Layoffs at Zillow, Redfin: 'We're headed for a big dip.'

Zillow.com and Redfin.com, rapidly growing web-based real estate companies, both announced major layoffs this week amid a weakening housing market and what Zillow says could be a "prolonged recession."

Zillow, the Seattle-based website that estimates home values, said it will slash its workforce by 25% in hopes of surviving what it calls "a major economic storm."  From a blog post by Zillow CEO Rich Barton:

The unprecedented economic events that are playing out on a global stage began in our own industry and have made a prolonged recession likely, in our judgment.  We are a young company that is not yet making a profit.  Despite having sizeable cash reserves, we deemed the responsible course was to meaningfully reduce expenses, so that Zillow emerges from the other side of the recession in a very strong position, even if the recession lasts many years.

Earlier in the week, Redfin, the discount brokerage and listings website featured frequently on this blog as a source of information, announced it was laying off roughly 20% of its employees. From a blog post by Redfin CEO Glenn Kelman:

Today Redfin laid off roughly 20% of our employees.

Unlike other startups, our industry’s recession started a year ago, when home prices first plunged.

Since then, we’ve fought like starving animals, and with some success: while industry-wide transaction volumes dropped 33%, we grew revenues by nearly 50%. Traffic grew more than 300%.

Even a month ago, we were raising 2009 revenue projections. All our markets, now including Chicago, contributed profits.

But the past few weeks have seen a major reversal. As the stock market wiped out prospective down-payments, tours and offers dropped 30%. Transactions that were done came undone. October will still be pretty good, then we’re headed for a big dip.

Two cents: I'm disappointed to hear news like this. I'm a fan of the web-based real estate companies like Zillow, Trulia and Redfin. I think they provide a valuable service to nonprofessionals trying to better understand the real estate market. I hope they succeed.

Secondly, it's worth taking a step back and placing this in context: No one yet knows the true extent of the economic fallout from the collapse of the real estate and credit bubbles in this country. It's quite likely that, at Dow 14,000, we had a stock market bubble as well. What Redfin is saying is that an already weak housing market worsened dramatically in the past few weeks.

Your thoughts? Comments? E-mail story tips to Peter Viles

-- Peter Viles

Hat tips: Cal and Laker, via comments.

Comments

[Alpine292]

Home prices will even out. Then go back to 2006 prices.

[Rich]

I think people are missing a super-important nugget of information that came across with this one: that many down payments were being made with investment money (people breaking into their 401k's and the like) and that money has, at least on paper, disappeared for them. That is a totally new wrinkle that may synergize the downward spiral and make 2009 a worse year for both stocks and housing than they might otherwise have been. The market was already pricing in the expected wave of foreclosures from the last big October ARMS resets, but taking others out of the market because their down payment cash dried is a new and ominous factor...

[sfvrealestate]

This news does not surprise me. I'm familiar with the various business models in the brokerage industry. I've wondered for a long time how either Zillow or Redfin could possibly earn enough to keep their respective companies going -- and I'm a Zillow advertiser.

[TrojanDLA]

The allure of "free" or "discounted" real estate representation is tempting, but an illusion. The truth is that a very good broker/agent will only work on commission and the new, inexperienced agents will do anything to make a buck. Redfin attempts to insert "quality" into discount by creating a business model that's "cheaper". Unfortunately, "cheaper" requires volume to work. The most productive and experienced agents will never work for Redfin - and why should they? Unless Redfin raise their commissions/pay-scale, which brings us back to the dilemma - eliminating the high commission.

The truth is it can't be "eliminated" completely. Sure you have educated home sellers who do things FSBO but that's a minority. Everybody else is free to hire agents or not, but most will. I personally know of 3 "discount brokers" who charge 4% commission (1% listing, 3% buying) and went out of business in less than 12 months in 2006 because they couldn't sell enough houses to pay for overhead.

There is no free lunch - everything costs time and money. Consumers want free information and cheap service - who's the fool that's going to create that business model? The market has spoken, and sadly for consumers, it's not feasible (yet).

[AAnd]

I'm a big redfin fan. Perhaps they need to start charging a small monthly fee for their service. I'd certainly pay for their service as long as it's reasonable. I love all the info they provide, and those street views are a huge +.

[DAve]

"It's like imagining a magical world where our government helps the people, instead of just giving billions to special interests and corrupt insiders."

QUOTE OF THE MONTH