SubscribeThe Innovator’s Dilemma in Real Estate Redux: Redfin Proves You Can Turn a Profit Even With Lower Commissions
July 19, 2009
In Redfin CEO’s Glenn Kelman’s inimitable “Aw Shucks” writing style, he announced recently that the discount online hybrid brokerage has turned its first monthly profit. While one month certainly a trend does not make, it is an important milestone in the company’s development. If Redfin can make money while a) charging a lot less than its competitors and b) serving a market segment that the traditional industry is wary of … then Redfin’s prospects going forward just got a whole lot brighter.
Exercising my blogger’s prerogative to quote myself, here is what I said some two years ago, applying Harvard professor Clayton Christensen’s thinking on “The Innovator’s Dilemma:”
His theory, put forth in his books The Innovator’s Dilemma and The Innovator’s Solution posits that new entrants into an industry often take advantage of a disruptive technology to enter the marketplace at the lower end, catering to the low-margin customers that the established players aren’t that interested in serving.
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If the new entrant succeeds, it starts to take market share from the incumbents, who finally wake up — often too late — and discover that the “cheap, undesirable” part of the market is both larger and more lucrative than they previously thought.
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Even more interesting is that as the new entrant grows, its clients’ needs often change over time — to the point where the new entrant now also provides more of a “traditional” experience. Think back to Charles Schwab: its early customers were drawn in by the prospect of significantly less expensive stock brokerage services. The Charles Schwab of today still provides that, but also provides a higher-touch, higher-cost service, akin to that of the Merrill Lynches.
Exercising another of my blogger’s prerogatives — that of making wild generalizations — many of Redfin’s clients are tech-savvy, data-hungry, 30-ish first-time home buyers for whom Redfin’s data-rich site is like crack cocaine … and for whom the company’s 50% buy-side rebate is like, well, crack cocaine on steroids. These folks are do-it-yourselfers who think — rightly so — that much a traditional Realtor’s tasks (educating clients about neighborhoods, taxes, the transaction process, etc.) can be done on their own, in their pajamas, in the comfort of their home office, on their favorite Macbook.
Think about these same folks five to ten years hence … they’ll be wealthy(ier) tech-savvy, data-hungry customers, perhaps with a kid or two in tow … looking to sell their existing home and buy a newer, larger one. They’ll probably be more pressed for time, perhaps less concerned about getting a rebate … and voila! Redfin will be there to hold their hand again, perhaps operating like a traditional brokerage, charging more.
Prediction: Within 2 years, Redfin will launch a “Redfin Deluxe” service which will look and feel an awful lot like a traditional full-service real estate experience, with no or little rebate. If they can make a profit giving back half the commission, imagine their bottom line when they apply those efficiencies to the full-service market!
Other commentary on this event:
- Techcrunch, predictably, painted the event as causing “shudders” in the real estate industry. Even more predictably, the post attracted the usual scrum of Realtor-hating consumers, with Reba Haas pretty much single-handedly keeping them at bay.
- Nearly-the-same-last-name-as-mine Brian Boero of 1000 Watt Consulting notes that Redfin works by concentrating on three things that many traditional brokers ignore: talent, transparency, and technology.
Tales From The Front – The Market on July 12, 2009
July 13, 2009
Since so much of what we read about the real estate market is looking at it nationally, or statewide, it is easy to forget that real estate is local. In fact, it is probably the only product that still is local.
Here in Los Altos, the market has really picked up starting in early May. Consumer confidence came back as the stock market rallied, the sun came out, flowers bloomed and sellers got more realistic about pricing. Buyers responded by buying up homes faster than they are coming on the market, mopping up inventory.
In June, there were more homes in contract in Santa Clara County than were for sale. The majority are under $500K, but the buying frenzy has moved into the mid-priced homes up to $1.5M. Buyers are finding themselves in multiple offer situations in some cases, with a homes in Los Altos and Palo Alto occassionally receiving over ten offers. . . . What year is it again?!?
Even this new market activity is being regulated by loan availability. I wish I could remember the name of the banker who said that “the lending pendulum has swung to stupid” last week. He is in Nebraska and was saying he can’t do loans now that his father would have happily done in the 1950’s. Home buyers in the dreaded jumbo market are having to provide tremendous documentation and larger down payments, which are softening the market with inflection points at $1.5M (20% down), and $2M (25% down). Over $2M, you need to bring $600,000 in cash, which is a decent chunk of change, especially if you are in the tech industry these days.
Yesterday, I had the pleasure of spending the afternoon at this lovely home in Oak Valley in Cupertino. It is a beautiful home with views and a sparkling pool, priced at $2,348,000. That is at the top of the Cupertino market, but upper-mid range for south Los Altos, which the neighborhood borders. I had plenty of company, as there were a lot of visitors, most of whom are in the market to buy a home, not looking for decorating ideas. The majority had seen the house online, so they knew the size and price before driving over.
Forecasts for the fall market are varying, at best. So don’t believe what you read in the papers, check with your local Realtor. Hopefully, rates will stay low, and we will see inventory continue to be absorbed.
Stay tuned, and thanks for reading . . .
What Happened To The Market? – A retrospective on June 2009
July 6, 2009
With the warming weather, June saw the market continue to heat up, as Buyers jumped back into the market aggressively, resulting in strong sales across the area, especially for single-family homes under $1.5 million. Homes that are attractive to the bulk of the market, with updates, attractive floorplans, and four bedrooms are commanding multiple offers again, with a few homes in Los Altos and Palo Alto recently receiving over ten offers and selling for cash.
A combination of continuing low interest rates, rising consumer confidence ( we are getting used to bad economic news), and the closing window for tax incentives, is fueling the current buyer activity, so we will see how long this will continue. The state is running out of funds for it’s tax rebate, but the US government has the printing presses running to fund its programs.
The Anderson School of Business at UCLA released its latest report for the California economy last week, and senior economist Jerry Nickelsburg writes “there is nothing happening in California that will help pull the state out of recession in advance of the nation.”
“The dire conditions surrounding the state budget will contribute to prolonging tough conditions in California, according to the report.
Yet that the real risk for California, Nickelsburg writes, is the possibility that there will be no budget agreement at all and that the chaotic and inefficient spending cuts that would likely follow would have an even more severe impact on the ability of California to stem the downturn in economic activity this year.
Overall, the forecast for California is for a very weak first two quarters of 2009, to be followed by very little growth in the last six months of the year. The economy will begin to pick up in 2010 and return to more normal levels of growth in 2011.
The expectation is that total employment will contract by 3.5 percent in 2009 and will not grow in 2010. Once growth returns in 2011, it will rise at 1.8 percent.”
The high-end, over $3 million continues to lag, as usual, but the lack of stock profits and the international economic downturn has really depressed the market for luxury homes over $5 million. Two noteworthy listings in Portola Valley and Woodside really symbolize the luxury market currently.
1990 Portola Road in Woodside has been on the market for two months, and just was reduced from $12,500,000 to $8,500,000. That isn’t a mis-print. So much for the benefit of Larry Ellison living next door. . . . This could be an excellent opportunity for the right buyer. If you are interested, I’d be happy to show it to you.
In Portola Valley, 5070 Alpine Road is Portola Valley’s first REO property. Priced at $7,895,000, the bank is willing to provide attractive financing terms on a $1.2 million down payment. Again, I’d be happy to show it to you if you are interested and a $6.6 million mortgage doesn’t frighten you.
On to the numbers:
Atherton:
Currently, the Median Price of a Single Family Home in Atherton is $4,095,000 with a range of $1,075,000 to 16,800,000. 36% (versus 48% last month) of the homes in Atherton have had price reductions, as Sellers are accepting that the market has shifted, and the average number of Days on Market is 132 days versus 133 last month.
Menlo Park:
The Median Price of a Single Family Home in Menlo Park is $1,297,000. 39% (versus 38% last month) of the homes in Menlo Park have had price reductions, as Sellers are resisting that the market has shifted, and the average number of Days on Market has risen to 135 days from 127 last month. If you look at individual homes, the ones that are well prepared and marketed are still selling quickly, some with multiple offers, while those that are overpriced, or are less desirable due to location, odd floor plans or deferred maintenance issues are being passed over.
Palo Alto:
The Median Price of a Single Family Home in Palo Alto is $1,595,000. 41% (versus 41% last month) of the homes in Palo Alto have had price reductions, as Sellers are resisting accepting that the market has shifted, and the average number of Days on Market has fallen slightly to 96 days from 99 last month.
