Compass revises market share numbers after NAR changes math

Kristen Ankerbrandt and Robert Reffkin of Compass (LinkedIn, Getty Images)

The world of residential real estate is guilty of fuzzy calculations.

Compass said its national market share over the past two years was lower than it had previously claimed, with the brokerage citing a change in how the National Association of Realtors estimates home prices as the reason.

In Compass’ 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. The changes, said he said, resulted from a change in NAR methodology made in July to better reflect luxury home prices.

“At first we thought no one was paying attention to it, I wanted to delete it.”

Lawrence YunNational Association of Realtors

“This has resulted in (average) average monthly selling prices of existing homes being higher than previously reported and increases in the total market [gross transaction value] than previously reported,” Compass said in its report of the findings.

Compass’ revised domestic market share estimate for 2020 was 3.4%, down from 4%, and for 2021 was 4.5%, down from 5.6%. Its estimate for the second quarter of this year was 4.9%, meaning Compass says its market share is up.

For years, when calculating monthly average national sales figures, NAR had capped high-end sales at $750,000, according to Lawrence Yun, chief economist of the trade group. Any transaction above that threshold was counted as if it were a $750,000 sale – a figure that barely gets you a studio in Manhattan. The cap, according to NAR, was put in place to prevent ultra-luxury sales from skewing the average too high. Yun said NAR’s methodology was borrowed from the US Census Bureau and the Department of Housing and Urban Development.

In July, NAR quadrupled the cap to $3 million after realizing the average was not rising as it should have been during the supercharged 2021 real estate market. Yun said the metric was not being tracked as well closely than other NAR stats, as median price calculations are generally more useful.

“At first we thought no one paid attention to it, I wanted to give it up,” Yun said of the monthly average. “But then we got requests, asking ‘could you please calculate what the average would be? “”

Although the median sale price is the most reliable statistic because it is less subject 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. transactions.

Yun drew an analogy from the auto industry: If you try to figure out how much money people spend on cars, you can’t count a Ferrari like a Lexus.

“You would have to get the average because the median would consider all Ferraris to be a nominally expensive car, instead of super expensive,” he said.

Reached by telephone Thursday, a Compass executive stressed that the brokerage firm had not lost market share to its competitors.

“It’s no different than if they were like ‘hey, we were using pounds and now we’re using kilograms,'” the executive said. “It’s not like we think we have 50% market share in the United States and now we have 5 [percent].”

The executive also said that although Compass reports market share data at the national level, what it really values ​​is local market share, i.e. its dominance in the specific markets in which it operates.

Two market analysts have squarely pointed the finger at NAR, which is the largest trade group in the residential industry, with more than 1.5 million member agents coughing up nearly $230 million in dues in the first nine months. of 2021, according to Real Trends.

Compass calculates market share this way: it divides the company’s gross trading volume by that of the industry. By increasing the average selling price, NAR increased the industry’s GTV.

“It’s not like we think we have 50% market share in the United States and now we have 5 [percent].”

executive compass

“Assuming the industry is using actual numbers, everyone would have declined equally,” said David Friedman, co-founder and former chairman of Wealth-X, an analytics firm focused on high net worth individuals. “Each’s numerators are accurate based on their own data. (However, it’s not clear if all residential brokerages use the same methodology to determine their own sales activity.)

Jonathan Miller, CEO of Miller Samuel, a valuation firm that compiles popular residential market reports for Compass rival Douglas Elliman, said continuing issues with NAR’s methodology call the accuracy of the numbers into question. .

“Based on their methodology, they can say their market share is not diminished,” Miller said. “It’s not definitive, but using the methodology that NAR has laid down, it is.”

Miller remains skeptical of market share claims because NAR has not removed its cap – it has simply increased it – and because its data does not cover the entire market: NAR’s data is powered by the MLS, which does not take into account sales in Manhattan. and some sales in other markets, such as paperback sales in Los Angeles, which he says may account for more than a fifth of the market.

And he said NAR shouldn’t have released data that isn’t robust — whether anyone paid attention to it or not.

“Why are you posting information that doesn’t stand up to scrutiny because you think no one is reading it? It’s just bad analytical practice,” said Miller, who added that high market caps are problematic because they degrade over time. “It’s arbitrary and it means
that it becomes moot as you go back in time because that number meant something different 10 or 20 years ago.”

Along with its narrative of being a tech company, Compass has also positioned itself as a luxury real estate brand, particularly in California, where it said it was the top luxury broker last year. In a statement released in March, the company said it had just under 20% of the Los Angeles luxury market and 40% of the Bay Area market. It also released its first report on the ultra-luxury market earlier this year.

And the company, which RealTrends last year ranked the nation’s top brokerage by trading volume, has long made domestic dominance a key part of its story for investors. In 2017, it announced a plan to capture 20% market share in the country’s top 20 cities by 2020. In late 2019, CEO Robert Reffkin acknowledged that although Compass had made significant progress, it did not hadn’t quite achieved that goal. In March 2020, The real deal published an analysis of Compass’ performance in key national markets, including New York, the Bay Area, Los Angeles and Chicago, also illustrating how well it fell behind those numbers.

Last week, Compass announced a net loss of $101 million for the second quarter and said it would embark on austerity measures in a bid to achieve profitability. Chief Financial Officer Kristen Ankerbrandt, who joined Compass from the Carlyle Group in 2018, will leave the brokerage next month.

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