Compass reviews market share numbers after NAR math change
The world of residential real estate is guilty of some obscure arithmetic.
Compass revealed that its national market share over the past two years is lower than it previously claimed, with the brokerage citing a change in how the National Association of Realtors estimates home prices as the reason.
Within Compass’s second-quarter earnings report released last week, there was a note explaining that the company had updated its market share estimates for 2020, 2021 and the first quarter of 2022. It said the changes were the result of a change in NAR methodology made in July for better accounting for luxury home prices.
“At first we thought no one cared about her, I wanted to get rid of her.”
This has resulted in higher average (average) monthly sales prices for existing homes than previously reported and an increase in the total market [gross transaction value] Compass said in its earnings report.
Compass’s revised national market share estimates for 2020 are 3.4%, down from 4%, and 4.5% for 2021, down from 5.6%. Its estimate for the second quarter of this year was 4.9 percent, which means Compass claims its market share is rising.
For years, when calculating average monthly national sales numbers, NAR has set high-end sales at $750,000, according to Lawrence Yun, the trade group’s chief economist. Any transaction above that limit counted as a $750,000 sale—a number that barely gives you a studio in Manhattan. The cap, according to NAR, was put in place to prevent ultra-luxury sales from deviating from the average too high. Yoon said the NAR methodology was borrowed from the US Census Bureau and the Department of Housing and Urban Development.
In July, NAR raised the cap fourfold to $3 million after realizing that the average wasn’t rising as it should have during the supercharged real estate market in 2021. Yoon said the metric isn’t tracked as closely as NAR tracks other stats Because average price calculations are usually more useful.
“At first we thought no one cared about her, so I wanted to cancel it,” Yoon said of the monthly average. “But then we got some requests, asking ‘Can you please calculate what the average will be? “
While the average selling price is the most reliable statistic because it is less susceptible to fluctuations based on the extremes at either end of the market, the average price is used to calculate market share because it better reflects the total dollar value of transactions.
Yoon drew an analogy to the auto industry: If you’re trying to understand how much money people spend on cars, you can’t count a Ferrari like a Lexus.
“One would need to get the average because the broker would discount all Ferraris as an expensive car, rather than as expensive,” he said.
In a phone call Thursday, a Compass executive confirmed that the brokerage has not lost market share compared to its competitors.
“It’s not the same as if they were like, ‘We’ve been using pounds and now we’re using kilograms,'” the CEO said. [percent]. “
The executive also said that while Compass provides market share data nationally, what it really values is local market share — that is, how dominant it is in the specific markets in which it operates.
Two market analysts have pointed the finger at NAR, the largest residential industry trade group, with more than 1.5 million agents coughing up nearly $230 million in receivables during the first nine months of 2021, according to Real Trends.
Compass calculates market share thus: Divides the total turnover of the company by the size of the industry. By raising the average selling price, NAR has increased the GTV industry.
“It’s not like we think we have 50 percent market share in the US and now we have 5 [percent]. “
“Assuming the industry uses actual numbers, everyone is going down equally,” said David Friedman, co-founder and former president of Wealth-X, an analytics company focused on high net worth individuals. private data. (However, it is unclear whether all residential brokerages use the same methodology to determine their sales activity.)
Ongoing problems with the NAR methodology call into question the accuracy of the numbers, said Jonathan Miller, CEO of Miller Samuel, an appraisal firm that compiles popular residential market reports for Compass competitor Douglas Elliman.
“Based on their methodology they can say that their market share has not diminished,” Miller said. “It’s not definitive, but using the methodology outlined by NAR, it is.”
Miller remains skeptical about market share claims because NAR hasn’t canceled its cap – it just increased it – and because its data doesn’t capture the entire market: NAR data is fed by MLS, which doesn’t take into account sales in Manhattan and certain sales in other markets, such as Jeep sales in Los Angeles, which he said could offset more than a fifth of the market.
He said that NAR should not make non-robust statements — whether or not anyone has paid attention to it.
“Why would you put any information that doesn’t stand the test of scrutiny because you don’t think anyone is reading it? This is just bad analytical practice,” Miller said, adding that market caps are a problem because they deteriorate over time. “It is arbitrary and that means
It becomes irrelevant when you go back in time because that number would have meant something different 10 or 20 years ago.”
On top of its narrative as a technology company, Compass has also positioned itself as a luxury real estate brand, particularly in California, where it was reported as the leading luxury brokerage last year. In a statement published in March, the company stated that it has just under 20 percent of the luxury goods market in Los Angeles and 40 percent of the Bay Area market. It also released its first ultra-luxury market report earlier this year.
And the company, which RealTrends ranked the nation’s best brokerage firm by deal volume last year, has long made national dominance an essential part of its story for investors. In 2017, it announced a plan to capture 20 percent of its market share in the country’s 20 largest cities by 2020. At the end of 2019, CEO Robert Rifkin acknowledged that although Compass had made significant progress, it had not This goal is fully achieved. In March 2020, The real deal It published an analysis of Compass’ performance in key national markets, including New York City, the Bay Area, Los Angeles and Chicago, also showing how they fell well below those numbers.
Last week, Compass reported a net loss of $101 million in the second quarter, and said it would embark on austerity measures in an effort to reach profitability. Chief Financial Officer Christine Ankerbrandt, who joined Compass from the Carlyle Group in 2018, will leave the brokerage next month.