Transcript
Dean Wehrli:
Hello and welcome to the New Home Insights podcast. I’m your host, Dean Wehrli. Today we’re going to kind of defy the name of the podcast and we’re going to dig into the world of the existing home market, not the new home market, the features and dynamics of that sector. Also, kind of the evolution of the resale brokers and resale brokerages. To do that, I have Mark McLaughlin. He started one of the best resale brokerages I’ve ever known. He then moved on to one of the biggest resale brokerages I think in the world where he is now, Compass, where he’s the Chief Real Estate Strategist. Titles… There’s a lot of times where the title is this kind of a thing and this is one of those instances where the title makes perfect sense because Mark is not just a really good broker, a great broker. He’s way more than that. He really is someone who thinks strategically and analytically and has vision, and again, that last word is another one of those words that you hear a lot. They’re not always honest. In this case, it’s very accurate to describe Mark. Mark, how are you doing this morning?
Mark McLaughlin:
Dean, it’s a privilege to be here. It’s been too long. Yeah, I’m really excited about our session today.
Dean Wehrli:
Well, I gave you a little mini intro, but that doesn’t really give justice to the breadth of your experience, so I want to give you a chance in just a second to give a brief rundown of your path to where you are now and what you’re doing now with Compass. Then I promise, listeners, we’re going to get to the meat of the podcast. We’re going to talk about hot topics like supply, what’s happening with buyers and sellers? The existing home market technology, some fascinating stuff. First though, Mark, tell us a little bit more about Mark?
Mark McLaughlin:
Yeah, just a quick snapshot of my past. In 2009 in the great financial crisis, I was lucky enough to be around to buy Pacific Union in the San Francisco Bay Area. At the time, it was 450 people at 17 offices, just shy of 2,000 trades for about $2 billion in sales volume, so the average sales price just shy of $1 million. Over the next nine years, we built that business to be $14 billion in sales on about 10,000 trades a year in 50 offices up and down the coastal line of California. When Compass came knocking and acquired the business in 2018, I stayed and ran the business for a couple of years, and then I exited to do some really kind of fun consulting work, skiing, biking, emphasis on skiing and biking, and just literally within 90 days rejoined Compass again as the Chief Real Estate Strategist. And to your point about using facts and being quantitative and looking at things strategically, I do think I look at industry from sort of 30,000 feet and I do try to make decisions based on facts. I always told my leadership team, “I can make 1,000 decisions a day based on facts and not one on storytelling.”
Dean Wehrli:
That’s what… We’ve met years ago, and it did always impress me that you could kind of bring both those facets to the world. You have this great personality and a lot of charisma, but you also understand numbers and understand the importance of data and letting data lead you to the right answer.
Mark McLaughlin:
Yeah, yeah, so-
Dean Wehrli:
Let’s start with maybe the hottest of hot topics in the existing home world, at least with respect to new home folks, and that’s supply because for sure folks have asked me, “What do you think the single most important factor is in sort of bolstering the new home market?” In my mind, it’s for sure the limited supply in the resale sector in most markets, so I think we all know the answer, but let’s still go over it. Why is resale supply so low right now?
Mark McLaughlin:
Yeah, so we went through, in the last five years, we’ve been through sort of two cycles on our third now, and in the middle cycle where interest rates were 3% and sub 3, if I’m not mistaken, you all know better at Burns Consulting, but I think something in the neighborhood of 70% of homeowners in the United States have a mortgage below a 4, and that’s really no longer liability. That’s an asset. Why would I sell an asset that has a face value that’s 300 basis points below market? And so whereas, in the marketplace coming up to Covid, people wouldn’t sell their house because they had no one to buy. Now they don’t want to sell their house because they have the financial asset. So we have sellers that are staying in their homes right now, and the buyer demand is ferocious. It’s just this limited supply of inventory that I can’t replace my property, this is just too attractive for me.
Dean Wehrli:
Don’t you think that buyer demand though – is I still think that that demand part is lower than it was during the heyday of Covid, but the other part that supply part is so much lower that the equation is much more in favor of demand?
Mark McLaughlin:
But I think the demand side of the equation has shifted for a different reason. The demand side of the equation has now shifted because of purchasing power, and in January of ’22, mortgages still had a 3 in them. By July of that year, they were midway through the 6s, so the purchasing power of my dream home looks like this. Okay, well, in a six-month period, your dream was compromised unless you were willing to increase your spend. If you think about the monthly mortgage payment, unless you’re willing to increase your spend, your dream got compromised and in Covid you could say, “Okay, now I can move anywhere. I don’t have to focus on the city center or less than an hour’s commute from my office. I can move anywhere.” And so you could go to a market where the average trade was 60% of the one that you currently live in that urban high density area.
Dean Wehrli:
It sort of realized untapped demand that had been there all along, but it allowed it to be real.
Mark McLaughlin:
For sure.
Dean Wehrli:
And here’s something else I’ve noticed, that when we look at time periods from some analysis we did, whatever, six months ago, eight months ago, and look at the movement in the resale market versus the new home market, I’m consistently seeing stronger price movement, positive price movement, in the resale market. Am I seeing things? Are you seeing that more nationally? Are you seeing just stronger pricing power in the resale world, presumably because of this low inventory?
Mark McLaughlin:
Pricing power meaning price increases?
Dean Wehrli:
Yes.
Mark McLaughlin:
Yes. We’re definitely seeing, even though we have limited supply and we have significant demand, so we are seeing consistent 1% increase in prices in a month, not 6%, something like that. But we are definitely seeing there’s more people chasing fewer homes, simple supply and demand. We’re going to get lift in pricing.
Dean Wehrli:
Yeah, it is really remarkable too. It is this weird kind of counterintuitive world in which very often in some submarkets there is much more availability of new homes, oddly, than there is of resale homes, which of course is extraordinary. How about niches, like price niches. Is there more or less inventory by niche, or is it really just kind of tight everywhere by price?
Mark McLaughlin:
It’s interesting. I just started sort of an inventory analysis this morning by price point because the marketplace sort of over luxury in whatever market you’re in, let’s call it $2 million or $5 million, wherever you are in the spectrum of housing in the United States is not as adversely impacted by interest rates because there’s a lot more wire transfers and all PS transactions there. But the sensitivity in the marketplace is where you’re buying an $800,000 home or you’re buying a home with an $800,000 mortgage, far more sensitive in those areas.
Dean Wehrli:
Mortgages is a great segue. So I’m going to ask a question that is really about mortgage rates. What I mean, some folks think that if mortgage rates come down to a certain level – I’ll ask you what you think that level is – that we’re going to see sort of this explosion of listings and a lot more inventory onto the market. Are you in that camp?
Mark McLaughlin:
I’m definitely in that camp. I can’t say I’m the expert on what that number is, but I would say that if mortgages came down to a 6 or a 5.75 we would see a significant increase on the demand side of the equation. And with the things that we’ve learned about mortgage buydown in the last say, 7 to 10 months, the seller could really prepare themselves for the next place that they’re going. Well, they’ll use proceeds from sale to put up 3, 4, 5, 6 points almost like your new home builders have been doing it.
Dean Wehrli:
Yeah. Okay, good one, another one too. So are you seeing the strategy of some buyers, I’m sorry, sellers in the resale world making offers to buydown that seller’s rate the way a lot of the bigger new home companies do?
Mark McLaughlin:
So back in April, I think I watched one of the John Burns weekly podcast and you all lit up what the home builders were doing. They had inventory, it’s cheaper to buydown the mortgage than it is to reduce the price of the house. We have ever since, really doing best efforts to articulate that same thing, not necessarily to the buyer, but to the equivalent of the builder is to the supply side in the equation to the sellers. It’s in your best interest to put up 2, 3, 4, 5 points to buy the seller’s mortgage down. It’s a much, I mean, the home builders had that conversation in their conference room by themselves. They didn’t need outside advisors for that. So we have to be in there as the real estate professional articulating the strategy of the seller who’s never even contemplated a financial transaction like this before. And then you got to get the buyer’s agent involved to have the buyer think that through, no, we can move the needle on your mortgage by a point through bylaws, but they’ve never been through that either. So there’s this whole acclimation to a brand new cycle related to the synthetics, if you will, of mortgages.
Dean Wehrli:
That’s fascinating. You know what, let’s get back to the strategy of buyers intelligence in just a second. Let me loop back to kind of finish my thoughts on mortgages, if you will. And that’s, let’s take the opposite. So if we are getting down to 5.5, maybe high 5’s, we open up a significant amount of supply within the resale world. If get down to low 5’s, we maybe, I mean, do you think it’s something like, I don’t know, a tsunami, let’s not overdo it, but do you think you get just a really substantial amount of new supply at 5-ish or something like low 5’s, let’s say?
Mark McLaughlin:
Absolutely. In 2021, what do we do, 6.2 million home sales in the United States? This year will probably be what, 4.2, something like that. Maybe 4.3 on a lucky day, so that’s 30% movement. If we bring mortgages down to 5%, again, I could see going way over 5 million. I don’t know that we’ll ever see what 6.2 again. Yeah, those would be my thoughts for sure.
Dean Wehrli:
That’s a good point too. We do have to be careful of anchoring to times that are abnormal that are kind of ahistorical and the Covid thing was abnormal. It’s like looking at 2004 and 2005 and pretending that was the real world when it for sure wasn’t. So we always have to be careful of the past when the past is weird in some sense.
Mark McLaughlin:
You’d have a flawed set of expectations if we thought sort of under any scenario we’d get back over 6 million homes sold.
Dean Wehrli:
Yeah. Yeah. How about the other direction though? Is there a mortgage rate that is too high even for the strengths we are seeing in this market? I’m continually surprised by the resilience of the housing market. I know a big part of it, like we said, is low supply, but is it 8 plus? Is there 9 where we really start to see these transactions start to really diminish?
Mark McLaughlin:
I sure hope not, but that hope is not avoid a very strategy in that. Yeah, I think that just the purchasing power of the consumer, it’s an emotional defeat, right? I saw what I wanted. I saw the prize that I wanted 18 months ago. I didn’t pull the trigger. Maybe I was outbid five different times, and I said, “I’m just going to take the sidelines for a moment and see everything just settle down.” Well, it hasn’t slowed down. I think this is back in 2016, 2017 when we were doing those economic outlooks. There’s a big difference between deceleration and deflation, right? Deceleration still means you’re accelerating just at a slower pace.
Dean Wehrli:
You can be excused by the way, by if at the end of ’22 or even really early ’23, you thought prices would continue to moderate because we were all pretty surprised by how strong ’23 has been with at first much lower rates. But like I said, the resiliency of this year has been pretty impressive. I’m assuming this is true, but are you seeing a lot more multiple offers?
Mark McLaughlin:
In a sweet spot of the product range, we definitely see multiple offers. Now, are they big double digits? Not really. They’re probably north of 5, though. If it’s a home in your neighborhood that’s in that medium price range where there’s going to be a 70% or an 80% mortgage on it and the property is fixed up where you can kind of move in and go to the movies and it’s modern, it’s going to get a lot of attention. The one on the hilltop or the one that needs a lot of work, the discretionary capital and the reserves required for the mortgage is not really there.
Dean Wehrli:
Okay. Are you seeing an increasing distance between bid and ask, between the final sales price and the original asking price?
Mark McLaughlin:
To the downside?
Dean Wehrli:
To the upside. I’m seeing a more positive distance. We are seeing, again, in some of those markets, really the stronger markets, the more core kind of markets, we’re seeing that go up from mostly 0, if you look at the average, into 2%, 3%, 4% or 5%, 6%, which is surprising me again.
Mark McLaughlin:
Well, there’s a lot of markets in the United States where housing prices had a lift of 1% and 2% month over month. So by definition, if you’re going to have multiple offers, you’re probably going to move through that range.
Dean Wehrli:
Yeah, that makes sense. Okay. Okay. Now let’s go back to the buyers and sellers. Now, you mentioned that in terms of the… You’re seeing more folks that are offering or somehow manufacturing some kind of a deal of a mortgage buydown. I mean, that’s really been the secret sauce of a lot of the new home incentives. But that’s difficult because essentially when a new home builder says, “Okay, we’re going to do buydowns now.” Every single home they offer is doing it, but usually, but with a reseller, you’re educating folks one at a time?
Mark McLaughlin:
Oh, I would say that the opportunistic people, sellers sponsoring the buydown is probably in the 5% to 7% of houses range.
Dean Wehrli:
Wow.
Mark McLaughlin:
So pretty small. It’s just-
Dean Wehrli:
Very small.
Mark McLaughlin:
… Getting that message out is just not simple, it’s hand-to-hand combat.
Dean Wehrli:
Yeah. Do you see it growing though? I mean that’s higher than it would’ve been. Do you see it growing?
Mark McLaughlin:
Well, if we want to move properties for sellers, we have to educate them that way.
Dean Wehrli:
Yeah. What other strategies, what other tactics or strategies are sellers using right now to make that deal? Besides maybe offering a buydown?
Mark McLaughlin:
Yeah, I mean the Compass Concierge Program that’s been around for four plus years now, where the capital is available to you as a seller to dial up your home. Well, it’s unfortunate that sellers wait to the point in time where they’re going to sell their home to dial it up, but it certainly you do it because that’s what the demand represents. The demand requirement says, “I want the house fixed up ready for me to move in, sell my family, whatever it might be.” So that’s definitely one of those phenomenons that we keep coaching sellers on.
Dean Wehrli:
How about in terms of being strategic about who they are outreaching to? What I mean by that is, the buyers right now, because so many folks, like you said, over 70% are under 4.0. They’re kind of off the boards. So the buyer types that are still in the market are people who are kind of a little more motivated to buy like the relocations or their family is growing, or their family is shrinking something that really is kind of pressing you with some urgency to buy. Would sellers, I don’t know how they do this, but could and do sellers try to target those people specifically, is that-
Mark McLaughlin:
We can do some pretty, I wouldn’t call it precise, but we can do some specific demographic targeting where if we know that in suburb A, the school district is so hot that it attracts people from city B, we can definitely do targeted digital marketing campaigns to target that house to those people. And you can do it, you can pick your channel, you can do it on CNBC, you can do it on CNN, you can do it on the local high school football channel. You can do it really anywhere you want, but the really good real estate professionals have, not anecdotally, I know where the buyers are coming from, but empirically, I know where the buyers are coming from and do digital campaigns to address the buy side of that.
Dean Wehrli:
I was just thinking weird, butcould you target people who are getting married, people who are getting divorced? I hate to say it, people who just had a baby or had multiple kids, things like that because those are the people who might be a little motivated to change the kind of home they live in.
Mark McLaughlin:
Yeah, there’s AI embedded in technologies now that completely permit you to do that. The divorce is a lot easier in certain states than the marriage certificate because the marriage certificate usually gets filed the day of the wedding where the divorce, most states have sort of a six-month runway that you file and then you’re done in six months type thing, and so you got a little more time on your side there, but there’s the five D’s diapers, what is it, diapers, divorce, all that kind of stuff.
Dean Wehrli:
The classic stuff. Relos too. That’s a little harder though, isn’t it, to track folks who are moving into a given area, but those people are ripe. Obviously, they need to live somewhere so.. Are buyers right now being more acceptant of these high mortgage rates than we might’ve thought they would be based on this intent, “Hey, I’m just going to refi in a couple of years when I’m pretty sure that mortgage rates are going to be lower.” I mean, is that just pervasive?
Mark McLaughlin:
We definitely hear that conversation quite frequently and we hear it from the lenders in the country too. Is that are they pricing that in and are the rates just a little bit higher than they need to be? But the buyer is, I think very hopeful. Again, not the best strategy in the world that, “Okay, I’ll take this 7. 75 right now, and in 24 months I think there’s going to be a 5 out there for me.” Well, I absolutely got the prediction in the early part of this year wrong as to how fast the Feds would raise, and everything I’m gearing is higher, longer. So when will that actually come to fruition? If it’s this time next year, pre-election, if you will. I think there’s a lot of pent-up demand on the sidelines.
Dean Wehrli:
Most of the folks, because that happens a lot in the new home world too, so when we’re talking to new home sales agents that typically seems like they’re thinking two years, maybe three, we can make this work, this higher monthly payment than we expected. We’re not going to eat out nearly as much and go to the movies and stuff like that. We’ll make it work for two or three years when we think that mortgages will be lower. That seems to be a rough timeline, I guess.
Mark McLaughlin:
And big difference between the new home builders and the sellers in the United States because the new home builders have inventory, they need to move and the home seller has a choice. I can stay right here in my rocking chair.
Dean Wehrli:
Yeah. Should I not ask this question, but what happens if we don’t get to this lower mortgage rate environment in two or three years? Or is that just too depressing?
Mark McLaughlin:
Well, we’re diligently preparing for next year, which we think will be same if not slightly less than this year, in terms of number of homes sold in the United States, and we just want more than our fair share of those. But if this lasts for two years, there’s going to be a lot of real estate professionals that are looking for work somewhere else.
Dean Wehrli:
And we do, John Burns Research and Consulting does expect market rates to come down, but not super rapidly, but come down enough to where this refiing kind of strategy could work-
Mark McLaughlin:
Plus with all, if you think about all the tragedies that are going on in the world right now in the Ukraine and Israel, it is just if that type of geopolitical things keep going, the safest haven for capital in the world is going to be the United States of America and the tenure, and if there’s an increase of demand for the tenure, that would put pressure on interest rates.
Dean Wehrli:
Well, yeah, I know, it’s so hard. What we do is we peg it to what the bond market thinks is going to happen with mortgae rates, but even then, like you said, there’s always some event that could smash that expectation in a night.
Mark McLaughlin:
And I am by far, far from an expert on that. So you could even delete that section.
Dean Wehrli:
No. What’s happening with investors, just more generally, are you seeing more investor type buyers, less, same as let’s say a year or two ago?
Mark McLaughlin:
When you say investor, do you mean home for rent?
Dean Wehrli:
That, but also anyone… Mostly that. Mostly the kind of people who are going to buy it to rent it out. Also, maybe even flippers as well, if you want to kind of disentangle those two?
Mark McLaughlin:
So broad strokes on the investor buying a home to rent it out, it’s definitely slowed since 2021 because if you think about it, they were chasing yield. They were chasing yield, and here’s a fixed asset class giving off a great yield. You can lever it up to a certain point and benefit from the appreciation. So we’re seeing less of that. The fixers and flippers have decelerated as well, although, the borrowing costs in that channel is such a short period of time that it wouldn’t have the same… It’s going to have an economic impact on the trade, but not to the severity if you held it for three years.
Dean Wehrli:
So I mean they’re thinking three months, so it’s just going to be a really short timeline, six months max typically. I think our definition is within if they buy and sell within a year, but mostly they’re thinking three to six months.
Mark McLaughlin:
So their carrying costs are not as significant to the trade.
Dean Wehrli:
So you still see those folks? They’re still in the market. They’re still a big part of your demand, are significant-
Mark McLaughlin:
Oh definitely.
Dean Wehrli:
Okay. Anything like the latest with buyers, are you seeing any changes there? You could, for instance, think of folks who don’t have a mortgage. Like people who are renters or people who are forming a brand new household, moving out of the parents’ house kind of a thing. Are you seeing more of that type? Those folks are also going to be perhaps challenged by price too, aren’t they?
Mark McLaughlin:
Sure and important to distinguish between somebody who’s coming from a rental situation into the buyer pool, but they’re going to use a mortgage versus not. Going back to the generational wealth transfer that’s going on right now. We see, I think we’re up to now 28% all cash, where 4 or 5 years ago that number was probably 20% all cash. So there’s a lot of cash in the marketplace.
Dean Wehrli:
That was excellent. Literally, my next question is you’re definitely seeing more cash buyers and that’s a direct consequence. Are they spending maybe more than they thought to? That is to say maybe when mortgage rates were lower, they would’ve put just 50 down and kept the rest, but now they’re going all in because they don’t want to have that 7.5% mortgage?
Mark McLaughlin:
I don’t have a precise answer on that, but anecdotally, I would say yes, but they are paying more for the asset because the asset class is rising and there’s some areas in the tax-free states that are in the Sunbelt, those states get a lot more of attention than the others. But we’re also seeing the mountain resort towns having incredible appreciation over the last five years. Incredible, over 100% in five years.
Dean Wehrli:
I think you are in one right now, I believe. Judging by what I see behind you in your window.
Mark McLaughlin:
Jackson, Wyoming.
Dean Wehrli:
Jackson, Wyoming.
Mark McLaughlin:
Yep.
Dean Wehrli:
Okay. Let’s move on to the market. Do you guys track sort of hot market versus cold market with respect, whether its price or whether it’s a volume of transactions? Are you looking at different markets across the country? You guys have a pretty much national footprint, if I’m not wrong, right?
Mark McLaughlin:
Yeah. We operate 500 offices around the United States, so we’re in just about every major market, all the NFL cities, all the nice resort communities, everything like that. And New York City has seen a fantastic resurgence, absolutely fantastic. And the state of Florida, I think they sort of ignored Covid down there and just kept going on with their lives and have done exceptionally well. But Telluride, Aspen, Jackson, all those types of places, fantastic. We’ve had a fantastic runup in Austin, and that’s tapered as well. So the faster on the uptake, maybe the faster run the downstroke.
Dean Wehrli:
Yeah, it sounds a little bit like this kind of scenario. These dynamics within markets probably track pretty close to the new home markets as well, don’t they? It’s still based on those same fundamental factors, supply and demand?
Mark McLaughlin:
I don’t follow that as well as you do, but instinctively I would probably agree.
Dean Wehrli:
How about the strongest price niches? Again, are you seeing with the all cash buyer, are we actually seeing more demand at some of the higher price niches than we maybe again, say a year ago from now?
Mark McLaughlin:
Well, it’s certainly not as soft as where you see… When the mortgages get to. If we’re talking about the high end, when the mortgages get up to $1,500,000 and $1,800,000 the transactions start to turn into cash, and that $1,500,000 and $1,800,000 mortgage is going to be very, very expensive. A $3 million mortgage at 6.75, you’ve got to have a hell of a career or hell of investments just to support the debt service.
Dean Wehrli:
Yeah, you almost have to be an all cash buyer. And it probably means that folks at those price niches probably have the wherewithal to be a cash buyer.
Mark McLaughlin:
Yes.
Dean Wehrli:
Except in maybe the cores like Silicon Valley where a $1,800,000 townhome is like a starter home and they are going to have to get a mortgage.
Mark McLaughlin:
Yes.
Dean Wehrli:
How about the who of the buyer, how that changes. Are foreign buyers, generally speaking, a lesser presence then, say again, say a year-ish ago, bigger prices about the same?
Mark McLaughlin:
When I got your questions, I actually went and did a little bit of research on that, and I think the foreign buyers right now are at the same level they were at in 2009, sub 15% of the market. And in 2016 and 2017, when China changed its currency laws to make it restrictive to get capital out of China, we were big participants in sort of developing a China concierge back then. It really kind shut that flow of capital off. And the items that I’ve been seeing recently, is significant capital now moving out of China to Singapore. Well, once it gets to Singapore, it can go anywhere in the world. I don’t know what the trick is to getting it into Singapore, but that’s the trend that we see now.
Dean Wehrli:
It is funny you say that because I did talk to a couple of my colleagues and one in particular, Scott Wild, he’s down in southern California, about places like Orange County and Irvine, which is a very popular destination for Chinese buyers. They’re still getting a lot of Chinese buyers. So at least you could speculate that that’s coming via Singapore? Or something along those lines.
Mark McLaughlin:
Maybe. Yeah, it used to be Hong Kong, but now Hong Kong’s back under Chinese rules. So the capitalist-
Dean Wehrli:
Macau.
Mark McLaughlin:
… Yeah, yeah.
Dean Wehrli:
Remember there was a while there where they went and lost at the craps table, like $1 million. They took their cut and the rest made it to the US for it to buy a home. “Oh, I’m having really bad luck tonight. Oh, I lost again.” That kind of thing. You can get very creative to get capital out.
Okay. Let’s talk about how you function in today’s world. What are you as a resale broker, are you doing differently to… Let’s start with this, to compete with new homes? Do you think about that? Do you feel more competitive with new homes? Are you doing anything different strategically or tactically to compete with that competition?
Mark McLaughlin:
Well, we had to. We had to get creative with our mortgage business, which is called Origin Point. We had to get our loan officers engaged with our real estate professionals to educate that buydown process. And everybody, well, not everybody, but the knee-jerk reaction is the buydown is for the buyer. No. In this instance where the home builders were getting all the headlines and their market share got up to what 30% of the homes sold in the United States were coming from the new homes markets? Is because they owned the headlines on the buydown from the seller side.
So that was an adjustment for our industry. It’s like buydowns, usually the buyer, but today it’s the seller we’re pushing to do it.
Dean Wehrli:
What’s the biggest ? We know there’s two buckets really. There are some people who are just resale buyers, there are some people who are just new home buyers, but more and more those two Venn diagram circles kind of seem to be merging. Is there something… What’s the single best value add that you as a resale broker bring to your client?
Mark McLaughlin:
So this is a bit of a longer answer, but it was true in the great financial recession. It was true in the great financial crisis. It was true in Covid, and it’s true now. The relationship between the buyer or the seller trades with a real estate professional on trust. And trust is a loyalty card that’s handed from the client to the real estate professional. And that card is earned over a period of time through advice, knowledge, recommendations, experience. And so in this market right now, if you are a buyer and there are multiple offers, you’re picking the person that you trust with the best relationships in the market. Because if I can bring your offer, if I can bring an offer to you, Dean, the listing broker, and you trust me, like my client trusts me, I have a much better chance of taking that down.
So in a market like this where you might think we’re going to see fee compression because transactions are lower, the really sophisticated buyers are saying, “You’re the best in the market. All the people you know where the bodies are buried, go find me a house.”
Or if I’m a seller that has just lost a job or my mortgage rate just incremented up, indexed up, same thing. I want the person who I trust who’s going to move this asset for me. So that is a constant theme that I have at Compass is that your clients are doing business with you, they trust you, and if you think you’re close to your clients, get closer.
Dean Wehrli:
But really it’s about you, the agent, this market, and you’re going to tell me, the client, what I need to do to maximize my prices, whether it’s staging or whatever, you know those little things that I don’t know because it’s not my area.
Mark McLaughlin:
And I went back through Real Trends, who publishes average fees per year. I went back 30 years for commissions, fees and looked at different economic events and looked at different technology events and what impact they had on fees. And the tougher the market got, the more fees went up because of that trust card that the buyer or the seller comes to the real estate professional says, “Either I’m in a tough spot that I have to sell or I’m in a tough spot, I want a house and I can’t fight one.” So the two points on the commission on this cost of the trade doesn’t matter if I can’t sell the house or if I can’t buy a house. So the consumer has voted with their checkbook, although, we don’t use those anymore literally for years, that they value advice over discount.
Dean Wehrli:
And you really need to be someone who is really an advisor, not just someone who’s looking at MLS and bringing… You need to be much more strategic than that?
Mark McLaughlin:
Exactly. In this market. The good will become great.
Dean Wehrli:
And having resources to do that makes it easier. So my next question is, I don’t want to make you uncomfortable. You’re at a big, big, big brokerage. Do you see more concentration coming within your world?
Mark McLaughlin:
Oh, for sure.
Dean Wehrli:
Some of the smaller folks getting squeezed out? Okay.
Mark McLaughlin:
Yeah, Compass had the benefit of incredible access to capital and devoted a significant amount of that capital, hundreds and hundreds of millions of dollars into a technology platform that now includes AI and ChatGPT. It’s a competitive advantage that will widen the gap in years to come because it will be hard for people to access that kind of capital again. And so competing in the world today of 4.2 million trades a year, homes a year versus 6 million, 30% of the trades taken out of the market, take 30% of the trades out of any real estate broker’s, P&L, and it’s upside down.
Dean Wehrli:
So technology is, I mean, is it a game changer? That’s a hackneyed word, but is technology a game changer in the resale brokerage world right now or becoming one?
Mark McLaughlin:
I don’t think it’s binary like that Dean, but it is going to create share because people are going to value it. If you think about what AI and ChatGPT do for you, it’s not going to replace me as a real estate professional, but it’s going to eliminate the routine and the mundane. And we have a lot of routine and mundane in residential real estate. Just think of the friction, the paperwork in a transaction. And so if that gives me time, I take that time and I can either enjoy myself or I can put it back into my relationships.
Dean Wehrli:
This is a horrible question because I know it can differ by market, but remember the old rule of thumb that six months of supply was that kind of equilibrium point. We know that is smaller now and the reason I ask you now is because the technology is a big part of that. Do you have any sense what is the new equilibrium for months to supply? It’s not six, but it’s more than one or two too. I feel like.
Mark McLaughlin:
Yeah, there’s no way it’s six because, so I would take a stab at the true, true balance would probably be somewhere between 60 and 75 days. And the two reasons are, that there is so much transparency on the front end, the search end, that the consumer comes in like hot, they come in knowing exactly what they want. They want 123 Main Street. And then there’s been so much investment into Proptech to eliminate the friction in the transaction that the trade happens faster. So we’ve got this craze of an under supply of housing, a faster transaction that collapses that side.
Dean Wehrli:
That’s a great analysis. So it’s kind of from both ends is shrinking this time period. You are right. Buyers know they can go online and find out so easily and so quickly everything they need to know in a way that they couldn’t have found that at all, in any time, 10 years ago, 20 years ago.
Mark McLaughlin:
Now, if you take the mortgage out of a trade, all the money that was invested into Proptech during Covid, which was a significant amount, billions of dollars was focused on removing friction from the trade. So now you have an e-notary, the title companies can file electronically. They don’t have to walk into the courthouse. So if you don’t have, in most states, I shouldn’t say most states, in many states, if you don’t have a mortgage, you could probably close a trade in four or five days, maybe even sooner.
Dean Wehrli:
That gives them, I imagine a pretty significant advantage over anybody who is going to have to have a mortgage?
Mark McLaughlin:
Well, because if I’m the seller on that trade, you’re giving me certainty, “Oh, I can be out. I may not be able to be physically out in four days, but I have my capital freed up to go do what I need to do.” Right?
Dean Wehrli:
Yeah.
Mark McLaughlin:
So as we reduce friction from the trade, we create velocity and velocity creates liquidity.
Dean Wehrli:
It’s like, what, four days? I don’t even have boxes yet. Give me a couple of weeks.
Mark McLaughlin:
Yeah, exactly.
Dean Wehrli:
But that’s not a bad conundrum. How about virtual terrain? I know that seems like a two and a half year old question, but I know that became huge during Covid and it kind of had to, is that still getting bigger and bigger? Is it still getting more acceptable? Do you still see buyers who are buying sight unseen other than a Zoom tour or something like that?
Mark McLaughlin:
Well, I think the virtual tour has become sort of the standard as opposed to the leading edge. And now there are sellers that are really want their privacy, and so maybe they say, “You can put four pictures of the house and that’s it.” They want their privacy. And so that’s definitely part of it. And what was the second part to the question?
Dean Wehrli:
I wonder if is that is going to become, I think you answered it, is that going to become kind of the norm?
Mark McLaughlin:
Yeah.
Dean Wehrli:
Are we going to see it being pretty routine?
Mark McLaughlin:
Definitely.
Dean Wehrli:
Oh, it was, do you see folks buying sight unseen, a relo, for instance? Are they going and physically, at least at some point during the process going and taking a look at the house physically?
Mark McLaughlin:
Yeah. Well, so relo is not as big as it used to be because of the work from home phenomena. Will that come back? Will companies start relocating people around? That means they’ve got a return to office policy that’s pretty rigid. We have a very aggressive return to office policy at Compass where we are building a community filled with culture and we want the people to be in it. I have not, literally since Covid kind of relaxed, maybe in late 2021, middle of 2022, I don’t think I’ve been seeing that craze of buying and well sight unseen.
Dean Wehrli:
Okay, it is a little bit different now it, let’s end with this Mark, how about you look into your crystal ball? I do this to all of my guests. I’m brutal and I am mean-spirited but how are we selling homes differently? How are you guys selling homes differently in say 5 years, 10 years? Is there something overarching that you think will be a different part of that process?
Mark McLaughlin:
Yeah, it’s hard to articulate, but like the financial services business has E-Trade and Goldman Sachs. I think we will see that kind of separation in the real estate brokerage business in 10 years, yes, in 5 years, early signs of it, really early signs of it. And the clientele will have an appetite for a different type of service. So if you have the appetite for the Goldman Sachs type service, you’re going to go and work with them. If you have an appetite for, I just want to swipe my card and I don’t really need a whole lot of help and I want to save 2.5%, you’re going to have that opportunity available to you and the transactions will get even faster. Because as soon as we can take the friction out the mortgage process, I mean, there’s three companies I know of out there that want mortgages in two minutes. Okay, well, wow. It’s hard to even fill an application out in two minutes. But yeah, I think that’s coming for sure.
Dean Wehrli:
So days on market is just going to shrink, and shrink, and shrink probably or more of a-
Mark McLaughlin:
Well, that’s going to be a function of that equilibrium, right?
Dean Wehrli:
Yeah.
Mark McLaughlin:
If interest rates go to 10, the ones that trade are going to trade at a big discount and probably go pretty fast.
Dean Wehrli:
So folks will just be looking for, they’ll kind of get the broker that they feel they need. Again, it could be all the way from really hold your hand concierge to just make it happen?
Mark McLaughlin:
Yep. And the consumer will get the choices that they demand because an entrepreneur will give it to them. But if we get back to five and a half million trades a year, that’s a lot of real estate to buy itself. And we also have to keep in mind that 80% of the time you’re not buying a house, you’re buying a home, and the shelter for your family and the experience of that shelter, and its proximity to whatever it is you like to walk to. When people say, “Where’s the best place to buy a house?” I’m like, “Well, do you prefer sunrise or sunset? And what do you want to be able to walk to? If you want to be able to walk to the water, you should buy it near the water.”
Dean Wehrli:
Yeah. Yeah. You think about that. That’s true. If there’s any purchase in your life that you need help on, it’s a home. You don’t have car brokers who come into the horrific car dealership with you, but for a home, that’s not just the biggest purchase of your life. It’s by far the most important purchase.
Mark McLaughlin:
And you as a consumer probably buy and sell a piece of real estate every seven years. So while you… There’s a lot of consumers that think they’re experts on everything, but maybe not buying and selling real estate against someone that does it 25 times in the same zip code every single year. They kind of make the market. So those people will have very bright futures.
Dean Wehrli:
Okay. Mark, let’s finish with one of the kind of hottest buttons in the brokerage world these days, and that’s commissions. The traditional 6% commission typically paid by the seller and shared between the seller and the buyer agents has been under some pressure lately. How do you see that playing out?
Mark McLaughlin:
I like the way you referred to it as pressure. Yeah, there’s certainly a tremendous amount of attention on the way that the brokerage industry gets compensated. And I do believe, and I believe Compass also believes, that one thing that’s going to change from a practical perspective is our behaviors, and a couple of three things are going to be included in that. First, we’re going to have to be more pronounced that commissions are negotiable. They always have been, but maybe it’s been in the fine print, maybe it hasn’t been sort of the billboard along the highway. We’re not literally going that far, but we’re going to have to be more open and communicative with our clients that commissions are negotiable.
To follow on that, the commissions are also going to become far more transparent like there’s a thousand dollars paid to a brokerage company in a commission, then everybody involved in that transaction, it will have to be laid out how they got paid. Did it come from a lead source? Or did it come from a referral? That person’s name will be there with the amount of the referral. If it came from Zillow, Zillow will be there, that it came from Zillow as a lead source. So there’ll be far more transparency.
One place we hope sort of the pressure doesn’t go to is forcing the buyer to pay the buy side of the trade because that would really … It would severely compromise the first time home buyers in the United States. Some of these government related loans that have very small denominations down, 3%, 5%, if they had to come up with another two plus percent, it’s going to compromise their ability to live the American dream.
Dean Wehrli:
That’s a hugely important point at the end. I know I’ve seen that in the media coverage of this issue, but if this does become kind of transferred to that buyer, especially in the entry level, which is so critical, who’s already paying different fees and is struggling to get that down payment, that could have a really marked negative impact on the housing market.
Mark McLaughlin:
Yeah, definitely. Now it’s been being battered around that the MLS should not be offering a compensation to the buy side, or give the homeowner the choice is really how I should rephrase that. Give the homeowner the choice of not offering compensation on the buy side of the trade. Well, interestingly enough, in 2019 in the state of Washington, the rules or the guidelines of the Northwest MLS changed not to require the seller to offer compensation to the buy side. We’re four years into that now, and 97% of the homes offered through the MLS have buy side commissions included in them to the procuring cause compensated broker.
Dean Wehrli:
By choice of the seller in that, Mark?
Mark McLaughlin:
By choice of the seller, and 95-ish plus percent of the time that fee is 2% or higher. So there’s practice for four years now that the seller isn’t really objecting to that compensation and it’s setting the market fee at pretty close to what you might say is industry average. So we’re learning from that and we’re going to keep training our folks appropriately to that end.
Dean Wehrli:
That is a great … It’s a better answer, I will say, Mark, than what I’ve seen of some of your given patriots in the media portrayal, so I appreciate that.
Mark McLaughlin:
Yeah, and there’s a lot of noise on this topic, and then our industry tends to publish news on noise, so you got to get to the facts of … The facts are at Compass, we went back and looked at our buy side commissions in the state of Washington month by month through the year, and they range from between 2.25% and 2.45%, and the consumers are making those decisions, that they value our service.
Dean Wehrli:
That’s perfect. Well, let’s end there. I like that. Thanks a lot for coming on. This has been great. As I mentioned I think upfront, we’ve been trying to get this together for a long time now. I am so glad we did and you came on the show.
Mark McLaughlin:
It’s such a pleasure. Such a pleasure, Dean. Good to see you.
Dean Wehrli:
Thank you very much. Thanks everyone too who’s listening now, and this is Dean Wehrli for the New Home Insights Podcast. We will see you again in a couple of weeks.
