When you think about it, it is rather remarkable that there is still a need for a person to show you the kitchen and bathrooms of a house for sale, all in an era where cars can drive themselves. This is not a shot at real estate agents, rather a warning signal that technology will replace them at some point in the near future. Real estate firms have looked into the crystal ball as well and see the winds are changing.
There can’t be three people left in the U.S. who don’t use an online source like Zillow or Redfin. It’s only natural then that these companies leverage their users in tangential ways as margins get tighter. Opendoor, a company that buys homes from consumers in cash, makes minor repairs and then resells them has recently acquired a title and escrow company and launched a mortgage-lending business. This vertical integration makes sense and soon others will jump on board.
According to Greg Schwartz, president of media and marketplace at Zillow, “Typically it’s not about finding the home. It’s really about the last mile.” Here’s the thing. There needs to be a checks and balances system in place in the market. It sounds a little too cozy that you can find a house, finance that house, and have the title and insurance all provided in one place. I’m the first to rail against regulation, but we must look back at 2009, as it was this very market that led us into the great recession.
The real estate brokerage business is like any other, in that it is sales that drive profits. Profits from real-estate commissions are generally shrinking in the industry because agents are demanding to take home a larger split. This is the paradox that is perplexing. Agents want more in a time when they are needed less. Glenn Kelman, Redfin’s CEO, said, “We’re trying to hit the gas on almost all of these businesses.”
Analysts who follow the real estate industry don’t believe that this vertical integration will solve the problem of shrinking margins in their main business. “These are not going to make or break bad decisions in your core business,” said Jack Micenko, a senior analyst at Susquehanna International Group.
It appears that unless your core brokerage business is profitable and growing, no number of tangential businesses will be able to make a difference. Redfin’s Kelman puts it this way. “You’re adding up four negative numbers and hope it comes to the positive number, and it won’t. Each of these businesses has to make money.” Over the last century, average returns in the stock market have outperformed investments in real estate.
In addition, since the great recession in 2009, the stock market has recovered and advanced well above the real estate market.
When all is said and done, real estate for most of us is a place to live, our home, and usually our main asset. Over time some are lucky enough to build equity and increase wealth. Like the stock market, if you invest when you are young, you can ride out the negative bumps in the road in both real estate and stocks, giving you a positive return on your investment in the long term.