Persisting challenges associated with a transitioning housing market proved to be a problem for Compass, which earned less and lost more money during the third quarter.
Three months after making labor cuts, dropping financial incentives, and pumping the brakes on tech investment, Compass earned $1.49 billion in Q3, marking a 14% decline from the same period last year. The firm also reported $154 million in net losses compared to $100 million in Q3 2021.
Like others in the industry, Compass’ lagging earnings and an uptick in losses are indicative of shifting conditions that have contributed to what the firm’s CEO and co-founder Robert Reffkin characterized as “a generationally bad year in residential real estate.”
“The incredible speed of the decline has been historic,” Reffkin said during a Thursday call with investors. “Transactions have fallen significantly as soaring mortgage rates, high home prices, lack of inventory, stock market declines, and high levels of uncertainty are keeping many buyers on the sidelines.”
According to Compass, its losses were influenced by non-cash stock-based compensation expenses of $50 million, depreciation and amortization of $21 million, restructuring charges due to the cost-saving actions of $29 million, and litigation charges of $11 million.
The brokerage also recorded a 12% dip in total closed transactions by its agents.
Compass agents closed 54,606 transactions last year, which company executives touted favorably, comparing its decline to a 21% lull in deals for the entire industry based on numbers reported by the National Association of REALTORSⓇ.
“The past 12 months have been tough, and the next 18 months appear that they can be tougher,” Reffkin said, emphasizing that Compass is focusing on weathering the market headwinds and coming out on the other side.
That will be predicated on the firm’s ability to adapt effectively to the shifting conditions in real estate. Thus far, Compass has been tightening toward that end.
Last quarter, the company announced that it would be cutting back on its investment in technology while also eliminating the use of financial incentives—equity or cash incentives—to recruit new agents in the future.
At the time, Reffkin and Compass COO Greg Hart said they were confident the firm would continue reeling in new agents and retaining current ones on the strength of its existing tech platform and presence in markets across the U.S.
Compass increased its principal agent count last quarter, arguably its most significant win for its Q3 performance. Compass added 335 principal agents in the previous quarter, bringing its average count to 13,314—up 15% from 3Q21.
“We believe agents are making this decision to join because of the power of our platform, our strong brand, and the support that we offer as opposed to financial incentives,” Hart said during the Thursday call.
Hart also said, “Despite fierce economic headwinds, our core business continues to strengthen based on our ability to continue to add agents, improve our technology advantage and maintain our industry-leading principal agent retention of over 90%.”
Part of its cost-reduction efforts also included multiple rounds of layoffs, including firing former Chief Technology Officer Joseph Sirosh.
Reffkin claimed that Compass’ cost reductions in recent months have put the brokerage on the right track but also signaled that more are likely to come as the company aims to become cash-flow positive by the second quarter of 2023.
“Market conditions are continuing to deteriorate, and as a result, we will be implementing additional cost-reduction initiatives to get ahead of any future market declines,” Reffkin said.
He also pointed out that Compass has been preparing for “a significant double-digit decline” in next year’s housing market.
“We are seeing an industry forecast of plus 1% to negative 23% for the full year 2023,” he said. “While we do not believe the market will go down 25% next year, we are not waiting and have already begun to build a plan to account for a decline of this magnitude, and we expect this plan to be implemented in the next three months.”
Reffkin added, “As we look ahead, we believe the housing market will remain challenged during 2023 before returning to stability and growth in the future.”
Looking ahead to the final three months of the year, Compass expects to earn between $1.15 billion to $1.30 billion in the fourth quarter while also forecasting a full-year revenue range between $6.05 billion and $6.20 billion.