Facing Fear in the Housing Market

Published Jun 23, 2022, 4:05 AM

Glenn Kelman is the CEO of the real estate company Redfin. His problem: With the housing market teetering, how do you sell houses online?

Redfin has a website where you can look at houses for sale, just like Zillow. But Redfin also employs real estate agents all over the country to help people buy and sell houses. Recently, Redfin has started to buy houses and flip them for a profit and that new business is risky.

"I'm worried about the economy," Glenn says. "I'm worried about the war in Ukraine, worried about the stock market, worried about consumer confidence and mortgage interest rates. So lions and tigers and bears, it might be a scary summer."

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Pushkin. I always love talking about real estate. It's this nexus where all these huge macro factors like interest rates and demographics and technological change converge with the most personal micro thing in the world, your house, your home, the place where you live. And right now we are in a particularly interesting moment to talk about real estate. We've had a couple of years of wild price rises. Now mortgage rates are starting to go up really fast, and everybody is starting to get spooked. At the same time, you've got companies buying and selling houses on the internet, and huge sums of money slashing around, and an incredible amount of uncertainty and change and innovation. I'm Jacob Goldstein and this is What's Your Problem, the show where entrepreneurs and engineers talk about how they're going to change the world once they solve a few problems. My guest today is Glenn Kellman, CEO of the real estate company Redfinn. Redfinn has a website where you can look at houses for sale, just like Zillo, but Redfin also employs real estate agents all over the country to help people buy and sell houses. Glenn Kelman is my favorite person to talk about real estate with, and just one of the most candid, thoughtful CEOs. I know his problem is this, how do you sell a house online? You should get a better deal, you should pay a lower fee, We should use technology to make the whole process better. There should be someone who's totally on your side. And I know that sounds like a whole bunch of hocom but it's the whole reason I got out of bed this morning, and it's the truth. Glenn joined Redfinn in two thousand and five. Earlier in his life he almost went to medical school, not once, but twice, tried and failed to write a novel, and started and sold a software company. When he joined Redfinn, the company was a few guys in an apartment who had just come up with the idea of putting real estate listings on a map on the web, which obviously was a good idea. Wildly popular Zillo would soon follow, and before long looking at houses online became a national pastime. But Glenn wanted to go further. He figured, if we can put the listings online, why can't we do everything online? Why can't people look at listings, compare prices, make an offer, and buy a house online? And he actually started trying to make it happen back in the Auts, trying to get people to buy houses on a website rather than through a real estate agent. As he told me in our interview, it did not go well at first. There was almost no agent. There was someone who was willing to sign all the paperwork, but he was actually building a winery in eastern Washington, and he and I had a deal that, under no circumstance would he ever actually have to talk to anyone. He just wanted to sign the documents and be paid a small fee for doing so every month, And whenever I did have to call him because a customer had some gnarly question, he would say, what was our deal? I'm sorry he had his license or something. You needed him because he had the license. He had a license, and he was willing to sign all of these offers because you need a real estate agent to authorize the offer, if you will. But he didn't want to get into the messy business of actually giving people advice. And so the real issue was, first of all, people need guidance, and second of all, their real estate agents on the other side of the transaction. The seller's agent, the agent who was listing the house. Yeah. And so if you want to do something disruptive and cool and get into wired or fast company, you have to make sure that the the listing agent is cool with it. And we had not done that. So we had this revolt in Seattle all the real estate agents because suddenly thousands of people were on our website clicking a button to see a property, and the listing agent was being told that he had to show it and then later we would send him an electronic offer that was forty thousand dollars under the asking price, with no rationale and expect him to accept it, and that would tick him off. So for a bunch of reasons, it wasn't working. So what did you do? I just decided that whatever people want is what we will give them. And it doesn't matter whether the company's categorized as a technology company. What matters is that you got into real estate to make it better for people, and if what you're delivering isn't better, then you need to change it. And is what you realize that people want a real estate agent. I realized that some of what a real estate agent does people really love. They like it when somebody picks up the phone, they like it when somebody's really committed to selling their house. But there are parts of it that they absolutely hate. They hate the fee, They think it's a total rip off. They worry that the agent is trying to get an easy sale instead of doing what's in their best centrists And even now I am an unreconstructed hippie about that. It may be that there's a different way to serve customers, but I've never lost sight of the idea that you should get a better deal, you should pay a lower fee, we should use technology to make the whole process better. There should be someone who's totally on your side. And I know that sounds like a whole bunch of hocum, but it's the whole reason I got out of bed this morning, and it's the truth. So Glenn decides that Redfinn should do what technology companies try very hard not to do. Hire lots of people, not just programmers to make Redfin's website better, but thousands of real estate agents to put up lawn signs and drive actual human beings around in actual cars to tour actual homes for sale where you know they can whatever, turn on the faucets and talk about the water pressure, Glenn figures Redfin can use technology to help agents be more efficient, and that'll allow Redfinn to charge customers a fee that's about half what traditional agents charge, and very slowly it starts to work. Redfinn hires thousands of employees, revenue rises to hundreds of millions of dollars per year. The company goes public in twenty seventeen, and the whole time, Glenn is waiting for some cinematic moment when he'll know that he and Redfinn have finally made it. And by cinematic, I mean, in particular, he thought it would be like a Bruce Willis movie from the nineties. I used to have a model in my head, inspired by Diehard, that these guys are drilling through seven layers of security and a vault in Nakatomi Plaza, and the final layer is destroyed by the FBI because they knock out the power grid, and these guys are dancing around throwing money everywhere. And I just thought that someday Redfinn would feel like that, that I would have this one moment where it went from feeling like an embarrassing failure to a total success us. But instead we've just kept drilling. The seventh seal is broken the way the other seals are broken by just continued drilling. And as a result, I couldn't say when Redfinn went from being a failure to a success, and I'm not sure it's a complete success now because we're still drilling. Redfinn still drilling, still doing new things, trying to figure it out. One of those new things is a business called I buying. Redfinn got into I buying a few years ago. It's this business where a few big companies will basically buy your house for cash over the Internet, then turn around and try and sell it for a profit. I buying was in the news last fall when Zillo said they had lost hundreds of millions of dollars in just a few months in the iBuying business, and we're getting out of it. Later in the conversation, Glenn and I talk about what happened with Zillo and the risks Redfinn is facing, But before we got to that, we start out with some eyebuying basics. First off, who sells their houses to eyebuyers Like Redfin. There are people who want to sell a house while having to clean it up every day so that someone could tour it. They just want the money right away, and some of that is about convenience. You just want someone to buy at lockstock and barrel on the spot. Another reason that people do this is because they see the home of their dreams. They're bidding against cash investors, which has become increasingly prevalent, and they get the money out of their old place in three hours on a Sunday afternoon. And these eyebuyers provide that liquidity. We are the ones who say, listen, your house is worth about seven hundred thousand dollars. I think if we fix it up, we could probably sell it for seven hundred thirty seven hundred and forty. But we'll give you the seven hundred right now. And that has been wonderful for some people. But it's a trade off. You get a little less money for same day sale or a near same day sale. So when an eyebuyer buys a house, well, when Redfinn buys a house, is an eyebuyer, what do you do with it? We fix it up, get it back on the market, and sell it to another home buyer. So being an eyebuyer, you don't affect inventory you don't affect the amount of homes net that are for sale for people who want to buy houses and live in them, not at all. We're not going to sell the homes that we own to institutional investors. We're only going to sell them to families, so we're going to live in those homes. So I want to just kind of step back for a minute and recognize that I buying, this thing that you're doing is something that just suddenly appeared in the world a few years ago, and I want to ask you, like, why why did this come into existence? You know when it did. There's two or three things that kind of had to happen for IE buying to come into existence. Number one, all the pictures of houses had to be available on a website, because if you're going to price a property without ever setting food on it, you at least need to be able to preview all the photos. So step one is sort of the first wave of like what ordinary people I think think of when they think of real estate online. They think of redfin and Zillo and truly and just being able to go online, look at a map and click and see the house and click through the pictures. So that's the first thing, Yeah, okay, then step two and so the second step was just machine learning to process all this information and spit out a price. So redfin Zillo many other parties have these automated valuations that they publish on a website. And if you're able to do that for almost every address in America, sooner or later the question comes out, would you pay for it? Would you put your money? And then the third big change is that the cost of capital just radically changed, meaning it got cheaper for big tech companies to get money from investors. Right, yes, you told me a few years ago a story that I still think about all the time, not just in the context of I buying, but in the context of the economic world that exists. Now, do you know the story I'm talking about. I was talking to somebody I think representing money on the Middle East, and he said, well, we'd have you do some paperwork and then we'd give you this money, and we wouldn't really need an interest rate, we wouldn't really need an ownership stake in the company. And I said, well, why are you giving us this money? And he sort of said, I don't know, And I said, well, it's probably not even worth the paper cuts, all the diligence you'd have to do, we kind of don't need it. And then he said we really wouldn't need to do any diligence either, And then I said, Okay, this is getting seriously weird, and now, regardless of whether I'm going to take the money, I just want to understand what the heck is going on. Can you please just level with me? And that's when he said, I've got a problem. I'm getting on this pile of money. I have to deploy it. That was the word that he used. There are many sovereign states who have the same issue. They want to put the money into the US because that's considered a safe market. They want to put it into tech because that's sexy. And I am just trying to give you money. And it was like he wanted to be relieved of a burden, and then I needed to relieve him of that burden. And the reason it's important for I buying is that for the longest time, you never could get into the business of being a principal where you actually own the car or own the house that you were selling, because it's so capital intensive. And maybe five or ten years ago, tech just surmounted that huge obstacle. I want to own five or ten percent of all the houses in America. There's no way you could get the money for that, except there is. Like that would have been inconceivable in two ten, but in two seventeen there were people lined up to pay for it. And it means that we're really on the market. That suddenly we own a ton of houses, and it's very risky, and it's very capital intensive, and it means that we have to be right on top of the market because we'll trade up in good times and it's going to be a roller coaster ride to hell when the market collapses, and it does every once in a while. Is Redfinn about to go on a roller coaster ride to hell? In a minute, Glenn and I talk about where the real estate market is headed. That's the end of the ads. Now we're going back to the show. Redfinn currently owns hundreds of millions of dollars of houses scattered around the US. This seems scary given both the state of financial markets and the fact that Zillo recently lost a ton of money in the eye buying business. So I asked Glenn, could what happened to Zillo, happened redfin Well. The first moral of the story is that you have to acknowledge that it could happen to you, or it will absolutely definitely happen to you. So if you think somehow that your poof doesn't smell, or that you have a brain the size of a planet, it could never happen to you. That's the ubris that will cause you to fly two coast to the sun and end up holding billions of dollars in homes that you can't sell. So it can happen to us. But our thesis for why we can be different, it's just our ground game. So Zillo and redfin both focus on building websites. We've both been doing that for fifteen years. But in those fifteen years, Redfinn has also done all the hard work to sell houses, host inspections, attend to open houses, work with clients, and we've been through these terrible ups and downs that just being a website operator insulates you from. So, just to be clear, the distinction you're drawing here is Redfinn has real estate agents on staff all around the country and Zelo does not. Yeah, part of the reason that I got into eye buying. Is when I said I'm worried that it's too risky that we could get long on the market and own all of these houses right when there was a downturn. It's because Adam Wine, or the proponent of that business here at Redfinn, said, you're already long on the market. You've got thousands of people you have to pay, and if the market goes south, we're going to have to deal with that anyway. I tell the people running our eyebuying business that you are running on a knife's edge, that you have to have your finger on the pulse. I know I'm mixing all sorts of metaphors, but that's what business people do. The knife edges on the pulse of your finger sounds like a bloody outcome. You just have to be all over the market every single day, and you have to price in the risk appropriately. So in some markets we've priced ourselves out of the market where people have come to us wanting us to buy their house and we've said no because the price they wanted was too high. Yes, we're not sure where that house will trade three to six months from now. By the time those people pack up, we get the place fixed up, we get a sign in the yard, and we get it on the market, it'll be a very different housing market. So housing twenty thirty years ago was the safest investment my parents could think of. They were unwilling to invest in the stock market because they did want to compete against Wall Street sharps. And they told me that housing just goes up one or two percent every single year. It's where you should put your money. And now I think the housing market has more characteristics in common with the stock market. And part of that is because there's so much institutional activity in the housing market, and part of it is because there are also these platforms that provide much faster liquidity, much faster price discovery. So when we have a problem selling a house, we don't wait two months to come to grips with it. We mark it down right away, and everyone else on that block is disappointed that we move so quickly, but apart we're trying to stay ahead of them. And that makes the housing market more volvatible. So you have lots of real estate agents on the payroll, and you own a lot of houses, and we're at this moment in the housing market that seems I don't know. Pres you tell me precarious. So how do you navigate that potential problem with great humility if we have to choose between losing out on tens of millions of dollars in profits because we could have bought some houses and sold them for a profit, but there's also this risk that the whole market could disappear. We just decided to be more conservative as an eye buyer. Are you buying specifically? We're still buying. We're still buying properties. Are you buying fewer? We're more selective? I mean the first change in the housing market that you always see, and sometimes this confuses journalists. Beautiful houses, corner lots of light, still gets three offers, and you'll have a real estate agent say, I don't know why anyone's saying a housing market is softened. I just sold this house and had multiple bidders. It's the properties that aren't so pretty that suddenly have a problem. When you're really in a boom. The market isn't selective. Even the dogs sell for a song. But the first sign that the market has shifted is that middle tranche of houses that have a few problems, where the layout isn't perfect, where the price isn't quite right suddenly sit on the market, and those are the houses you have to be more careful about owning. And to be clear, is that happening now? Are this that middle trunch of houses sitting on the market longer? Now? Are we in that turn now? Absolutely? Does that give you information about what is likely to happen next? Yes? And no. So what I'm used to is a fifty basis point increase in mortgage interest rates. When that happened in twenty eighteen, there was half half a percentage point. When mortgage interest rates go up half a percent, the housing market has a major problem. That happened in twenty eighteen. It would have led to a housing downturn if the Federal Reserve hadn't backed off and mortgage rates hadn't come back down. This time, we're looking at not half a percent, but three whole percentage points increase in mortgage rates. Huge in relative terms, Yes, and so that is a massive shock to the system. There's so many buyers out there who thought they were going to be able to buy a home and can't. And I think what many observers don't appreciate about the housing market is how much it has depended over the past five years. On the stock market. We still talk about the ratio of income to home price, but people aren't using their wages to buy house. They're using their stock market portfolio. Some of them are paid in stock if they work at Google or Facebook. Others just have portfolios that are doing really well, and if that gets wiped out, you can't afford the down payment for a house. So we've just had a bunch of people who are in the market no longer be in the market. And I had always felt that even if the market cooled down, it would be healthy because there were so many more buyers than sellers. The price increases were fifteen twenty percent year on year, which is obviously unsustainable. Now there's some houses where there are no buyers, and those houses first are the ones that, as I said, do have problems. The perfect houses are still selling just fine, but there aren't that many perfect houses in the market. So you're going to just keep buying houses? As redfinn through this, how do we land this? Are you going to just take a pause and say, you know what, this is a bad time to buy houses. We're going to stop buying houses now or now we're going to buy houses, but with all the risk priced into the offer, and we're going to tell the people who are approaching us this is how we see the market. We might be wrong about it, and if you want to try to do better, we're here to help you with that too. We'll list the house and we'll test the market. And what surprised me is how many people say, actually, no, I'll take the money. Do you think house prices are going to fall? It depends on where, but in some places yes. So if you look at Idaho or Austin, Texas, sort of these secondary markets, where people leaving Seattle went to Idaho, people leaving La went to Austin, Texas. The home price appreciation there was twenty five thirty percent and that is going probably to come down. There are other places where I think it'll be more stable. There's still these powerful demographic trends. Millennials are moving, people are now free to work from wherever, and rents are still high. So rents are up fifteen percent year on year, and it doesn't give people many choices. Some folks say I'm going to step back from the housing market. I don't want to buy a place right now. And then they get another notice of a rent increase, and then they call us again. And so it's just a really tough situation for people looking to find a place to live. Yes, And so does that suggest that in that prices won't fall across the boarder won't fall that much? I mean, is that what that means? That's possible? That's not the market we're in right now. We're still selling houses. Yeah, yeah, I mean, is something like two seven, two thousand and eight unlikely, Like I'm just trying to Oh, I think that's very unlikely. Okay, So I'm proud that in two thousand and eight, I will give you the receipts, find the tapes. I was saying, there is a huge bubble, it is going to crash. Yeah, this time. I don't believe that's the case, because the people buying houses are living in them for the most part, and they're paying cash. It used to be that folks are getting liar loans. You had the story of the strawberry picker buying an eight hundred thousand dollars home in Central California that she couldn't possibly afford unless the price kept going up. And here it isn't a bubble in the most strict death nition of the term, which is that someone is buying the home only on the expectation that it will go up purely as a matter of speculation. People are buying homes because there's this unbridled lust for more space. People are investing more in their houses. They want to live there, and they are paying cash for it, so they are just not over their skis. When we talk to sellers about discounting their house so it can sell, that conversation is so different now than it was in two thousand and eight and two thousand and eight. They would say, listen, I'm right up against my mortgage. I cannot discount more than this because it'll be a short sale. I owe the bank that amount of money, right right. They didn't have anybody in the house. Yeah, now they've got three hundred thousand dollars of equity. I'm going to make a lot of money on this. Turns out it'll be two fifty. It'd set a three hundred. I don't like it, but it's still upside to me. So I do think it's different in that sense. But I'm worried about the economy. I'm worried about the war and train, worried about the stock market, worried about consumer confidence and mortgage interest rates. So lions and tigers and bears, it might be a scary summer. And all of that means worried about home prices. Yes, And I just think that if you're going to be in this business of running on a knife's edge, you can't get much sleep. Like other people have given us money to buy houses and to hire real estate agents. And if you were to say, oh, I was at the Bahamas this weekend, I wasn't paying attention to the housing market. You shouldn't have my job. So it's what I've signed up for. And you keep asking me about my comfort level. I haven't been comfortable in fifteen years. In a minute, the Lightning Round, including a few simple tips for when you're buying or selling a house. Okay, get back to the show. We're going to close with the Lightning Room. If I'm about to sell my house, should I redo my kitchen or my bathroom? Kitchen? What is the one red flag I should look for when I'm shopping for a house that you don't want to own it for at least five years what's your favorite trait in a coworker. I'm trying to put it into words in a concise way, but it's being persuadable. Like when somebody says that's an interesting idea. I'd never thought of it before, and I actually see them change their mind. I realize I should be that way, because the way that I got to my position is by being very opinionated, and that makes me hell to work with. Sometimes, in what year will the last human real estate agent retire? Never? If everything goes well, what's a problem you'll be trying to solve in five years. It's so easy to imagine hell and so hard to imagine heaven, isn't it, Jacob, I'm sorry. What's one piece of advice you'd give to someone trying to solve a hard problem? Make sure it's a problem you love more than anyone else, because then you can work on it harder than anyone else. How do you think you'll know when it's time to retire? So the only thing that I worry about isn't that you know the job will get boring or anything like that. It's that I worried I won't get to do it anymore because there's somebody else who can do it better. How do you think you'll know when the head of HR shows up with the general council and they walk in and close the door. I feel like you think about that. Well. I have told her that you shouldn't worry about me firing you. You're going to be the one who fires me. But it's also you know, even if I love the job, like if I own the company, if it were like a hot dog stand where I owned it, even if somebody else could run the hot dog stand better, I would say, well, I like running it, Kiss my Fannie, but I don't own it, and I shouldn't own it. It's a public trust at this point. And so not only do I worry out being fired. I know this is weird, but I'm worried that our board won't realize when I need to be fired because we're also worried about not being fired. I worry about everything. Glenn Kellman is the CEO of Redfinn. We spoke two weeks ago. Then last week, as mortgage rates continued to rise and home sales continued to slow, Redfinn laid off eight percent of its employees. In an email to the company's staff. Glenn said the company needs to prepare for a slowdown in the housing market that could last for years. Today's show was produced by Edith Russolo and edited by Robert Smith. Amanda ka Wong is the engineer special thanks to Justine Lange and Mola Board. I'm Jacob Goldstein and I'll be back next week with another episode of What's Your Problem five

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