Above, Robert Reffkin
Shifting gears during a standard company earnings report last week, Compass Founder and CEO Robert Reffkin delivered a state-of-the-industry address in which, among other things, he insisted that the residential real estate market will rebound dramatically in the coming years, driven by factors such as increased inventory, all-cash homebuyers and low mortgage rates.
He also downplayed the impact of a recent litigation settlement, stating he believes there will be little impact on Compass business, and that experienced agents, strong value proposition and the project management role will continue to be valued by buyers and sellers. He emphasized that buyers and sellers prefer to pay for value rather than receive a discount.
“I still believe 2024 will be better than 2023, and that 2025 will be better than 2024 with the mid-cycle coming in 2026,” he said after parsing the financial aspects of an upbeat Compass earnings report, explaining his logic due to the following:
- Inventory is up 3% from a year ago. More inventory leads to more sales.
- The percentage of all-cash homebuyers is at the highest level in over two years, with the stock market near an all-time high. Homebuyers are less reliant on mortgages.
- The percentage of sellers with mortgage rates of 4% or below is approaching 50% after dropping from approximately 75% at the peak. At this rate, in two years, only approximately 25% of people may still have mortgage rates of 4% or below, nearly eliminating the biggest bottleneck to the mid-cycle real estate market.
- There is over two years of pent-up demand. Assuming 2024 is just modestly better than 2023, this will end up being a three-year housing downturn, forcing many people to live and remain in homes that they don’t want to be in. When rates come down, it will create a massive surge in transactions. The longer this lasts, the stronger the market bounceback will be.
Reffkin said that the No. 1 question from investors is about what effect the lawsuit settlement is having on Compass business. He answers with five facts and five beliefs.
“One, buyers are using buyer agents now more than ever,” he asserted. “In 2023, 89% of buyers used agents, up from 75% just 20 years ago. Two, buyer agreements are not new, and they’re already required in half of the states in which Compass operates. Thousands of Compass agents have been getting buyer representation agreements signed for years with no issue.
“Three, 90% of our agents have been trained and are prepared for the rules since the verdict. We have provided our agents with 57 national training sessions and hundreds of local training sessions. With these efforts, I’ve seen our agents transition from initially being worried to now being confident. Four, commissions were 5.5% in 2023. That compares to 5.1% just 20 years earlier in 2003. And five, the industry has not seen a noticeable change in either the percentage of sellers that offer a buyer agent’s commission, nor in the average commission amount they are paying the buyer’s agent.”
Reffkin noted that when reviewing MLS data in the markets generating the majority of Compass revenue since the announcement of the National Association of REALTORS®’ (NAR) settlement March 15, it was found that more than 99% of new listings included offers to pay the buyer agent. Fully 96% of all listings included offers to pay 2% or more, and about 67% offering to pay 2.5% or more.
“We are not hearing from agents that any of these numbers are coming down,” he said. “We believe the sensationalist press, specifically the headlines, has caused significantly more reaction than what we expect to see from the actual rule changes. Since the NAR settlement, sellers are asking if they need to pay a buyer agent, and the result of those conversations is that sellers felt more than 99% of the time that it was still in their interest to provide a commission to buyer’s agents.”
Reffkin then shared some beliefs related to Compass that are also applicable to the widespread industry.
“After conversations with hundreds of our agents across the country, we believe there will be little impact on the professional, full-time agents,” he said. “Agents will increasingly need to be able to sell their brokerage’s value proposition, to communicate that to buyers.
“Real estate agents are project-managing a highly complex, multi-month process where they can often be coordinating between over a dozen different parties, loan officers, title officers, home inspectors, home appraisers, painters, stagers, photographers, videographers, agents on the other side, and so on. This important role will not be displaced or discounted.
“The percentage of buyers and sellers that will use an agent will continue to be at the 90% level. Buying and selling a home is the biggest financial decision that most people make in their lifetime. However, for decades, people have been declaring that there’ll be a decline in the use of real estate agents. In the last 20 years since the rise of the internet, we’ve seen many attempts to replace the agent, such as for-sale-by-owner companies. Then you had the aggregators, the discounters, the iBuyers and then the Power Buyers. Yet, despite all of those attempts to disrupt the real estate agent, buyers and sellers are using agents more than ever before. In the last 20 years, the percentage of buyers using an agent has increased from 75% in 2003 to 89% in 2023. The vast majority of buyers and sellers prefer to pay for value over receiving a discount.”
Reffkin insisted that sellers as well as buyers understand the unique value an agent brings to the table.
“If saving money on commissions was the most important thing to a seller, the majority of home sales would be for sale by owner,” he said. “Obviously, that is not the case. There are countless agents in brokerages that offer low commission rates. Discounters are not new and have been operating in the market for decades. Many of these firms have either gone out of business or have not gained traction. The market will inevitably come back, and when the Fed cuts rates, we will be in a position to thrive.”
