Anywhere and the Real Estate Sector

Anywhere (formerly Realogy), with a brand portfolio that includes Coldwell Banker, Corcoran, Better Homes and Gardens, CENTURY 21, and Sothebys that collectively supported around 1.2 million home transactions in 2022, just released their year-end results for 2022, a good barometer for all of us to see in the context of how the real estate sector is performing at a time where interest rates have risen faster and more than in the past several decades. And yes, Anywhere will be just fine, as will most of the larger real estate brokerages! We know how to weather storms.

Anywhere is mostly franchises (over 90% of Sotheby's offices are franchises alone), a few brokerages, relocation, title and settlement and a mortgage joint venture. Roughly 195,000 independent sales agents in the U.S. and approximately 142,400 more in 118 other countries and territories are part of this huge conglomerate. Here are some key takeaways:

* Anywhere reported a net loss of $287 million and free Cash Flow of negative $159 million.?

* Combined closed full year 2022 transaction volume decreased 14% year-over-year with 4th quarter 2022 combined closed transaction volume decreasing 33% year-over-year. This showcases how the Fed's rate hikes started to really take effect later in 2022. Rate hikes take time to impact markets.

* Total corporate debt, including the short-term portion, net of cash and cash equivalents (net corporate debt), totaled $2.7 billion at December 31, 2022

* With 1.2 million transactions and about 338,000 agents globally, that equates to roughly 3.55 average transactions per agent. No, real estate agents on average do not earn millions and no, it's not easy work!

* Anywhere recently laid off about 11% of its staff to cut costs and ended its i-Buying program. Several other i-buyer entities have suffered as home prices have declined in areas. Almost every real estate brokerage entity has been compelled to cut staffing.

The above is just one company, but also a good insight into the entire real estate sector as Anywhere conducts business at all price points in almost every area of the USA through its multiple brands. Anywhere is a publicly traded company whose stock was trading as high as $48 in 2012 when it IPO'd on the stock exchange after going private in 2006, but - like most real estate sector stocks - has dipped in recent months, to around $6.18 as of this memo. They are not alone:?REDFIN is off about 88% off its high, Zillow is down 68%, Douglas Elliman is down 64% in just 14 months since its debut as an independent stock after splitting from Vector Group, owner of the 4th largest US tobacco company, EXP is down 72%, Compass is down 84%. The entire sector has been the victim of sharply higher interest rates triggering a real estate recession of sorts.

Housing costs have been an enormous contributor to high inflation. Recent spikes in rental prices have tapered off a bit, but no, renters are not immune from rising housing costs. Neither are landlords as operating costs and real estate taxes soar. Sadly, the Fed's actions - as witnessed above - are causing bad damage in the real estate sector that impacts millions. While some might gloat at the plight of 'them overpaid agents' we all know the reality is different. Agents on average earn under $75,000 BEFORE expenses that are high as they are mostly self-employed independent contractors. Franchisees pay big fees to their Franchisors, upwards of 6%. Dramatically reducing the ability for many to buy a home, forcing them to rent, encouraging builders to build-to-rent, and worse: triggering a severe cutback in construction when our markets are horribly under-built is a disastrous policy.

Not unlike computer chips, natural gas, lumber, paper towels, gasoline, or eggs: the only way to bring prices down is to ramp up production and supply. Reducing demand alone won't do it. The Fed's policies are doing the exact opposite with housing. A home is an ESSENTIAL demand, and that demand won't go away unless we wish to grow our homeless population? Worse, they are encouraging builders to focus on rental properties thereby limiting future supply of for sale homes. That can only lead to one thing long term: higher prices.....MUCH higher prices. (PS: that's inflation!) There is not just one solution to high housing inflation. Raising rates is just one solution, but it may cause bigger, longterm problems. I hope the Fed - and all policy makers - saw these results too and took note.