Real estate brokerages Compass Inc. and Redfin Corp. are laying off about 920 employees as rising interest rates cool a U.S. housing market that reached a frenzy during the pandemic.
Compass will cut about 10% of its workforce and Redfin will cut about 6%, the companies said in regulatory filings Tuesday.
For Compass, those cuts total about 450 employees and will contribute to an estimated $21.5 million to $23 million in costs before taxes in the second quarter, the company said. Redfin said it expects to cut about 470 employees and estimates that severance and other costs will total $9.5 million to $10.5 million.
The cutbacks come as the Federal Reserve’s efforts to tamp down inflation push mortgage rates higher, cooling home purchases. Redfin Chief Executive Glenn Kelman said demand in May was 17% below the company’s expectations.
“We raised hundreds of millions of dollars so we wouldn’t have to shed people after just a few months of uncertainty,” Kelman wrote in a blog post Tuesday.
“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. If falling from $97 per share to $8 doesn’t put a company through heck, I don’t know what does,” Kelman wrote.
Mortgage interest rates have soared in recent months, which makes buying a home more expensive and pushes some people out of the market. Last year, rates were below 3%.
The average rate for a 30-year fixed-rate mortgage reached 5.2% last week, mortgage-finance giant Freddie Mac reported last week. The rate was up 3.2 percentage points from the beginning of the year. In April, the rate hit 5% for the first time since 2011.
Compass shares plunged 10.5% to $4.26 on Tuesday. The stock is now worth 76% less than its initial public offering price of $18 a share in 2021.
A Compass spokesperson confirmed the layoffs in an email and declined to comment further.
Redfin shares dropped nearly 5% to $8.13. That stock is down almost 92% since its nearly $97-a-share high reached in 2021 during the pandemic-spurred housing boom.
“I think Compass laying off 10% of the staff is the minimum reaction to market conditions,” said Mike DelPrete, a scholar in residence at the University of Colorado Boulder. “It’s doing the least possible to treat current symptoms but not addressing underlying challenges with the business model and incredibly high cash burn.”
Compass’ job cuts are part of a broader retrenchment by the real estate brokerage, which includes a planned pause in geographic expansion and merger-and-acquisition activity. The company is also expecting to consolidate some offices as a way to cut costs.
“The strategic actions are part of a broader plan by the company to take meaningful actions to improve the alignment between the company’s organizational structure and its long-term business strategy,” Compass said in the filing.
Compass was co-founded in 2012 by Robert Reffkin, a former Goldman Sachs Group Inc. banker who sought to build a tech-enabled real estate brokerage. The company grew rapidly, often acquiring existing brokerages as a means of expanding and using generous incentives to recruit top-performing agents.
Those moves helped vault the company past Anywhere Real Estate Inc. and Berkshire Hathaway Inc.’s Home Services of America to becomes the largest U.S. brokerage by sales volume in 2021, according to industry website Real Trends.