Realogy generated $1.6 billion in quarterly revenue, but the vast majority of that is from home sale commissions, which largely are returned to the company’s independent contractor real estate agents. Once commission and other related expenses are subtracted, Realogy brought in $647 million.
The revenue is up 6% from the first quarter of 2021, but net income dipped from $33 million that quarter, largely due to declining fortunes for the company’s mortgage joint venture with Chicago-based mortgage lender Guaranteed Rate.
The pair’s spinoff company, dubbed Guaranteed Rate Affinity, lost $3 million in operating income for the first quarter, after making $61 million in quarter one 2021.
“Our mortgage business took a pretty tough hit,” said Ryan Schneider, who has been Realogy’s CEO since the start of 2018.
In response, the company told investors that the amount of operating income it predicts to make in 2022 has been pared down from $800-$850 million to $750-$800 million, “predominantly due to the rising mortgage rate environment and its impact on financial results at the company’s mortgage origination joint venture.”
Realogy posted $902 million in 2021 operating income, and $343 million in net income.
At the same time, Realogy’s CEO noted that the housing market is still pretty good – at least if you’re not a consumer trying to buy a home. Despite the acute inventory shortage, the National Association of Realtors estimated this week that 5.6 million existing homes will be resold in 2022, down from 6.1 million last year, but higher than any year between 2010 and 2019.
Additionally, while rising 30-year mortgage fixed interest rates fuel the present evisceration of the mortgage refinancing industry, “Demand is higher than supply,” Schneider said, due in part to demographic changes.
“The five biggest birth years of millennials are about to turn 35,” the CEO noted.
Limited supply and rising interest rates are not the only big picture issues that affect Realogy.
The company is a defendant in a Missouri federal court lawsuit in which a judge this week granted class action status on behalf of hundreds of thousands of consumers who either bought or sold homes from Realogy, RE/MAX, Keller Williams, or Berkshire Hathaway HomeServices.
The lawsuit contends that by following a National Association of Realtor’s policy to tether the buyer’s agent commission with the seller’s agent, these brokerages are artificially inflating consumer prices. Asked by an investor analyst about the case, Schneider said, “Not a lot I can comment on with pending litigation. We take it seriously, and we’ve got an experienced legal team.”
Schneider added that Realogy will continue to “vigorously” defend itself in the case.
Another matter is the rising agent commission splits that have made an already low margin brokerage business even more tenuous. The CEO acknowledged that recruiting more agents has resulted in higher commission splits. But he seemed to not quite agree with the notion that the higher splits will partly result in less operating income for Realogy.
When inventory gets tighter, Schneider said, “Higher-end agents get a bigger share of the volume.”