long-term competitive position, we know we have to draw visitors away from all our major rivals, not just one, and we believe that we can.”
There’s good news on the Google front, he added: “For Google searches on a home address and our 10 longest established markets, Redfin is now most likely to appear as the first result across the US for these searches,” he said. “And we can still grow by expanding the parts of the US our competitors already cover and by improving the machine learning software we use to recommend listings. Drawing more visitors to Redfin is the first step in our growth.”
Search is one thing, he hinted, yet measurable action is another: “But we also want a higher proportion of those visitors to hire our agents. Because we look like other real estate sites, consumers often assume we’re a marketplace for promoting the agents who paid us the highest fee. In fact, the whole reason we employed our own agents has been to deliver faster service at a lower fee from top producers. Almost no-one knows that in 2022, Redfin agents had the highest average sales volume of any major brokerage beating our closest competitor by almost 20%.”
Why is US housing inventory so low?
For all the tactics and fixes, market conditions continue to pose the biggest obstacle toward growth, he suggested: “What’s most remarkable about this housing downturn is that the number of homes for sale hasn’t meaningfully increased from the calamitous lows of the pandemic,” he explained. “Sure, the number of homes on the market at the end of January 2023 was up 40% since January 2022, but it was still at roughly half the pre-pandemic level it was from 2016 to 2019 during a strong seller’s market. Our agents report that would-be sellers with 30-year mortgages at a rate below 3% are choosing to keep their homes instead of selling either to live in or to rent out. This is why from May 2020 to May 2022, home prices increased 40% but have fallen only 3% since.
Why are fewer and fewer millennials buying homes?
The millennial generation for which so many in the industry had high hopes in terms of homeownership continue to wait on the sidelines until the market improves: “The millennial generation that mostly came of home buying age just after home prices and mortgage rates shot up still faces an affordability crisis with no real relief in sight,” Kelman said. “Because of low inventory, we continue to believe that sales volume will be more volatile than home prices. Regardless of market conditions, Redfin will generate adjusted EBITDA in 2023 and net income in 2024. Once we recover from restructuring our business to be more profitable, our share gains will resume and accelerate.”
