Glenn Kelman is the CEO of Redfin, a self-described technology-driven real estate company that offers a modern way to buy and sell homes. He has been at the helm for almost two decades and does not seem to have lost his zeal, neither during the great financial crisis nor now; he describes himself as the happiest person in the world.
It can't be easy. Redfin stock peaked at over $95 per share during the pandemic and the accompanying housing boom, but has trended downward since then, ending up at around $5.50. It was a tough ride; Revenue fell last year and the number of agents was cut. It goes beyond Redfin; The entire real estate world suffered when the Federal Reserve raised interest rates. “The loss of 40% of our agents is a tragedy,” Kelman told Fortune. “I feel personally responsible for it. I was the one who signed their offer letters in spirit, if not actually. And I haven't been able to grow the business to the point where we could employ them all… It's just tough when the number of homes sold in the United States drops from 6 million to 4 million.”
Last year, existing home sales fell to their lowest level in nearly 30 years. The real estate market is frozen and the thaw has only just begun. Mortgage rates were at their highest in more than 20 years and have since fallen, but are still high compared to those during the pandemic. Last week, mortgage rates rose sharply again, reaching 7.50%, their highest level in months. Real estate prices are also high. “The cost of buying a home has increased again, and prices have not decreased,” Kelman said. “So the Fed continues to try to contain inflation by raising interest rates, but at least one sector is untamable, and that is real estate.”
It's scary, he said. Housing is a basic need, and prospective buyers who held out last year are tired of waiting. Millennials who have put off starting a family and put off plans can only wait so long, Kelman said. He had never experienced anything like this and described it as the “worst situation” for the real estate market. “Housing is in this recession and the rest of the economy is booming,” he said.
“I was CEO during the Great Financial Crisis,” he continued. “Sales volume went down, but so did prices.” One problem solved another, Kelman said. Normally, when sales go down, prices go down, and later sales go up – that's the cycle, he said. Houses are becoming affordable again and sales are increasing as a result. This situation is completely different. Interest rates have risen and sales volumes have plummeted, as he put it, but real estate prices haven't kept up. “Some of this is just an artifact of 30-year mortgages,” he said. Anything the Federal Reserve does has no real impact on homeowners other than keeping them where they are. “It actually has the perverse effect of keeping property prices high,” Kelman explained.
He doesn't know that mortgage rates will rise significantly by the end of this year; Depending on inflation, they could even fall. He expects sales to improve, and they have already been better than expected. That's because people need a home – it's not a “fad to own a home” and there is a “deep-rooted human need to own a home in which to raise your family,” he said. Still, the problem goes beyond the recent period of unaffordability and has more to do with building houses.
“Housing became very expensive for a long time, but money got cheaper,” Kelman said, and one product of the pandemic ensured that people could move anywhere they wanted: remote work. Californians became Texans and Floridians, but all the buffers were gone, he said. The people who wanted to move have already done so, and the money is no longer cheap. The only way to solve the problem is to build houses.
“The basis of the American dream was that there was more land here than in Europe,” he said. “And for a long time the government was very aggressive, working with developers to create more housing.” But eventually that changed, with what Kelman described as well-intentioned laws to protect the environment and give people more control over it to provide information about what type of housing has been built in their neighborhood. This backfired and it became much harder to build anything. “The left and the right have had a lot of trouble solving the affordability crisis,” he said.
California is likely ground zero, Kelman said. For years, the housing crisis worsened due to political failures and unfettered local control. Initiatives to change local land use regulations have been developed, but these have repeatedly failed. But in the end they didn't. Kelman said it's an encouraging sign and people are finally talking about housing at all levels of government because something needs to be done. “Biden's basic problem with millennials is how optimistic can you be about the economy from your parents' basement?” Kelman said.
“If we were completely naked in public, we would have nothing to fear”
Aside from worsening affordability, there's another thing that rocked the real estate world: the National Association of Realtors' $418 million settlement. “NAR had to settle – it was existential,” Kelman said. “Every ruling in the Missouri case was against them, and that was a precedent that other courts would follow, so they had to do it.”
Redfin's commission model has always been different from and lower than the industry standard, so it's not clear what will change at the company. The “opacity of pricing in the real estate industry,” he suggested, may actually have discouraged people from selling and buying with Redfin.
“As a company, we are usually very frustrated: If you offer better service for less money, the world will beat its way to your door,” he said. “And Redfin grew from zero to a billion dollars on that premise. And yet I think we could have grown even more if consumers had been value-driven…The more clearly buyers understand the value of what we offer, the more sales we will achieve.”
Still, Kelman said he doesn't know that the housing market will be affected after the deal. If anything, the change in commissions appears to benefit sellers; This does not make housing more affordable. He is in no way in favor of the settlement because, for one thing, it still has to be approved – and there is no way to know for sure how everything will turn out. Of course, Redfin is facing commission lawsuits of its own. He didn't want to comment on whether he was worried at all; Instead, he said the company was in a good position and its only existence for 18 years was to give people a better deal. “If the world knew more about Redfin and we were completely naked in public, we would have nothing to fear,” he said.
Despite holding a 2% stake in Redfin, Kelman is the lowest-paid person on its leadership team. He takes home $300,000 a year in cash salary and requires that he only receive a bonus if there is a positive net income, basically if the company makes money after paying expenses, which is the last three was not the case for years. You don't see that often.
“My board asks me this question every year,” he said. “I really don't know what to say. I feel like I earned a king's ransom with this company. I'm the luckiest person in the world to run it, and what's wrong with America is that so many capitalists are actually engaged in a kind of plunder. And I don’t know how to lead except by example.”
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