A new TechCrunch headline is raising some eyebrows this week with a quote from Redfin CEO Glenn Kelman.
The infamous quote is taken from the Q&A segment of Redfin’s Second Quarter 2024 Earnings Conference Call, every word of which was included in the official branded transcript.
Kelman’s words will also be transcribed on investor relations websites.
For the final question in that Q&A, Jay McCanless of Wedbush asked Kelman about the company’s “Plan B” if mortgage rates don’t fall and, instead, remain in the high 6s and low 7s.
Great question. Plan B is to drink our own urine or our competitors’ blood, stay in the foxhole. I don’t know if you remember, but the last earnings call ended with me singing a line from a Who song, ‘Won’t Get Fooled Again,’ where I had said we’re not banking on low rates when other people had thought they might come down.
I don’t know. I’m just very, very seasoned in ups and downs in the housing market. If it comes, it will be upside. We’ve built a model that’s more resilient, so we don’t have to hire a bunch of salaried agents in advance of that. We’re ready to take share if the market grows, we’re ready to take share if it doesn’t, but we’re not going to ease off.
It’s fair to say the “drink our own urine or our competitors’ blood” comment was in keeping with the “foxhole” metaphor.
But as his interesting choice of words demonstrates (and my 6th grade English teacher would back me up on this—using my own writing as an example), there is such a thing as taking a metaphor to absurd lengths.
As the Q&A wrapped up, Kelman added, “Thank you. We’ll drink our urine before the blood. Actually, I wish I just hadn’t said that. I’m a lover, not a fighter.”
And on that note, the conference call ended. We can’t speak to how Kelman feels right now about his words being immortalized online. But for one glorious day (or maybe two?), the uproar surrounding his comment has drowned out some of the election drama.
Cheers to that.
Q&A Highlights from Redfin’s Q2 Earnings Conference Call
In less WTF news, we’re sharing highlights from the other five questions asked in the Q&A segment and the answers given by Kelman and Redfin CFO Chris Nielsen.
#1: Gross margins and long-term EBITDA margins with Redfin Next
Jason Helfstein with Oppenheimer (leading global full-service brokerage and investment bank) asked the first couple questions:
Question 1: “How should we think about real estate gross margins once the majority of agents are under Redfin Next? And then just more broadly, just how should we think about long-term company EBITDA margins as you leverage real estate traffic across all the segments and then kind of under the Redfin Next model?”
Kelman took this one, leaving the second question to Nielsen.
We think that long term Next will have similar gross margins on sales sourced from redfin.com. There may be incremental sales that we wouldn’t have gotten in past years as agents become more entrepreneurial and source their own business, but that should be incremental gross profit. Our focus is on the gross profit we can generate from sales sourced by redfin.com.
So we expect gross profit to grow faster, and we expect margins from redfin.com-based business to be the same or better. There might be some pressure from the NAR settlement fees being lower, agents wanting better splits across the industry, but we think we can offset that by getting more efficient with support and management. A more entrepreneurial agent doesn’t need to meet her manager every week. So there’s some upside in our margins….
Helfstein directed his second question to Nielsen:
“Just a follow-up. Chris, you may have said in the comments, but the other EBITDA, was the strength from title or from advertising there?”
In terms of our other segment, this is a place we’ve seen strength all year, and it really is those two core components that you mentioned, Jason. So both the title business is delivering well, plus we’re getting more advertising revenue all the time from—across the website, different inventory on the website and different capabilities that we’ve been able to put in front of advertisers. So both pieces are hitting really nicely right now.
#2: “Does Redfin Next have a type?”
The next question came from Ryan McKeveny of Zelman & Associates
“On Redfin Next and the recruitment efforts there, I guess when we think about all the ways that we can slice and dice agents in the industry, so whether that’s people new to the industry or veterans or those who like online leads versus those who don’t or individual agents versus teams, there’s a lot of ways we can slice and dice things. But I’m curious if you can talk about the types of agents that the Redfin Next approach is resonating most with? Is there a characteristic or type of agent out there where you’re finding success on the recruiting side or who this seems to be the most appealing option to?”
Kelman’s response:
Another great question. Thank you, Ryan. Well, there are two dimensions to that, we do think the appeal is broad. So a wide range of agents have applied for the job. But what we’ve learned is that the agents who have experience working with online opportunities, whether through Redfin’s partner program, Zillow’s, Realtor, some other website, they have the systematic approach to maximize gross profit from a given online set of opportunities. So they’re going to be very driven to have a high close rate.
There’s just a different way you need to approach online customers because they may have gone to three different websites or introductions to three different agents. So you need to be fast and you need to be good. So that has been our experience. Getting agents, not just with the great lifetime deal count, but with good deal velocity unsurprisingly has also been important. So what have you done for me lately is a really key question…
And then I think the next dimension for us is teams. So we want the Redfin promise to be that when you come to our website as opposed to any other real estate website, you’re just already more likely to work with a top producer. We want to double down on that by forming teams around our top producers, which allows us to develop new-to-the-industry type agents under a top producer and being able to work together in those teams has already been quite effective for us and some pilots….
#3: Redfin’s strategy around lower fees per sale
The next question came from Ygal Arounian with Citigroup
“I’ll start on the NAR buy-side fees… base case expectation is that there will be some compression on fees. Maybe if you could just elaborate on that and kind of where you think things will balance and can you also elaborate on that point of trading off the lower fees per sale for driving more volume and kind of what the strategy is around that.”
Kelman’s response shed some more light on the company’s commission strategy:
…If you look at the chart, you can really tell how commissions have come down since March 15. Commissions have been very stable over the past decade for buyer’s agents where they think they’ve been more competitive for selling agents.
So our belief is that there will be some pressure on commissions. It’s very early to make that call. I do think that some of the people who listed their home already had a preconceived notion of how much they would pay the buyer’s agent. Next spring when people list their home, those preconceived notions may not be as ready set. …
#4: Real estate revenue and Q3 market performance
John Campbell with Stephens, Inc. posed the next question:
“On the guidance for real estate revenue, I just want to maybe start there. At the midpoint, it looks like you’re calling for a 7% sequential decline. If I go back and look over the last 10 years and basically take out some of the outliers, I think there’s a rate spike kind of fallout in 2022 and then obviously you had a big jump during COVID in 2020. But that last 10-year average is up modestly sequentially. It seems like you’re going to get some rate relief here, who knows how much the market will respond to that…
“Maybe if you could start with unpacking how you expect the market to fare in 3Q. Are you expecting it to be down a fair amount, I guess, just housing activity? Or is that maybe a little bit influenced by the conservatism with some of the market changes coming on August 17?”
Chris Nielsen’s response summed up the company’s outlook on the housing market and why they’re not expecting significant improvement coming from the recent drop in rates:
So, the way we always set guidance is based on what we can see in terms of customer behavior, but also booked revenue. And so we’re sitting here today with a view on July and somewhat on August. And I think our take is that the market has been slow in the last couple of months in general, and that has influenced what the revenue guidance looks like. We’re not making a significant assumption about an improving housing market as we move forward from here, coming from the lower mortgage interest rates that we’ve seen more recently. That certainly could happen, and we would be thrilled if it pulled through in that way, but it’s still too early to make that call.
Kelman commented on the market’s tepid response to the rate drop:
And it’s been like—oh, John, just briefly. It’s been Twilight Zone, man. The economist dug up some weird little period in 2016 where rates went down and mortgage purchase classifications didn’t go up, but I don’t remember it. I can’t remember a time when rates came down this far, this fast, and the market has been so muted in its response. And we just have to believe that it will. But the immediate reaction—we have a better instrumented funnel than I think almost anyone else—has just been ‘meh.’
#5: “What will it take to unlock buyer demand?”
Curtis Nagle with Bank of America was up next:
“So maybe just segueing on that point, Glenn, a question for you. So in terms of this kind of nonresponse, right, from consumers and rates, which to your point is highly unusual. I guess how much of it do you think is just some of the color we’ve picked up, people just a lot more aware kind of total home costs, whether it’s taxes, insurance, rates, financing, a part of that and just it may just simply take much longer for this unwind to, I guess, acclimatize, right, to higher costs? Or do you think what can help rates and perhaps prices going down that, that will be enough to unlock given so much underlying demand?”
Kelman’s answer echoes an earlier statement he made tying the general housing market “funk” to the upcoming presidential election.
Great question, Curt. I think some of it might just be that it came too late in the homebuying season. Somepeople are on vacation this week. And so the reaction has been slower. If that had happened in April, May, June when people were raring and ready to go, maybe they would have had a different reaction. Some of it is just that America has become so partisan that people are now convinced that the only thing that will save the housing market is if their candidate wins, and I’m not sure that goes one way or the other.
But be that as it may, Americans are distracted. There’s some fatigue and the reaction may be slower. It’s just inconceivable to me that there won’t be a reaction. The actual physics of how much you pay every month have significantly changed no matter what the insurance offset might be in Florida or California.
As for the sixth and final question, we’ve covered that already. Read the full transcript for more information on Redfin’s Q2 earnings and company projections.
