A rather subdued Glenn Kelman addressed investors and analysts during Redfin‘s third quarter 2023 earnings call Wednesday evening. The call occurred on the heels of Redfin’s early Wednesday announcement about laying off 862 employees and shutting down RedfinNow, its iBuying business.
“We are grateful for the dedication and ingenuity of the people leaving, and heartbroken that we don’t have enough customers to pay for their work,” Kelman said at the start of the call. “Our June layoff was a response to our expectation that we’d sell fewer houses in 2022; this layoff assumes the downturn will last at least through 2023.”
Despite the rising interest rates that triggered a housing market slowdown during Q3, Redfin managed to record an 11% year-over-year increase in revenue to $600.5 million. However, its net loss of $90.2 million was much higher than the net loss of $18.9 million reported one year ago.
Kelman attributed the firm’s poor performance to its struggling iBuying business.
“The entirety of the earnings shortfall came from RedfinNow, which has been selling homes at a lower pace than expected,” he said. “As recently as August, we still anticipated full-year gross profits from our property segment, which includes both RedfinNow and our concierge services. The properties’ 2022 gross profits to the third quarter were negative $5 million and we now forecast full year gross profit losses of $22 million to $26 million.”
As of September 30, 67% of homes purchased in the second quarter were sold or under contract for sale. According to Kelman, the firm expects to complete the liquidation of RedfinNow inventory in the second quarter of 2023. Redfin expects this to return more than $100 million in cash to its balance sheet.
In addition to the layoffs and the closure of RedfinNow, Kelman announced that the firm will eliminate its commission refund in all markets, starting with the customers writing offers on December 1. Kelman noted that this decision came after noticing “almost no sales impact” in the 22 markets they piloted this program in earlier this year.
“Pilot data indicated this will lower the total number of brokerage transactions by a minuscule 0.13%, while lifting gross margins five points,” Kelman said.
The firm said it is also looking to boost income by improving the attach rate between its brokerage, mortgage and title operations.
“Since Redfin acquired Bay Equity Home Loans in April, the percentage of Redfin homebuyers using Redfin for a mortgage has kept increasing from 12% in June to 17% for the third quarter,” Kelman said. “In the markets where we have been especially focused on integrating the Redfin and Bay Equity sales forces, the attach rates of the last three months have been between 23% and 25% and are still rising. With title services we are doing even better. In the third quarter, title services attach rate was 40% of eligible brokerage transactions, up from 29% in the second quarter and 8% a year ago.”
While executives are encouraged by the improving attach rates, what they see as the biggest source of potential growth is the firm’s growing website and mobile application traffic. In the third quarter, traffic to the Redfin website and mobile application was up 3% year over year, with an average of 51 million monthly users.
“For Google searches on a home address in the first 10 markets Redfin opened, we started appearing first more often than any other competitor,” Kelman said. “These home address searches account for about two-thirds of the traffic we get from Google. Since the most reliable earliest indicator of transaction share growth is search share growth, our gains and search engine ranking will probably raise our fortunes more than any other development we discuss today.”
Although Redfin’s model of staffing real estate agents as salaried employees has come under fire recently, Kelman vehemently defended Redfin’s strategy to investors and analysts.
“On the day of a layoff, we are painfully aware that employing our agents limits Redfin’s resilience to extreme volatility,” Kelman said. “Employing agents has magnified Redfin’s losses in the 2022 bust and limited our share gains in the 2020 boom. If Redfin were a portal or even a traditional brokerage, with contractors on 100% commission, idleness would mostly be a problem for our agents, not our company, but our identity isn’t binary. We decide from month to month and sometimes week to week whether to staff our brokerage to handle 50% or 75% of the demand generated by Redfin.com. The rest of the demand is routed to partner agents.
“We have to fit between our teeth to monetize every pixel on the site as aggressively as we can, and we think that the employee model is entirely consistent with that,” Kelman added.
Given the housing market slowdown and the winddown of the firm’s iBuying business, Kelman said the firm plans to generate its first annual net income in 2024.
“Glenn and I both firmly believe that we have the right long-term strategy for the business, but we also acknowledge the need to remain focused on driving profitability in the short term and allocating capital wisely as we navigate a challenging housing market,” Chris Nielsen, the firm’s CFO, said.