Real estate companies have been trapped in a repeating cycle of bad financial quarters. Will this latest round of earnings break the loop, or is the industry doomed to relive it?

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In 1993, Bill Murray woke up to the soothing sounds of “I Got You, Babe” from Sonny and Cher. And then he did it again. And again. And again.

We’re talking, of course, about Groundhog Day, when Murray’s character, Phil Connors, gets stuck in a time loop that requires him to live the same tedious day repeatedly. Before it ends, the character kills himself multiple times, takes up piano and ultimately learns how to be less selfish — thereby breaking the loop.

So why recount the plot now, on the eve of Wall Street’s latest earnings season, when major publicly traded companies are about to share their latest numbers?

Because, at least for the nation’s biggest real estate companies, this earnings season feels a bit like that movie. Mortgage rates are high and generally moving upward. Inventory is low. The Fed is trying to tamp down inflation. If this all sounds familiar, it’s because these are the same conditions we were talking about in the second quarter. And the quarter before that. And, well, you get the picture.

All of this raises a question: Will this quarter become another trip through the time loop? Or will it be the one that breaks the cycle?

The answer may be mixed. Experts who spoke to Intel tended to believe the time loop will be apparent in Q3 earnings. In other words, the next two weeks are likely to produce some painful results in keeping with previous quarters.

But if that sounds bleak — the earning season equivalent of Bill Murray hurling himself off buildings — the good news is that the companies that make it through this environment are likely to come out stronger on the other side.

Lowering expectations

For John Campbell, this earnings season looks familiar.

John Campbell

“It’s not too dissimilar to Q2,” Campbell, a managing director at the analytics firm Stephens, told Intel this week.

Indeed, it was after speaking with Campbell that the Groundhog Day metaphor came to mind. And during that conversation, Campbell said that what’s happening right now involves a growing acceptance that both this earnings season, as well as the coming quarter and even 2024, may be tough.

Analysts are, accordingly, resetting their expectations about the future under the assumption that a “sudden recovery isn’t going to be around the corner.”

Cue “I’ve Got You, Babe.”

However, Campbell did say that while a reset of expectations can be a bad thing, in this case, it might have an upside: It’s lowering the bar that publicly traded real estate companies are expected to hit.

“From a tactical standpoint, that’s what you want to see,” he said.

In other words, this earnings season is likely to be rough. Next earnings season may be rough, too. The Groundhog Day loop may even continue into next year. But as analysts increasingly accept that reality, they may greet cooler earnings results with less apprehension.

Though the big wave of earnings reports is happening this week, Anywhere already published its numbers last week. In that case, the company managed to hold on to profitability even though revenue did decline by 12 percent year over year. In a statement, company President and CEO Ryan Schneider discussed “a difficult housing market” — a quote that could end up being the theme of the fall earnings season.

Rocked in the stock market

Wall Street investors seem to agree with Schneider and have sent real estate shares through a Groundhog Day loop of losses for more than two years now.

As Inman has previously reported, many real estate company share prices hit all-time highs in early 2021. But the momentum didn’t last, and by fall of 2022 many companies were seeing their share prices hit all-time lows.

Earlier this year, it looked like the bull market might return as many companies’ share prices surged. But as the chart below — which illustrates eXp’s share price over the last year — illustrates, the rally didn’t last. And in the wake of Tuesday’s Sitzer | Burnett trial verdict, for instance, eXp shares fell even further to the mid-$13 range, down from $25 per share in August.

Share prices for eXp World Holdings over the last year. Credit: barchart

The same story has played out again and again at different companies. For instance in early January, Opendoor shares were fetching barely more than $1. By August, shares had rallied to more than $5. Then they crashed again and by Tuesday were trading at under $2 — an improvement over January, but hardly a vote of confidence from investors.

Opendoor share prices over the last year. Credit: barchart

Compass followed a similar trajectory, beginning the year with shares trading at just over $2 before experiencing several rallies in which prices climbed at the high point to more than $4. But by Tuesday, shares were back below $2 — and were commanding less than they had at the beginning of 2023.

Compass share prices over the last year. Credit: barchart

The point here isn’t to pick on any single company. Rather, it’s to highlight a trend that applies broadly to most public firms Inman covers: Despite a short-lived rally this year, real estate stocks have generally struggled. That story has been more or less on repeat since 2021 and now, heading into the Q3 earnings season, Wall Street appears to be bracing for more of the same.

Going backwards

Experts who spoke to Intel seemed to share Wall Street’s mood. Industry veteran Chris Heller, president of OJO, pointed out that transactions are down across the board, and that will weigh on everyone’s earnings.

Chris Heller, OJO

“No one is going to escape what’s going on,” Heller said. “Every company is going backward.”

Heller went on to say — much like Campbell — that he sees tough conditions continuing into the coming months.

“I believe the fourth quarter of this year will be as bad or worse than the fourth quarter of last year,” he noted. Heller specifically doesn’t see mortgage rates coming down significantly, though he does think prices will eventually soften. He also thought companies that focus on teams might have an advantage in the present environment as agent ranks shrink.

“Instead of people taking an offramp out of the business, they’ll take an offramp onto a team,” Heller said. “And the good agents and good teams close a disproportionate amount of transactions.”

A loop — but an improving one

One of the pleasures of Groundhog Day is that after a period of despair, Bill Murray’s character eventually accepts his fate and focuses on helping people. He repeatedly saves a homeless man. He catches a boy falling from a tree. On his final loop, he delights everyone at a town party — a fact that astonishes his coworker and love interest.

So could we see something similar here: A loop that gradually improves as reality sets in?

The numbers offer some hope. The chart below, for example, shows Zillow’s earnings over the past year:

Credit: Jim Dalrymple II

The chart shows that despite a sluggish market, revenue over the last year mostly held steady, even ticking up (though part of that is likely due to seasonality). Losses, also, are moving in the right direction.

Revenue at Opendoor, on the other hand, has been trending down for the past year. But losses have also been shrinking, and by the second quarter of this year, the company actually managed to turn a profit — a noteworthy feat given how slow the market has been of late.

Credit: Jim Dalrymple II

Finally, the chart below shows Compass’ numbers, which illustrate something similar to what happened at Zillow: Revenue holding steady and bouncing up with seasonality, while losses gradually get smaller.

Credit: Jim Dalrymple II

All in all, the numbers in these graphs illustrate two things. First, they give support to the Groundhog Day thesis; each quarter over the last year has been relatively similar, with both earnings and losses only changing slightly during each period. And second, the numbers also show that some companies are turning things around, even in a difficult time. The loop is, arguably, improving.

Heading into Q3 earnings, the question is if major companies can keep up this trend of holding steady — or making gains — in the face of tough times, or if other factors might derail that trend.

The bombshell lawsuits

When it comes to “other factors” there’s one 800-pound gorilla in the room: The bombshell commission lawsuits. There are several of these cases in various stages of litigation, but the two most prominent are Sitzer | Burnett, for which a trial just wrapped up on Tuesday, and Moehrl. In the case of Sitzer | Burnett, the jury sided with a group of homeseller plaintiffs and ruled that major real estate players had engaged in a conspiracy to inflate commissions. The ruling sent shockwaves through the real estate community, and though it’ll take time to fully understand its implications, the potential for disruption is huge.

Relatedly, immediately following the Sitzer | Burnett verdict Tuesday, the plaintiffs’ lead attorney filed another similar class action suit against a new group of big companies — meaning the legal battles over commissions will continue for the foreseeable future.

The question now, in the wake of this week’s verdict, is what publicly traded companies might say in their reports and investor calls about this major industry development.

Industry veteran Robert Hahn, who is the founder and CEO of online auction platform Decentre Labs, told Intel the cases are likely to have a major impact on real estate’s publicly traded companies. He argued that Anywhere and RE/MAX, which have filed settlements in the cases, have a distinct advantage over other firms that haven’t or couldn’t settle.

Anywhere and RE/MAX “got out for pennies, they got out super cheap,” Hahn said, explaining that those companies may be able to recruit on the settlements and the legal protections those settlements might offer for their agents. That means agent count — present or future — could end up being a theme for some companies this earnings season.

Whether any of this comes up in this week’s earnings calls with company executives remains to be seen. And past earnings seasons have seen only fleeting mentions of the cases.

But Tuesday’s verdict in Sitzer | Burnett should increase pressure on industry leaders to speak up and explain how the situation might impact their bottom lines. And Hahn is not the only one who will be keeping an eye out for news on this front.

“If you think commission rates are going to get cut in half everything is on the table,” Campbell said. “I am curious to see how some of the companies this week are going to respond.”

Structural shifts and the long term

Campbell plans to watch this earnings season for ways that companies are cutting costs, and he imagines leaders having to make hard decisions about which of their companies’ endeavors make sense in a “higher for longer” environment — or in other words in a world where rates remain relatively elevated for a longer period of time.

“Some of those very tough operational decisions, we’re at a point now where those decisions have to be made,” he said. “This whole higher for longer, there’s a consensus view around that now.”

At the same time, Campbell noted that many companies may not have many more options for cutting costs, at least in the short term. As a consequence, real estate companies may begin to look at structural changes that fundamentally alter their businesses.

As an example, he pointed to Redfin, which recently rolled out a new all-commission agent pay model in two California markets. Campbell also said Redfin has managed to increase ad revenue from its website, though arguably somewhat at the expense of the user experience.

“I think they’re doing that out of necessity,” Campbell said of the company’s various moves of late.

Again, the point is not to single out Redfin here, but rather to highlight ways that companies are making structural, rather than short-term, changes. At this point, for many real estate companies, overhead has been trimmed, workers let go and operations streamlined. The tweaks, then, are more fundamental.

While the takeaway here is that the Groundhog Day loop of hard times will likely continue this quarter, Campbell also saw a silver lining: “This is where you go and get better positioned for the other side of the cycle.”

And as earnings season comes into full swing, the companies that do manage to get better positioned may — like Murray’s Phil Conners — end up better in the long run.

“I think it’s super important,” Campbell said, “if companies that have always been viewed as cash burn companies, as growth at all cost companies, those types of companies, if they can get cash flow positive in this type of environment, it means they’re built to last.”

Email Jim Dalrymple II

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