Traditional models shouldn’t be fully counted out, but they need to change, according to John Campbell. He’s downgraded Realogy’s target share price from $16 per share to $8 per share and lowered RE/MAX’s target stock price from $45 per share to $37 per share.
The real estate ecosystem is, “at the tipping point of considerable change,” according to John Campbell, managing director of research with the Little Rock, Arkansas-based financial services firm Stephens.
“After spending several weeks assessing the potential implications of the pending class action suit/DOJ probe, examining the private market (and funding), spending time at recent industry conferences and engaging in conversations with a multitude of industry players, we have come to the conclusion that the U.S. residential real estate ecosystem is at the tipping point of considerable change,” Campbell wrote today in a paper, giving investment guidance.
“Rather than stick with past calls due to valuation (and stubbornness), we are wiping the slate clean and recommending that investors go with those leading the change efforts across consumer home buying/selling and the way brokerages operate,” Campbell added.
“Rather than focusing on making the home buying/selling process fundamentally better for the consumer, we believe that traditional brokerages and franchises have long depended on its agents to lead the change efforts on the consumer experience side of things,” Campbell writes.
Campbell believes that agents have not been able to deliver on a different consumer experience because of a lack of capital and general power, lack of a feedback loop to tech development and lack of desire to rock the boat. That’s led to stagnation in the industry over the last several decades, but now he believes true change is on the way.
“After decades of the status quo, we believe that the industry is at the inflection point of considerable change,” Campbell wrote. “As noted, while consumers have been ready to embrace change, we do not believe that there was enough of a coordinated effort to deliver on that desire for change in the past.”
Campbell specifically believes Zillow and Redfin have consumers at the center of their strategy – with offerings like Zillow Offers and Redfin Direct – and new players like Compass, Opendoor and Offerpad are starting to break through with a lot of venture capital cash.
For that reason, Campbell is updating the target stock price on Redfin from $18 a share to $23 a share and updating Zillow’s target stock price from $48 a share to $57 a share.
Traditional models shouldn’t be fully counted out, but they need to change their models, according to Campbell. He’s downgraded Realogy’s target share price from $16 per share to $8 per share and lowered RE/MAX’s target stock price from $45 per share to $37 per share.
Campbell also believes that the market is large and fragmented enough to feed many mouths, and there is not only a window of time to adapt, but there is awareness from the traditional players that they need to adapt.
EXp Realty is another interesting case. While the target stock price for parent company eXp World Holdings remains unchanged at $19 a share, Campbell does believe it may represent the next generation-type brokerage.
“Given our belief that the industry is at a real inflection point, we want to be in the corner of those driving the change as opposed to those that are being more reactive and forced to change,” Campbell wrote. “We believe that [Redfin] and [Zillow Group] stand out as the clear longs from the standpoint of real consumer-driven change, and we believe that [eXp World Holdings] remains an interesting long given that it likely represents the next generation-type brokerage offering with a cloud-based approach and a limited back-office expense base that allows for higher agent payouts.”
Even with the industry seemingly on the precipice of major change, according to Campbell, agents have more power than ever and need brokerages less than in the past. Brokerages, at one time, filled the need for lead generation, office space and back-office support and today, agents can have most of those needs filled outside of traditional brokerages.
Agents can purchase leads from Zillow and use Zillow’s Premier Agent platform to run all their day-to-day activities according to Campbell and the need for brick-and-mortar spaces has been reduced with more virtual and cloud-based solutions.
Despite the pendulum of power shifting from the brokerage to the agent, the role of an agent in a transaction is likely to change, although they will still have a seat at the table, according to Campbell.
“A home purchase is the ultimate considered purchase/a major life decision and is often times 7 times the next level of debt for consumers so we do believe that there is a need for guidance and human interaction in the majority of transactions,” Campbell wrote. “However, given the size and fragmentation in the market, we do see a decent slice of the market moving towards limited agent presence transactions (like Redfin Direct and iBuying).”