The Portal Traffic Wars & The Mother of All Metrics

 
 

On my recent podcast, Redfin’s Joe Rath and I discussed the Mother of All Metrics – close rate – and its critical importance to online leads and real estate.

Why it matters: Close rate is especially relevant in Portal War ‘24; traffic is top of the funnel, but close rate – which correlates to lead quality – will guide the investment decisions of potential customers.

Dig deeper: Homes.com has become a serious contender in the portal space, with similar traffic to realtor.com and Redfin, and once Apartments.com traffic is included (CoStar Resi), it surpasses both.

 
 

After a few years of crazy, Zillow has reestablished its commanding traffic lead over realtor.com; its position as #1 is clear.

  • For more about a leading portal’s competitive advantage, read my strategic analysis: Millions More Buyers.

 
 

During the last quarter of 2023, all portals experienced a seasonal decline in traffic.

  • Compared to the previous quarter, that decline was fairly even across the board – surprisingly similar for Zillow, realtor.com, and Redfin – at 13 percent. 
     

  • Homes.com and CoStar’s residential network were down a smaller degree at 11 percent, most likely benefiting from a sustained marketing blitz. 

 
 

Homes.com’s meteoric rise in traffic is the result of CoStar’s massive advertising spend. 

  • For perspective, across its entire network in 2023, CoStar outspent Zillow by 4x, or $412 million, or more than 2x Zillow and Redfin combined.
     

  • It’s clear that CoStar is very, very serious about its investment in residential portals.

 
 

What to watch: lead quality.

  • I've spoken to some early customers and it's too early to make a call about the quality of leads generated by Homes.com.
     

  • So if you’re using Homes.com as an advertising channel, reach out and share your experience!

The bottom line: Traffic is just a number – ultimately, each portal is a business that must turn traffic into leads, and leads into money. 

  • Homes.com is coming to market with a new business and monetization model, and it needs to prove that it can deliver a strong return on investment to its agent customers.
     

  • Traffic is an important first step in the process, but in the end it comes down to lead quality, and that process will take time.


Note on data: Collecting traffic data for Homes.com and CoStar’s residential network relies on a combination of assembling clues, triangulation, and making a few assumptions. Some of the numbers above are estimates based on public information. 

Some of what’s known is that Homes.com’s average monthly uniques was 62M in Q3 2023, Apartments.com had 44M average monthly uniques in 2023, and CoStar’s entire residential network was 95M average monthly uniques in Q4 2023.

Zillow’s Transition to “Super App” Driving Revenue Growth

 
 

Zillow’s latest momentum is a manifestation of its strategy to diversify revenue across the transaction as it transitions from a lead gen platform to a housing “super app.”

Why it matters: As Zillow scales new revenue streams, including Zillow Home Loans, Rentals, ShowingTime+, and Seller Solutions, it is planting important seeds for its next phase of growth.

Context: After a pandemic bump, Zillow’s overall revenue declined and has remained flat since 2021 – during one of the worst real estate markets ever recorded.

 
 

Over a challenging two years, Zillow’s residential and mortgage businesses have shrunk (on par with the declining market), while its rentals business has ticked up from strong organic growth.

 
 

Even with flat revenue, Zillow has significantly outperformed the market during this period, with the magnitude dependent on whether you consider Zillow a lead generation platform or a housing “super app.”

  • While revenue growth at Zillow, the lead generation platform, has slightly outperformed the market, revenue growth at Zillow, the housing super app, is outperforming at a much higher rate.
     

  • This is a result of new products and services that are generating additional revenue across more of the transaction. 

 
 

Dig deeper: For years I’ve used the following framework to think about real estate portal growth strategy.

  • Zillow’s evolving strategy sees it getting closer to the real estate transaction (Zillow Flex and Zillow Home Loans) and expanding to more parts of the transaction (Mortgages, Rentals, Seller Services, Agent Tools).
     

  • Typically, services closer to the transaction are higher revenue, while services further from the transaction are higher margin and more scalable.

 
 

Zillow asserts that its strategy to grow transaction and revenue share is working.

Zillow’s mortgage business is growing, but, counter-intuitively, revenue is dropping as purchase volume nearly doubles.

  • This is a result of a shifting product mix – Zillow is funneling leads from its mortgage marketplace to fulfillment by Zillow Home Loans.
     

  • It’s shifting from an asset-light marketplace to an asset-heavier mortgage brokerage operation, with much higher revenue potential.

 
 

Last year I claimed that Listing Showcase was Zillow’s most interesting product, and now it’s probably Zillow’s most interesting slide in its investor presentation.

  • The mid-term revenue potential is spot on based on my earlier calculations, representing a significant revenue opportunity as a new, sell side product.
     

  • But the most interesting opportunity is long-term, where Listing Showcase could be rolled out as a mass market product for all agents.

What to watch: Zillow’s future growth aspirations hinge on a few key factors.

  • Expansion into 40 markets – as early “enhanced markets,” Atlanta and Phoenix are useful data points, but not necessarily representative of all 40 markets.
     

  • The last mile problem – Zillow remains completely dependent on local real estate agent teams to drive adoption of its new products.
     

  • Zillow Home Loans is driving revenue, but it’s unprofitable, lower-quality revenue – the business needs to demonstrate an ability to grow revenue faster than expenses.

The bottom line: Zillow is diversifying its revenue along the transaction – what it calls its super app – and is outperforming a depressed market.

  • Zillow will almost certainly miss its $5 billion in revenue by 2025 goal, but like many plans that were laid in early 2022, things have changed.
     

  • While early signs are promising in a few key markets, the path forward hinges on the stubborn realities of conversion rates, profitability, and – as always – partnering with agents.

Scout24: Growing a New Consumer Revenue Stream

 
 

Real estate portals around the world have been trying to diversify their revenue streams for years – with mixed results – but one portal’s efforts stand out as a success.

Why it matters:
Leading German portal Scout24’s consumer subscription product is a rare example of a new revenue stream that’s undoubtedly working – and a novel offering that directly targets consumers.

  • In addition to consumer subscriptions, Scout24 offers the usual suspects of adjacent revenue streams, mortgages and seller leads, neither of which are growing.

 
 

Scout24’s consumer subscription business offers property buyers and renters (pictured below) an enhanced experience, including early access to listings and priority messaging, for a monthly fee.
 

 
 


The product is resonating with consumers
in a meaningful way; revenue is up 20 percent year-over-year and it will generate over €60 million for the year.

 
 

Growth is being driven by a steady increase in subscribers; Scout24 has likely passed the 400,000 paying subscriber mark.

  • Average subscription revenue is around €16 per month, with a 3 month minimum term. 

 
 

Context: The consumer subscription business represents a substantial 14 percent of Scout24’s total revenue.

 
 

The bottom line: Successfully diversifying revenue streams in a meaningful way is hard, especially for real estate portals.

  • While most portals have focused on the false promise of mortgages – the siren song that has lured so many – Scout24 has built a valuable subscription business that directly targets consumers.

  • Yes, but: Just because a consumer subscription product is working in Germany doesn’t mean it will work in other markets!

Redfin: High Debt, Low Cash, and Unprofitable

 
 

Redfin’s latest results reveal a worrying financial trend – and raise questions about the sustainability and viability of its business model.

Why it matters:
A lot of debt, dwindling cash, and an unprofitable core business are a challenging collection of attributes for the business to deal with, which may force a larger strategic change.

  • It all started with Redfin taking on a substantial amount of debt in 2020, eventually rising to $1.2 billion by 2021.

 
 

Redfin then made a pair of expensive acquisitions: In 2021, it bought Rentpath for $608 million, and then acquired Bay Equity Home Loans for $138 million in 2022.

  • Since 2020, Redfin’s available cash balance (cash and liquid investments) declined sharply, from over $1 billion in 2020 to just $173 million at the end of Q3 2023.

 
 

Redfin is using its cash to gradually repay its debt, but the challenge is that the business itself is unprofitable (as measured by Net Income/Loss).

  • Redfin has incurred a net loss since at least 2018 – it doesn’t appear that the business has ever been profitable.

 
 

Over the years, Redfin has assembled a collection of unprofitable business lines.

  • Redfin’s real estate brokerage is unprofitable, its now-closed iBuying business, RedfinNow, was unprofitable, its rentals business is unprofitable, and its mortgage business is unprofitable.

 
 

To say Redfin’s problems are a direct result of the market would be incorrect – it’s not the market, it’s the business model.

 
 

This leads to a strategic dilemma: Redfin is significantly under-resourced in a challenging, competitive market.

The bottom lineA receding tide reveals, and the current market is highlighting Redfin’s various challenges.

  • Strategically, it appears that Redfin is overstretched with limited resources, and up against well-funded competitors with cost advantages, something it cannot compete with.
     

  • This is a galvanizing moment for the business; one way or another, something has to change.

Portal War ‘24

 
 

2024 is shaping up to be the year of the PORTAL WARS in the U.S., with CoStar Group, owners of Homes.com, leading the world’s largest effort to unseat a #1 real estate portal.

Why it matters: This multi billion-dollar game of financial chicken will certainly shake up the portal landscape and will force competitors to change strategy – if they can – or risk the specter of irrelevancy.

The primary driver of CoStar’s Homes.com growth is the near doubling of its annual advertising spend to almost $600 million, a massive investment that keeps increasing.

  • Keep in mind this advertising spend also includes brands like Apartments.com and other commercial real estate portals – but the big increase is being driven by Homes.com.

 
 

Comparatively, CoStar’s advertising spend – all to drive consumer traffic and build awareness – dwarfs its real estate portal peers.

  • In 2022, CoStar outspent Zillow by a factor of two, and is on track to outspend Zillow by 3.5 times this year.
     

  • Momentum is important: While Zillow and Redfin have been slimming their advertising to cut costs, CoStar continues to increase its investment.

 
 

Competition between portals is a marathon, and cash in the bank is not only a requirement to play the game, but a critical prerequisite for success.

  • CoStar has an enormous war chest of over $5 billion in cash, enabling it to outspend the competition, while Redfin simply does not have the resources to compete at the same scale.
     

  • Note: News Corp is the media empire that owns realtor.com and dozens of other businesses, including TV, newspapers, publishing, and more.

 
 

The ability to invest with cash flows from a profitable core business is another key factor in this race.

  • Once again, CoStar outstrips the competition with its cash-generating core business, as opposed to Redfin and Zillow, which both posted a net loss in the most recent quarter.
     

  • As a massive media conglomerate, News Corp generates a good deal of cash, but also pays a dividend and is more conservative with its investments.

 
 

An effective strategy should be simple and straightforward – and as I like to say, Compete Where You Can Win.

  • CoStar is demonstrating clarity in its strategy; it knows what its unique advantages are and is leveraging them to the fullest.
     

  • And it’s targeting a gap in the market: the 97 percent of real estate agents that aren’t buying leads from its competition. 

Critically, CoStar is focused on ONE key point of difference for each of its two main audiences, agents and consumers – in areas where it is betting that it can win.

  • For agents, Homes.com offers “Your listing, your lead,” which prominently positions the listing agent to collect leads directly, instead of being auctioned off to the highest bidder.
     

  • And for consumers, Homes.com is building exclusive content that’s actually good for consumers: rich media on over 20,000 neighborhoods across the U.S., including custom promotional videos, created by a team of over 1,000 human employees.

 
 

The bottom line: At its core, this is a case study in the importance of a clear strategy and focused execution. 

  • Love or hate it, CoStar’s strategy is crystal clear and its tactics aligned with its strategy and competitive advantages, while some of its peers are stuck in reaction mode with disbelief, discredit, and distraction – which is not a strategy.
     

  • Without a cogent strategy, CoStar’s competitors (especially realtor.com and Redfin) are at risk of being stuck with a waning value proposition, decreased relevancy, and not enough resources to mount an effective defense.


Dig deeper: On my podcast, David Mele, president of Homes.com, and I discuss Dunkin Donuts coffee, post-acquisition growth, lead gen hell, the 97% opportunity, innovator's dilemma, exclusive content, strategic clarity, what's in Andy's head, and what he would do if he were Zillow's CEO. Give it a listen!

Zillow Pressures Flex Teams to Perform

 
 

Zillow continues to double down on its mortgage business, this time by compelling Flex teams to send back leads that have expressed interest in learning more about Zillow Home Loans – or risk getting kicked out of the program.

Why it matters: Zillow is leveraging its immense market power and forcing its partner ecosystem to change behavior, all in an effort to meet its revenue goals.

The following chart, provided by Zillow to its Flex partners, clearly outlines its performance expectations.

  • Underperformance, in terms of not converting buyer leads or not sending leads back to Zillow Home Loans, can result in “disengagement” – no more leads.
     

  • While Flex teams that convert leads and send customers back to Zillow Home Loans are eligible to get more leads.

 
 

Zillow asks Flex agents to send back leads that have expressed interest in learning more about Zillow Home Loans.

  • Consumers “express interest” through a checkbox on the initial contact form, which is checked by default – so it’s really an option to opt-out rather than opt-in.

This is another clear signal of the critical importance of Zillow Home Loans to Zillow’s long-term strategic plan to double revenue.

Perspective: While Zillow is strongly leveraging its power on the market, it only affects a very small percentage of agents and transactions.

  • Less than five percent of the U.S. real estate agent population works with Zillow (with far fewer Flex agents), and Zillow only touches around three percent of U.S. real estate transactions.

The bottom line: Zillow is curating a small, exclusive ecosystem of agents that are willing to play by its rules, which now includes tight integration with Zillow Home Loans.

  • Zillow continues to lean heavily into mortgage as part of its broader strategy, even though Zillow Home Loans has lost $283 million since 2017.
     

  • At the end of the day, there is only so much Zillow itself can do; it is reliant on its agent partners, and Zillow is exerting immense pressure on those partners to achieve its goals.

Zillow Flex Fee Rises to 40 Percent

Zillow recently raised the success fees on its Flex program – from 35% to 40% – for the completion of a successful transaction in six markets.

Why it matters: Zillow, like every other leading real estate portal around the world, has tremendous pricing power, and is able to flex that power to squeeze more revenue from agents and the multi-billion dollar commission pool.

Dig deeper: In early 2022, Zillow set itself lofty revenue goals, including generating an additional $1.5 billion per year from its Premier Agent program.

  • This revenue stream, paid for by agents, taps directly into the $70+ billion annual commission pool.

 
 

A key component of Zillow’s strategy is growing its Flex program – Next Gen Lead Gen that monetizes transactions on a success fee model.

  • That success fee has been 35 percent for years, but has recently risen to 40 percent in a half-dozen markets.
     

  • Zillow Flex accounts for around 25 percent of Zillow’s entire Premier Agent revenue, a percentage that has yet to materially change in 18 months.

 
 

The pricing change quietly occurred in September (there was no press release, for obvious reasons) in six markets: Denver, New Haven, Cape Coral, Reno, Oklahoma City, and Greenville.

There is a graduated referral fee band, but in all but two markets the average home value (as computed by Zillow) falls within the highest, 40 percent fee band.

 
 

The bottom line: Zillow’s market dominance, coupled with the exclusive nature of its Premier Agent and Flex programs, gives it unprecedented pricing power.

  • As outlined in my Real Estate Portal Strategy Handbook, most revenue growth at real estate portals around the world comes from raising prices.
     

  • Despite talk of new revenue streams and super apps, the easiest way for Zillow to increase revenue may be to simply raise prices on a captive audience.

Zillow Still Crazy About Mortgages

 
 

In a down market with historically high interest rates, Zillow continues to invest in its mortgage business – Zillow Home Loans – and is the only company among its peers that is adding mortgage loan originators (MLOs) to its headcount.

Why it matters: While other real estate tech companies are shedding mortgage headcount, cutting expenses, and closing their mortgage operations, Zillow’s investment is a clear sign of strategic intent and a reflection of its ability to invest for the long-term.

Zillow’s real estate peers, including iBuyers, Power Buyers, digital brokerages, and mortgage start-ups, have all shed MLOs over the past 18 months.

  • Some companies, like Opendoor, have shut down their entire mortgage operations, while others have cut MLO headcount by half (or more).

 
 

The number of Zillow’s MLOs has fluctuated over time, but there has been a sustained and noticeable increase throughout 2023. 

  • Zillow’s MLO headcount is up around 40 percent since February ‘23.

 
 

Better Mortgage, which recently went public via a SPAC, presents a very different story of MLO headcount. 

 
 

Zillow Home Loans is still relatively small compared to industry peers, including Redfin’s Bay Equity and Prosperity Home Mortgage (a subsidiary of mega-broker HomeServices of America).

 
 

Zoom out: And as I’ve written in the past, these companies are a drop in the bucket compared to mortgage industry behemoth Rocket Mortgage.

 
 

Remember: Zillow’s recent financial reporting changes have removed an informative layer of transparency from its business.

  • After six years of losses, it’s no longer possible to track the profitability and operating expenses of the mortgage business unit.

The bottom line: The number and growth of MLOs is an important leading indicator of a company's firepower and strategic intent.

  • With continued struggles around profitability and uncertainty around adoption, Zillow Home Loans is far from an unequivocal success story – but the company continues its heavy investment.

  • The depth of investment stands out by going against the grain of other mortgage companies, real estate tech disruptors, and the overall market – which highlights the importance of mortgage for Zillow.

The Last Mile Problem

Real estate has a last mile problem. Despite advances in online lead generation, tech platforms, emerging AI assistants, and disruptive new models -- an agent is still the necessary bridge to a consumer. Watch a clip of me outlining this phenomenon during my Inman Connect keynote below.

The last mile problem is a concept that comes from logistics and transportation.

  • Getting goods from a factory to a warehouse, and from a warehouse to a distribution center, is the easy part.
     

  • The difficulty comes with the final delivery -- the last mile -- where the experience is uncertain, complex, and expensive.

 
 

Real estate's last mile problem is similar -- you can buy thousands of online leads, invest millions into building a tech platform, and use predictive analytics to score how likely a lead is to transact.

  • But you still need an agent to pick up the phone, make a call, and build a relationship with a consumer.

 
 

And that's why the biggest players in real estate are working with agents, and not trying to disintermediate them.

  • Zillow's Premier Agent and Flex programs keep high-quality agents at the center of the transaction.
     

  • And now Opendoor is pivoting back to agents with a significant marketing and partnership campaign.

 
 

Online real estate companies probably wish agents weren't necessary and that they could go directly to consumers -- and agents probably wish the online disruptors would just go away.

  • But both forces operate in a tentative equilibrium, not necessarily liking each other, but able to work together to achieve a common outcome.
     

  • Which leaves real estate agents as the last mile solution -- the unavoidable, indisputable, and irreplaceable central part of the transaction.


Watch my enitre keynote, Pandemonium, to hear more about the industry's Netflix vs. Blockbuster moment and what a receding tide reveals about business models and true intentions. Enjoy!

Zillow’s Listing Showcase Opportunity

 
 

As Zillow's Listing Showcase rolls out, it’s becoming clear that it will play a central role on the seller side of the business as it unlocks new premium revenue streams.

Why it matters: Zillow’s goal is to double its revenue and customer transaction share by 2025 – a significant undertaking – and Listing Showcase appears to be a foundational component of that strategy.

 
 

Listing Showcase is sold to agents on a subscription basis, and each geographic “zone” has a limited number of subscriptions available.

  • One subscription includes five new Showcase Listings per month (which include photos, a 3D tour, interactive floorplans, and enhanced visibility).
     

  • Subscription prices vary by thousands of dollars depending on the market, but the average appears to be around $3,000 per month.
     

  • Exclusivity is an important cornerstone of Listing Showcase: It’s possible for one agent or team to purchase all of the available subscriptions in a zone.

The revenue opportunity is significant, measured in hundreds of millions of dollars per year.

  • Assuming six million total listings per year, converting five percent of them to showcase listings at an average subscription of $3,000 per month, the revenue potential is $180 million per year (Zillow’s existing premier agent business is about $1.2 billion).

 
 

And by the way: Listing Showcase doesn't cannibalize Zillow's existing business – listing pages still have tour requests which are routed to paying premier agents. 

 
 

Perhaps most importantly, the launch of Listing Showcase gets Zillow’s paying customers on the premium product flywheel, a concept very familiar to its international portal peers.

  • Once customers start paying for premium placement (listings and exposure), they usually end up paying more and more over time.
     

  • This is ARPL (average revenue per listing), and it keeps going up, driven by consumer demand and agent exclusivity – it’s the growth engine of international real estate portals like REA Group in Australia, Rightmove in the U.K., and Hemnet in Sweden.

 
 

Zillow's goal is to double its customer transaction share – a transaction that Zillow monetizes – from three to six percent of the market.

  • Zillow reported that it had five percent of buyer customer transactions in 2021, and, as outlined above, if it's able to capture five percent of seller listings, the goal of six percent of all buyer and seller transactions is within reach.

 
 

The bottom line: Up until now, the path to Zillow's lofty goals hasn't been entirely clear – but Listing Showcase is providing tangible clarity. 

  • Listing Showcase doubles down on what the business actually is (a high-margin online advertising platform) and not something it isn’t (an unprofitable, low-margin iBuyer or mortgage company).
     

  • In other words, Listing Showcase is strategically aligned to Zillow’s DNA and sustainable competitive advantage; it is competing where it can win.

Zillow’s Most Interesting Product

 
 

In a year dominated by a confusing market, major advances in AI, and disruptors fighting for survival – Zillow has arguably released its most ambitious product since iBuying: Listing Showcase

Why it matters: Listing Showcase represents a new business model – from pay-per-lead to pay-per-listing – which is aligned to how Zillow’s very profitable international peers monetize their market-leading positions.

 
 

The Listing Showcase product promotes a specific listing with larger photos, enhanced agent branding, and premium placement in search results.

  • It’s also exclusive in each market, providing participating agents a unique advantage over other agents (“only my listings are enhanced in this market, making your property stand out”).
     

  • The result is a high profile listing with strong agent branding, ideally leading to more seller leads for partner agents.

 
 

Dig deeper: For years, seller leads have been the mythical holy grail of online real estate – incredibly valuable, but very difficult to generate at scale.

  • One surprise of the last five years was iBuying, which despite its challenges, turned out to be a great way to generate high quality, high intent seller leads (read more: Zillow's billion dollar seller lead opportunity).
     

  • Before it was shut down, Zillow Offers was generating tens of thousands of valuable seller leads per month.

 
 

Like its overseas peers, Zillow is using the concept of scarcity to increase the value of Listing Showcase; if it were available to any agent willing to pay, it would confer no unique advantage – but offered on an exclusive basis, the value becomes exponentially higher. 

  • Without an MLS, nearly all international portals charge agents (or home sellers) on a pay-per-listing basis, with multiple tiers of enhanced exposure.
     

  • Australia’s REA Group is masterful in the art of premium listings, which always include larger photos, premium placement in search results, and enhanced agent branding – all of which are features of Zillow’s Listing Showcase.

 
 

Yes, but: By only promoting the listing agent, Listing Showcase will cannibalize Zillow’s existing buyer lead business – but that’s not necessarily a bad thing.

  • Listing Showcase is a hedge against any potential impact from the various lawsuits that may restrict or change buyer agent commissions.
     

  • It also neutralizes the threat of CoStar's "your listing, your lead" product offering.

The bottom line: Listing Showcase is a serious, credible attempt by Zillow to expand its business from selling leads to selling exposure.

  • Modeled on its international peers, Listing Showcase has the hallmarks of a classic pay-to-play premium product, which, on a per listing basis, is a significant endeavor for the company. 
     

  • At its best, it’s a potential premium revenue stream that’s good for agents (the ones that pay), consumers, and Zillow's bottom line.

Signal vs. Noise: Unpacking the “Portal Wars”

 
 

The first quarter of 2023 saw a seasonal increase in traffic for all U.S. real estate portals and, despite the hype, the competitive landscape remains unchanged.

Why it matters: For real estate portals like Zillow, traffic – consumer eyeballs – remains the lifeblood of their strategic and unrivaled power across the industry. 

Zillow added twice the amount of monthly unique users than any other portal during the quarter.

  • Absolute users are more important than percentage gains; users turn into leads, and leads turn into money.
     

  • The number of users also increases the total audience size, which is THE most important metric for an advertising platform.

 
 

Zillow has increased its commanding lead over realtor.com during the previous year.

  • This is a reflection of the overall real estate market and a change in consumer behavior, rather than anything within Zillow or realtor.com’s direct control.
     

  • During a hot housing market with limited inventory, consumers spent more time on multiple portals, but in a cooling market with significantly less people moving, consumers are simplifying their casual searches on just one portal.

 
 

The new entrant is CoStar’s Homes.com, which was acquired in May 2021. With deep pockets, CoStar is known for its heavy advertising campaigns.

  • Homes.com’s Q1 growth of 7 million monthly uniques did not come cheap; CoStar spent $112 million across all of its consumer properties during the quarter, including an increase of $55 million “primarily for SEM advertising of our residential brands.”
     

  • SEM (search engine marketing) is buying traffic.

 
 

What’s playing out in the U.S. portal space is not unique, but the latest example of network effects and the dominant position of leading portals.

 
 

The bottom line: Once the signal is separated from the noise, Zillow’s commanding position becomes clear, despite heavy investment from competitors.

  • The hype may suggest that the portal wars are heating up, but the evidence suggests no meaningful change – in fact, Zillow’s position has become even more dominant.
     

  • Furthermore, it’s not even a war; Zillow already won.

Zillow 3.0: Is It Working?

 
 

Zillow’s latest earnings reveal growth in its core Premier Agent business after nine months of decline – the longest in the company’s history – a promising result of Zillow’s new strategy.

Why it matters: The next iteration of Zillow revolves around a back to basics strategy of generating more leads and monetizing those leads through an integrated consumer experience (a super app).

  • But a change in financial reporting will make it more difficult to track the various components of the business on its journey to building that super app.

Zillow’s Premier Agent revenue increased during the first quarter of the year, breaking a nine-month losing streak – the longest consistent revenue decline in the company’s recent history.

  • Premier Agent revenue was up 8 percent from Q4 2022 (but still down 16 percent from the heady days of early 2022, when the market was at its peak).

 
 

Comparatively, Zillow had a strong quarter – its Premier Agent business outperformed the market year-over-year and quarter-over-quarter.

  • Compared to the same period last year, overall transactions in the market were down 26 percent, compared to a 16 percent decline in Premier Agent revenue.
     

  • And compared to last quarter, market transactions were down 14 percent while Zillow managed to grow its Premier Agent revenue 8 percent – a noteworthy achievement!

 
 

Zillow’s ability to outperform the market comes down to two activities: capturing a higher percentage of leads in the market, and generating more revenue per lead.

  • Zillow’s stated goal is to double its share of customer transactions from 3 to 6 percent by the end of 2025.
     

  • ShowingTime and Flex are both designed to engage more consumers and increase conversion rates, resulting in more leads and more revenue per lead.

Zillow Home Loans is another source of revenue growth, and the company continues to invest in it.

  • The segment saw an increase in revenue during the latest quarter, but the change in financial reporting means we’ll no longer be able to see profitability for the segment – after six years of losses and two years of me writing about those losses.

 
 

Losses aside, Zillow continues to invest in its mortgage business and is hiring more mortgage loan officers (MLOs) to handle an increase in volume.

 
 

The bottom line: Zillow’s path forward is dependent on its ability to capture more leads, further monetize those leads, and attach ancillary services like mortgage – a super app leading to super revenue.

  • But Zillow’s change in financial reporting will make it more difficult to track, with any degree of granularity, which pieces of the puzzle are working well and which are struggling.
     

  • Still, the numbers (while they last) don’t lie – the company’s recent performance relative to the market underscores the powerful position Zillow occupies at the top of the consumer funnel and its ability to affect change for consumers, agents, and the entire industry.

A Comparative Study of Real Estate Portal Revenue Growth

With the books closed on 2022, the largest real estate portals around the world have demonstrated another year in a long line of consistent revenue growth.

Why it matters: The varied revenue growth between portals highlights business model differences, market share penetration, and hints at future prospects – all while reinforcing the strong position that leading real estate portals have in their respective markets.

  • The standouts are Rightmove (U.K.), Hemnet (Sweden), and Zillow (U.S.), all for a variety of reasons.

The change in revenue between 2021 (boom market) and 2022 (contracting market) highlights differing market dynamics and varied portal business models.

  • The U.S. housing market experienced higher highs in 2021 and lower lows in 2022 compared to many international markets – leading to revenue declines in 2022.
     

  • In Sweden (Hemnet) and Australia (REA Group and Domain), the homeowner pays the portal listing fee – making it easier for portals to increase prices on a fragmented audience that transacts infrequently.

 
 

Hemnet is the clear standout in terms of revenue growth over the past four years.

  • General Atlantic, a growth equity firm, acquired a majority stake in Hemnet in 2016 – and since then the business has accelerated its growth in a remarkable way.

 
 

Dig deeper: Hemnet’s revenue growth has come from increasing its average revenue per listing, with the major driver being price increases (in addition to new premium products).

  • As the only major portal in Sweden – far above any competitors – Hemnet has incredible pricing power.

 
 

On the opposite end of the spectrum, Rightmove has the slowest growth of its peers.

  • Rightmove is the dominant portal in the U.K. and its competitive position hasn’t changed in years, but the company has a more conservative growth model and tends to “stick to its knitting” more than its peers.
     

  • It’s also reached market saturation and is only able to raise prices so much each year.

 
 

The bottom line: Real estate portals are strong businesses that typically demonstrate consistent revenue growth.

  • But across the world, not all portals are created equal: markets, business models, relative pricing power, and competitive tension all factor into growth potential.
     

  • And with an asset class as financially and as psychologically valuable as real estate, customers – real estate agents and homeowners – are willing to pay more and more each year, fueling the perpetual revenue growth machine.

The Path Forward for Zillow Home Loans

 
 

Zillow has been doubling, tripling, and quadrupling down on its mortgage business – which continues to lose money.

Why it matters: Zillow Homes Loans is a key part of the company's growth strategy, and an analysis of its current traction highlights the opportunities and challenges on a likely path forward.

Zillow’s mortgage business posted a $167 million loss in 2022, for a cumulative loss of $283 million since 2017.

  • Interestingly, while other mortgage businesses have enacted layoffs and race to cut costs, Zillow is keeping its mortgage operating expenses (OpEx) steady.
     

  • While revenue dropped in 2022, OpEx investment remained high – illustrating that Zillow is continuing to invest in mortgage without pressure to turn a profit.

 
 

To succeed, Zillow Home Loans must attach loans to the leads delivered through Zillow’s premier agent and flex programs.

  • Zillow reported that in Raleigh, one of its test markets, customer adoption of Zillow Home Loans increased from 15 to 20 percent.
     

  • This mirrors the progress of Redfin, which reported 21 percent mortgage attach in February compared to 17 percent in Q4.

Yes, but: Attaching mortgage is nothing new for traditional brokerages.

  • HomeServices of America and Prosperity Home Mortgage have achieved 25 percent attach rates at a national scale of over 45,000 funded loans annually – 10x the size of Zillow Home Loans.
     

  • Zillow and Redfin are both below the industry average, and may likely top out at 25 percent, something of a universal constant in the world of attaching mortgage.

 
 

Zillow's next act, announced in early 2022 after Zillow Offers was shuttered, included plans for significant revenue growth through mortgages (adjacent services).

  • A key component of this strategy is integrating Zillow Home Loans into Zillow Flex.

 
 

Behind the numbers: Zillow generated about 75,000 Flex transactions in 2022 – if the company scales Zillow Home Loans to 50 percent of its markets with a reasonable 25 percent attach rate, it would close around 9,300 loans and generate around $84 million in additional revenue.

  • A possible end goal could include doubling Flex transactions and launching in 80 percent of Zillow’s markets, with a stretch 30 percent attach rate – leading to 36,000 loans and $324 million in revenue.
     

  • These are large numbers with equally large assumptions; scaling a national mortgage operation is hard (and expensive and people-intensive). 

 
 

The bottom line: Zillow is experiencing some early wins in its journey to integrate Zillow Home Loans with its Flex program – but the path forward is uncertain, long, and expensive. 

  • Even after years of investment, Zillow Home Loans (and Redfin) is still playing catch up to the tried-and-true mortgage attach methods of the nation’s largest real estate brokerages.
     

  • A multitude of factors need to go right for Zillow to hit its goals: doubling its Flex program, convincing thousands of Flex agents to promote Zillow Home Loans, and standing up a national mortgage operation to handle 10x the volume. 

The Race to Cut Costs

 
 

Across the real estate industry, companies are racing to cut costs in the face of a significant market slowdown. 

Why it matters: With dropping revenues, cost control is one of the only levers in a company’s control – and is the key to a sustainable, profitable business.

  • The need to cut costs – and the depth of those cuts – are a function of a company’s overall financial health and business model efficiency.

Some companies, like eXp, have the advantage of a more efficient business model with lower operating expenses (OpEx).

  • Compared to its peers, eXp is servicing a disproportionately high number of transactions with relatively modest operating expenses.
     

  • The more traditional industry behemoths, Anywhere and Compass, have a less efficient model with a much higher cost basis (and thus need to cut faster and deeper).

 
 

Dig deeper: Another measure of business model efficiency is the amount of revenue generated per $1 spent in operating expenses.

  • Based on this metric, eXp was about three times more efficient in Q3 2022 than its publicly-listed brokerage peers (who are all in the $3–4 range).

 
 

Compass has been racing to cut its operating expenses as quickly as possible (it also recently announced a third round of layoffs).

  • Compass is driving to cut its non-GAAP operating expenses by 40 percent, or around $600 million annually.

 
 

Layoffs are the most visible way that real estate tech companies are cutting costs.

  • Since June of 2022, Compass has shed around 1,700 employees (40 percent), while Redfin has also cut deep with 2,000 fewer employees (26 percent).
     

  • Many other real estate tech companies have also enacted significant layoffs to cut costs (and in some cases, in order to survive).

 
 

What to watch: Among the big brokerages, Anywhere, Compass, and Redfin have already made significant cost reductions, while eXp and Douglas Elliman are under less pressure to cut costs.

  • Cost reductions limit a company’s ability to invest in future growth opportunities (ex: Compass has "paused all expansion into new markets” and Anywhere shut down its cash buying program).

 
 

The bottom line: The market downturn is forcing all real estate tech companies to cut their expenses in order to achieve, or maintain, profitability.

  • Unprofitable companies with high cash burn and high fixed costs have no choice but to cut, and cut deep, to survive.
     

  • While other companies operating more efficient, low-cost operating models are under less pressure to make big cuts – and may be better placed to invest in future growth.

Behind the Scenes: Writing a 361-Word Article

 
 


Last week I published 2021 Is An Outlier, Not A Benchmark, which turned out to be one of my most-read and most-shared articles of the year. Even though it was only 361-words long, it took a considerable amount of time and energy to create. I’d like to share a behind the scenes look at my writing and research process, and what it takes for me to produce a concise, high-impact analysis.

Step 1: Curiosity
All of my analysis starts with intellectual curiosity. Because I work to my own deadlines and I’m not paid to write, I have the freedom to explore. In this case, I was curious about the housing market. The key questions swirling in my head were:

  • The headlines around the number of houses sold are really negative; is it really this bad?

  • How does 2022 compare to the pre-pandemic years?

  • What else should I know about this situation?

These questions sat in the back of my mind, occasionally entering my consciousness, for months. I would pay more and more attention to the monthly reports from NAR, Redfin, and others, zeroing in on the percentage drops in volume compared to last year. This led to a thirst for more data.

Step 2: Data Collection
All of my work is evidence-based and data-driven, so I knew I needed data. In this case, the necessary data was quite straightforward: existing home sale transaction volumes. Luckily for me, the NAR tracks and reports on this, and after reaching out to them I had my hands on a significant amount of historical transaction data.

For a first, rough analysis, I threw the data into Excel and quickly plotted some charts. At first I was just looking at 2022 compared to 2021, and it was a grim visual indeed. From there I added 2019 and 2020 to build a broader picture. That’s when the first hit of adrenaline came: 2022 was performing better than 2019. I recall looking at the June numbers, and while the media headlines focused on the 15 percent decline in volumes compared to last year, I noticed that the volume in 2022 was exactly the same as 2019.

 
 

Step 3: Storytelling & Data Iteration
There was enough initial data to reveal an interesting story. Now I entered a phase of rapid iteration and exploration (more data, more visualizations, more insights). I collected ten years of historical data, back to 2012, and started plotting everything. It turns out that 2022 wasn’t a disaster after all and the monthly volumes fell within the bounds of several past years.

 
 

I also made my own estimates for the rest of the year. At the time, 2022 was running around 10 percent lower each month compared to 2019. What if volumes were down 10 percent for each remaining month? It’s rough, but it’s a start, and the result provided a relatively solid estimate on what the remainder of the year could look like.

Meanwhile, at this point I started rolling over various narratives in my head. The first was something along the lines of, “2022 isn’t as bad as it seems.” Yes, the market is slowing down compared to last year, but put within a wider historical context, the market is still active, people are still moving, and, most revealing, transaction volumes are within the bounds of historical averages.

It was around this time that I stumbled upon the answer to my question, “What else should I know about this situation?” The answer was the commission pool, and the insight produced a powerful one-two punch for the entire analysis. Not only was 2022 not as bad as the headlines suggest, but because of rising home prices, the commission pool was going to remain at near-record levels — far above the historical average.

 
 

The commission insight revealed itself thanks to my previous work. I had written about how big tech companies were coming after agent commissions in the past, so it’s a topic that occupies a permanent place in my mind. It simply appeared, like many insights do, during one of my mindless moments riding a bike, sipping coffee, driving across town, or hiking in the mountains.

For this article I also created a rough outline. My intention with an outline is to collect and order the various key insights and takeaways as I discover them.

 
 

Step 4: Data Visualizations
At this point I was committed to writing and publishing something. The bedrock of my analyses are clear, concise, and compelling charts — the creation of which is a non-trivial task!

It’s at this point I go back to my narrative; if the point is to show that 2022 isn’t so bad in the context of past years, how can I quickly demonstrate that with a clear chart? I started with a line graph showing monthly sales volumes.

 
 

The chart wasn’t compelling because the key takeaway wasn’t immediately clear. Back to the drawing board. Only after several iterations did I realize I didn’t need to show monthly volumes; annual would suffice to tell the story. Simplifying the chart helped to sharpen the narrative.

 
 

Adjusting a chart’s y-axis is a subtle way to influence how data is visualized and interpreted. It’s a mechanism that I typically steer away from (I’m generally a y-axis starts at zero purist), but in this case, I felt that adjusting the y-axis helped to tell the story in a clear and transparent way.

 
 

Step 5: Writing
Sitting down and writing a first draft may be the fastest part of my entire process. By this point, the story feels seventy-five percent clear in my mind. I start by putting all of the graphs I’ve created into one document and order them in a way that tells a clear story. Visuals first, then words.

My writing aims to weave the various data together into a clear and compelling narrative. I always start by describing the key takeaways for each graph.

For me, the most challenging part of writing is the introduction. Robert Caro, one of my favorite authors, distills down an entire book into 1–3 paragraphs before he starts writing. That’s what I endeavor to do; how can I summarize the entire analysis into one sentence? And next, why should someone care?

The writing went pretty quick for this analysis, and my subconscious chipped in with an assist. Over the weekend, the introduction simply materialized in my mind while hiking. I’m grateful for the parts of my brain that continue to tick away on something while I’m otherwise occupied.

Step 6: Editing
Just because I write something doesn’t mean it’s immediately worthy of your time. The entire piece, from data to charts to words, needs to be continually refined until it’s distilled down to its purest form. This process is agonizing and immensely enjoyable all at once, and usually lasts a few days. For this 361-word article, I read, re-read, and revised the draft at least fifty times.

Phrases like “less is more” and “quality over quantity” are often part of my everyday life. My editing goal is the same: to provide the smallest amount of information necessary to make a strong point. In this case, many extraneous sentences (and even a chart) were removed in order to provide a clear and cohesive narrative.

Every single word needs to add something to the analysis. If it doesn’t, I cut. And editing isn’t limited to words; it also includes charts. Adjusting chart titles and adding call-outs are just as important.

The following chart benefited greatly from the addition of several key percentages, explanatory text, and a visual representation of the historical average.

 
 

This chart also benefited from a pair of call-outs to reduce the mental load for the reader.

 
 

I also realized the commission pool chart would benefit from a clear visual of the additional $25 billion compared to 2019.

 
 

While editing, I send multiple draft emails to myself for the full mobile reading experience. It's important to read my drafts as my audience will, and the process helps with editing, readability, and overall flow. For this article, I sent three separate draft emails to myself.

During the editing process I occasionally nerd out a bit. I love grammar and punctuation. There’s an important difference between an en dash and a hyphen. And for this article, the Gregg Reference Manual helped me by providing guidance on how numbers should be written out in sentences. I write out “percent” instead of % on purpose. Three of my favorite books are within arms reach on my desk.

 
 

One of the final pieces of editing is getting the heading and subject line right. I don’t write headlines as clickbait — I aim for a brief, compelling summary of the content of my article. In this case, there was much agonizing over individual words: is it “2021 Is The Outlier,” or “2021 is An Outlier?” Details matter.

An important component of my editing process is time. I often do a few editing passes in a row, but then need to let it sit for a few hours while I do something else. There’s no point, at least for me, to power through the process. Once I hit a wall, I need to leave it and come back to it later, which never fails to produce a better outcome with a somewhat refreshed perspective.

Just Press Send
I could continue editing for weeks, but at some point the entire process comes to a close with diminishing returns (and my need to mentally move on to something else). I’m always thrilled to publish a new piece of work and to see the reactions. I enjoy the responses I receive from readers, oftentimes sharing their own perspectives and observations on what I’ve written about.

I enjoy writing. At times, the process can be laborious and mentally taxing, but I’m passionate about the topics I write about. My fulfillment comes from the journey, not the destination. In the end it’s the entire process — from initial curiosity to final edits — that makes me, and hopefully you, a little bit smarter.

2021 is an Outlier, Not a Benchmark

 
 

The pandemic years, especially 2021, were a strange aberration where everyone moved, house prices skyrocketed, and nearly every real estate business posted record revenues.

Why it matters: 2022 is constantly being compared to 2021, which was anything but normal, and year-over-year comparisons are painting a deeply negative picture.

Dig deeper: Assuming a fairly conservative 5.15 million existing home sales in 2022, the comparison to last year is a sobering 16 percent drop -- but 2021 is an outlier, not a benchmark.

  • Compared to the historical average of the previous eight years (2012–2019), transaction volumes in 2022 would be down only 0.9 percent.

  • By contrast, compared to the same historical average, transaction volumes were up 9 percent in 2020 and 18 percent in 2021 -- notable outliers.

 
 

Comparing 2022's monthly volumes to the historical average reveals recent volume declines that are still significant, but less extreme than a year-over-year comparison to 2021.

 
 

But in reality, 2022 has tracked favorably to the historical average and is still in somewhat "normal" territory, even considering the recent market slowdown.

 
 

The big picture: Despite dropping volumes, the commission pool -- which fuels the revenue of real estate agents, brokerages, portals, software providers, and more -- is set to be 34 percent, or $25 billion, higher than 2019.

  • This massive increase is being driven by rising home prices.

  • It would take a drop to 4 million existing home sales for the commission pool to hit what it was in 2019: $73 billion.

 
 

(These estimates assume 5.15M existing home sales at an average price of $375,000, with a commission of 5.06 percent as tracked by RealTrends. Things may change.)

The bottom line: The pandemic years of 2020 and especially 2021 were radical outliers on a number of levels, real estate being just one.

  • Issues of home affordability, dropping sales volumes, and rising interest rates are all contributing to a challenging 2022.

  • But, if we consider 2021 the outlier and not the benchmark, the market in 2022 doesn't look nearly as catastrophic as headlines suggest.

  • In fact, from a business perspective, there is significantly more money flowing through the system (from commissions) than any year other than 2021.