It's not looking good for real estate employees who joined a brokerage in the midst of pandemic-related housing frenzy. In the last week, both Redfin (RDFN) and Compass (COMP) announced that they would be making significant layoffs as demand weakens.
Redfin employees on June 14 received an email saying that 470 employees, or roughly 8% of its workforce, were getting laid off.
The company blamed decreased demand for homebuying, which it said was 17% below expectations, as the reason such a large layoff was necessary.
Both Redfin And Compass Are Laying Off Employees
"A layoff is always an awful shock, especially when I’ve said that we'd go through heck to avoid one, and that we raised hundreds of millions of dollars so we wouldn't have to shed people after just a few months of uncertainty," chief executive Glenn Kelman wrote in a note sent to staff immediately after the people affected received notice.
"But mortgage rates increased faster than at any point in history. We could be facing years, not months, of fewer home sales, and Redfin still plans to thrive."
On the same day, real estate rival Compass told the Securities and Exchange Commission that it was laying off around 450 positions "due to the clear signals of slowing economic growth."
With 4,800 employees by the end of 2021, this represents a nearly 10% reduction in its workforce. After the news broke, Compass briefly paused trading on the New York Stock Exchange — likely to avoid a rapid share downfall.
"The Transformation Plan is expected to include, but not be limited to, a series of actions such as a reduction in U.S. hiring and backfills resulting from attrition occurring both in the first half of 2022 and anticipated for the remainder of the year," reads Compass' SEC filing.
Does This Mean The Bubble Is Already Here?
For some, such sweeping layoffs are a clear sign of a bubble.
As mentioned by the Redfin CEO, the 30-year fixed-rate mortgage rate is currently near 6%. While raised by the Fed to combat inflation, such historic highs significantly decrease who can buy a home by raising the cost of borrowing to a point that fewer can afford.
Subsequently, data from the Mortgage Bankers Association found that mortgage applications in May were 21% lower than a year ago.
Mortgage rates are not always a good indication of sales numbers or even prices — after more than a decade of underbuilding, there is still many parts of the country where there are more people looking to buy than homes on the market.
That said, such high rates inevitably take a toll on the number of people who can get a mortgage approved.
The Fed on June 15 approved another 0.75% rate increase so current conditions are likely to continue for at least as long as the homebuying boon seen in late 2020 and 2021.
"We could be facing years, not months, of fewer home sales, and Redfin still plans to thrive," Kelman wrote in his note to Redfin staff. "If falling from $97 per share to $8 doesn’t put a company through heck, I don’t know what does."
After the news of the layoffs, Redfin stock fell by 5% to $8. In February 2021, it was at a high of $97. Compass also went from $20 in April 2021 to $4.08 now. Layoffs sent the shares tumbling by more than 10%.
