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Here’s the problem with companies whose hype-and hoopla stocks have collapsed by 80% or 90%: They’re facing an existential crisis. They cannot raise more money. But their operations were never designed to make money in the first place. Their business model relied on burning cash, and the whole thing was designed from get-go to use home-made growth metrics to bamboozle investors into buying the stock and pump up the shares. Then the companies, based on their high share price, could issue more shares and raise more money, and feed their cash-burn machine. The plan was to fake it until they could make it.

But with their shares down 80% or 90%, they cannot fake it any longer, and they cannot sell more shares because no one wants them, and they’re going to run out of cash and won’t be able to cover their expenses, and then they cease to exist, and their shares will go to zero, unless they can get the cash-outflows under control, which means cost-cutting. And the fastest and most significant places to cut cost is staff and advertising.

If they cannot cut their costs enough, and cannot get their expenses to be less than their revenues, they’ll eventually run out of money. And then that’s it.

But if they can cut costs enough, and cut their staff and advertising and other things enough, so that costs come in line, their revenues may sag, or sag even more, and then they may be reporting declining revenues, or more rapidly declining revenues, and continued losses because revenues are now declining faster than expenses, and the whole thing turns into a classic mess.

There are hundreds of companies in this position that went public during the hype-and-hoopla era of money printing and interest rate repression, and they’re all fundamentally facing the same existential crisis, though each company has unique challenges, and in addition, all have to face their industry challenges.

Just to stay within one industry: Today two companies in “real estate tech” with collapsed hype-and-hoopla stocks announced job cuts: Compass and Redfin. Two others had massive layoffs earlier. Zillow, which is also in real estate tech, has been laying off people since last year, when it exited its home-flipping fiasco, with layoffs occurring through at least April this year. Unrepentant home flipper Opendoor went through a bunch of layoffs in 2020, but has not recently announced any new layoffs.

They all have one thing in common: The lost lots of money every year of their existence as a publicly traded company.

Redfin, the “Amazon of real estate,” as CEO Glenn Kelman called it as part of the bamboozle before the IPO in 2017,  announced today that it would lay off 8% of its staff “today” because “It’s time to make money.”

“We’re losing many good people today, but in order for the rest to want to stay, we have to increase Redfin’s value. And to increase our value, we have to make money,” it said.

Apparently, there had been some kind of come-to-Jesus meeting at the top, with “May demand 17% below expectations,” and “not enough work for our agents and support staff,” and the decline in revenues means “less money for headquarters projects.” Yup, the holy-moly mortgage rates that just went over 6%.

Redfin has been a publicly traded company since July 2017, and has existed for 13 years before then as a startup, and it’s just now time to think about how to make money?

Good grief. I mean, Oopsiespalooza. I mean, WTF. This is the definition of what’s wrong with the entire hype-and-hoopla startup scene.

On the news, shares of Redfin [RDFN] fell to a new closing low of $8.13. Back when it was still the Amazon of Real Estate, in 2017, it went public at the IPO price of $15. Shares briefly spiked to $30 then got stuck at around $20 for years.

But during the pandemic, the stock encountered the miracles of the stock jockeys that plowed their stimmies into whatever, the meme-stock chasers, and the hedge funds that followed them, and they all had a hoot and catapulted the shares to $98.44 in February 2021, yes, that infamous February 2021, after which the bamboozle ran out, and everyone began ever so slowly to sober up, and everything came unglued. Since then, Redin’s shares have collapsed 92%:

Compass announced today – after they too apparently had a come-to-Jesus meeting at the top – the “elimination” of 10% of its staff, about 450 folks. It said it would shut down its title and escrow software company, Modus Technologies, which it had bought in 2020, get out of some office leases, and halt further acquisitions, “to drive toward profitability and positive free cash flow.”

The real estate brokerage was backed by SoftBank and had raised $1.5 billion before the IPO, which it then spent, plus the money it raised in the IPO, on buying up real estate brokerages and on hiring brokers away from other brokerages.

So, now it wants to cost-cut its way to positive cash-flow and profitability after it couldn’t make money in what was for years the hottest housing market ever, where people paid no matter what to buy no matter what, sight-unseen, inspections-waved, no-questions-asked?

It is facing an existential crisis because its stock crashed, and it cannot raise new money to burn, and the real estate market has turned south, with demand withering amid holy-moly mortgage rates over 6%, and home sales are going to be far fewer and far harder to get.

Upon the news that Compass is now trying to figure out how to cost-cut its way to a positive cash flow as revenues are going to take a hit, and as its fake growth model fell apart, the shares kathoomphed 10.5%, to $4.26 a share, down 81% from the high, which occurred on the day of the IPO. Just about every investor that got bamboozled into touching this got shookalacked:

Zillow didn’t make any additional layoff announcements today, but given the conditions that the housing market is now facing, and the plight of Redfin and Compass, its shares dropped 6.2% today, to $30.22, down 86% from its meme-stock-stimmie-miracle high of February 2021, and back where it had first been in 2013. It probably saw something coming in its vast housing market data when it decided to get out of the house-flipping business last year:

Opendoor Technologies, the home flipper that decided to stay in the home-flipping business – because what else is it going to do? – didn’t announce any layoffs today either. Its shares inched up 2 cents from its all-time low yesterday, to $5.04, down 87% from its high which occurred, you guessed it, in February 2021.

The company now faces the inconvenient challenge of selling thousands of houses that it had bought in the hottest housing market ever, but now there are these new holy-moly mortgage rates, and price drops are spreading, inventories rising, and volume is dropping, and everything is going to get a lot tougher than before.

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I am a software developer who talked to a recruiter trying to pitch me a job at Compass shortly after the IPO. I didn’t get the business strategy and passed. Luckily I also passed on a bunch of crypto companies like Coinbase. Luckily I am not one of those people who see the grass as being greener on the other side…

Some developers were nipped even in this first round of Redfin layoffs. From their news release:

“Because for every project we start, we have to think about another we’ll stop. We’ve already built tools for teams to work together on a transaction, so we need fewer engineers to add to those tools.”

The real estate market in the Bay Area is turning faster than I thought possible. My neighbor told me last month he was planning to list his house for $2.4M. It went on the market today for $2M. I’m also seeing 6 figure price cuts everywhere. Has this ever happened before?

Still hot over here in So Cal. As I said before, people will pay ANYTHING to live near SocalJim. SocalJim is synonymous with Real Estate that Never Depreciates.

Come down here and join the Utopia.

Echo that, there’s certain level of stupidity in SoCal especially in South OC unseen anywhere else.

As time goes though, the domino will eventually fall even in this perceived invincible market.

I’m also looking in the Bay Area and the number of $300-$400k price drops is incredible. They are starting to list way below Zestimate but still above 2020 prices so we still have a long way to go. My realtor told me that half his buyers stopped looking stating they will reevaluate in 2 years! That’s just one data point but it’s crazy.

Prices are being slashed all over the country. Hell, just do a search on any of the named sites. Houses are being reduced by $10,000-$35,000 pretty much across the board. I just had a couple dozen hit my inbox, and was astonished at how fast the prices are coming down. It’s not time to buy yet, but at this rate it should be come Next year.

It won’t be time to buy until literally nobody talks about housing as more than a place to live and nobody talks about a bottom. When ti’s dead and gone and everybody hates it (including you and me) then and only then is a bottom reached.

We’re a long long long way from a bottom

The only smart sales agents left are those pricing far below comps and baiting the final few FOMO buyers to bid $100k over on the “bargain” priced home, carrying it close to what it would have fetched a few months ago with 3% lower rates.

It is delicious here in Greater Boston to see for the past month, sellers greedily reach for the moon with $700-800k listings only to have them languish on the market and slowly price drop.

Interest rates on 30Y mortgages have never risen this much, this quickly other than in the spring of 1980, however 3% to 6% hits much differently than 13% to 16%.

There were huge price cuts during the Great Financial Crisis. I read a recent article about single digit home price cuts in several cities, some of these were in the rust belt.

Housing prices went up faster than incomes. New home completions are low. Inflation is 8.6%, rising faster than incomes. Retirement accounts have taken a hit from falling equity and bond prices.

The sanctions against Russia have caused a spike in energy prices. Russian military actions caused food prices to rise.

It’s interesting that the Innovative Disrupters always base their future expectations on a completely NON-innovative and NON-disrupted ambient environment. I am the only variable in the world.

QE will continue forever. Prices will continue to rise forever. I don’t need a real business or real profits or real savings, because the free money will continue forever.

In fairness the free money thing has been going on for a very long time.

I think these companies were sort of designed as investor hit-and-run machines. They’re meant to sell a story, have an IPO where VCs and execs cash in big, and then fold once investor cash dries up.

If anything, most of the founders are probably amazed that the Fed stepped in with such aggressive QE for so long allowing their cash burner business to stay open many years beyond its originally planned lifespan.

A couple of less well known ones. – Side Inc, this month laid off 10% of its workforce. The way I understand it, the company provides “tech” to a select number of elite brokers. – Digital mortgage lender, Tomo also laid off 1/3 of its workforce, around 44 people.

Another one: – Blend Labs. They partner with Wells Fargo and a couple of other banks for mortgage origination. Their stock is off 80% from the high and they too laid off 10% of their workforce back in April.

I googled Glenn Kelman. It turns out that Redfin has made bucketloads of money…………..for him. He has sold over 32,000,000 Redfin shares which he got cheap as part of his employment package. He has averaged sales of over 60000 shares every 70 days for the last few years. Don’t try to tell me Redfin isn’t a moneymaker. It is doing exactly what it was designed to do. To make money for the top directors and executives. It will go bust in the near future, but you won’t catch Glenn and his mates putting any money back in to it. I do wonder what they do put it into. Is it blue chip low yield real estate? I suspect so.

“We have to protect our phoney baloney jobs here, gentlemen! We must do something about this immediately! Immediately! Immediately! Harrumph! Harrumph! Harrumph!” Mel Brooks in Blazing Saddles.

Mongo only pawn in game of life.

I love the smell of BBQ’d phony companies. The sooner these shams cease to exist, the better.

If the gang-banging could stop for a few minutes… Zillow (and Redfin?) are great public utilities. I hope they survive. I don’t know much about the others since we’ve never used them. But I’d hate to see either of these disappear. If the very impressionable, modern-day investors get bamboozled, tough tittles. You can’t characterize this whole thing as fraud just because the story was irresistible to the gullible: Hey diddle diddle, the cat and the fiddle, the cow jumped over the moon.

“Marry in haste, repent at leisure.”

I like Redfin’s layout and I hope their site at least sticks around. Zillow’s UI is disgusting, I’m not sure how that site got so popular when they make it hard to see the actual information on the home. Well, I know how, because the average dummy just focuses on the “pretty pictures” and doesn’t even read the background info about the home.

The worst one of all of them is realtor.com, the “official” site of realtors. spam central stupid popups and impossible to quickly find info. typical of the real estate grift.

If Zillow, Redfin or Opendoor end up being another Grocery.com and forever cease to exist, the only tears I have for them is tear of joy.

My disdain is especially strong for Zillow since they are about as terrible as Lawrence Yun when it comes to housing will forever go up or stay up gospel. You would think after $400M+ disaster of getting it so wrong, they learn to STFU in predicting the market but nope their “economist” still yapping on about growth for 2022 and 2023..

Oopsiespalooza! OpenDoor definitely deserves a ‘holy-moly mortgage rates’ hyperlink. Bamboozle time is over!

I’d never invest in Zillow but their Zestimate is a particularly convenient reference. And it’s free. Redfin has always been geared toward the RE crowd.

Well, the Zestimate isn’t useful if it is wrong/misleading.

If it simply listed transacted historical comps in a clear, detailed fashion that would be one thing.

But they pitch Zestimates as having some extra “magic” and they are wholly silent on the underlying factors that drive valuations (ahem, interest rates).

And then they try to specifically value every residential property.

All very misleading, biased upwards, and really, ultimately, a black box.

Just charge a fee for straight transactional data easily accessible and be done with it.

But that approach won’t generate the dreams of billions in revenues necessary to drive an IPO.

So you end up with a clown car of a company with a bunch of “revenue drivers” tacked on that aren’t sustainable.

Not unique to Zillow, but wayyyy too many people treated Zestimates as gospel. Probably beloved by Fed as driver of phoney baloney “wealth effect” (the real “transitory” number…)

“ Not unique to Zillow, but wayyyy too many people treated Zestimates as gospel”

Then they meet reality with hard appraisals or FHA Automated Valuation Model (AVM)…

And then they get mad, really mad…

How Redfin and Zillow estimate work:

1. If a house is off-market, the estimate is based on recently sold comps in the area.

2. When a home is listed, this is where the lies begin. The algorithm takes that as the “starting price” and adjusts their estimate to within a couple percent of the list price. You can verify this by seeing an off-market home the algorithm claims is worth $425k, then say it is listed for $500k, the estimate will change to like $497-503k. Fat fingered entries, for example adding an extra zero, the algorithm would claim the house is worth $5M, that is how bad these algorithms are.

3. Upward adjustment is mainly done based on engagement with the listing on the site, for example views and favorites are weighted in adjusting the price upward. The home with the most favorites in a town, will have the highest percentage increase in the estimate.

Honestly their methodologies are very poor, and could be replicated by a novice coder with an Excel spreadsheet and VBA.

Well, who is going to pay Google a quarter Trillion dollars per year, every year? Perhaps oil companies will start advertising their oil.

Google is probably better protected than most techs – for all its flaws, internet advertising is a helluva lot more potentially accountable than what was pumped out by TV (especially in the bad old oligopoly days…which didn’t end as much as people think it did.)

“Redfin has been a publicly traded company since July 2017, and has existed for 13 years before then as a startup, and it’s just now time to think about how to make money?”

IRL is sometimes even crazier and funnier than parody as Mike Judge said about Silicon Valley and the general mentality of tech valley VC in general. As the character Russ Hanneman said on the show or something to the effect of “F making money…VC loves it when you forever lose money but can sell that dream..”

They drove out all kind of small businesses, drove wages and employment conditions to new lows and now they will tank the economy into recession while the SOBs at the top laugh all the way to the bank!

Wolf, “They all have one thing in common: The lost lots of money” should be “they lost” is missing the “y”. I know you enjoy your crowd sourced editing so not meaning to nitpick. I assume you delete these comments after making the fix.

I suspect the bad financial news is going to be coming fast and furious for several months and that this correction will be ongoing for years. We all saw it coming because we pay attention. What’s shocking is that even though we knew it was coming there seems to be a common thread here that none of us thought it would be this fast. This is going to be bad.

So another SoftBank company is having issues. Perhaps Compass should change its name to WeBust.

If I see Warren Buffett’s name, I think if I keep reading/watching I will get good advice to follow. Now, when I see SoftBank mentioned, I think I will find out what I should avoid.

Buffet’s BRK is starting to get to reasonable price. Somewhere between current price and around $200 is probably the bottom for it. Price to book around 1.2 now. Usually a long term winner if you can get around 1.0. Long term average price to book around 1.35.

Yep. BRK.B is getting within range. I have to wonder whether a new CEO would feel the same commitment to some of the laggards that Buffet has, like Kraft/Heinz, Restoration Hardware, and a few others.

To some extent I believe it is on redfin themselves. Their estimates are so bloated up that the buyers just resign and not even try looking. May be if they made sure their estimates were more in line with current market, probably they would have some more business? And I don’t know, may be use mortgage rates in the algorithm for estimates?

ARKK domino. RE domino. Within few months the energy domino might inflame another energy region.

In Orange county CA, residential real estate has gone from $400/sqft to $600/sqft since 2020, as reported by movato market trends. 50% increase in two years from an already expensive starting point. To be honest, I’m not sure prices will come down much until/unless mass layoffs begin when the recession hits (mid next year?). Even then, people will be coming out way ahead. It is just pure insanity that the Fed did this.

I watch Holden Beach property in NC and prices have basically doubled to get on the island to about $550/ SQ ft. A lot of new $1.5 – $2.5 million new construction properties being listed. A million used to be top end there.

Seeing some price cuts in the last three weeks. One did two 3% cuts and then last Friday did 10% price drop to around $380/ft. Still way above pre pandemic price.

You may want to hoist the house up and slide under a few pontoons to keep that investment from slip-sliding away.

Who made the money in the Bitcoin crash? (if this is a zero sum game)

California must be floating on a sea of cash to have these prices for homes that has been around for decades. At least since the 1970s and 1980s In 1983 I was offered a move to Ca from Ok and the home prices then in Ventura CA were triple the price in OKC and Tulsa. Now from the 400 to 600 sq ft pricing I’m seeing they are still 3 to 4 times the prices in Houston and other parts of Texas that are not Austin and Dallas. Tech has easily replaced oil for generating the greatest wealth transfer in generations vs the railroads steel banking and oil of the 1800s. Tech reigns supreme for asset prices salaries and stock grants and return on capital and the ability to raise capital! Very similar to my industry energy. Sell the hype. Real Estate leverage in 2005-8 created one of the worst recessions ever with the banking crisis. The cure for that was QE and zero fed funds rate for another 13 years until now. Decades to create and now decades to unwind.

Looking like ECB QE may be coming back already Wolf ?

Maybe we’re missing the point here… one of the objectives is for the Fed to try to maintain full employment. If you print lots of money it allows companies who make no money to raise lots of cash from Wackstreet. This then allows them to hire lots of technically competent people and get them some real world training. I get it!

I never had much bamboozle myself. I think I used up what little bamboozle I had just getting Holly to go with me to the senior prom.

Instead, I’ve had to rely on my other talents, which is probably why I’m stuck at my desk all day, every day, and only go outside to freshen up my sunburn and aggravate my allergies.

It’s tough, trying to break into established markets. It’s pretty crowded out there. Creating new markets is even worse. It’s no wonder nearly all new companies fail. Look at what happened to Sears Roebuck and Co. For a while there it looked like they were going to make it. At least they got enough altitude so they could crash and burn. You’re lucky if you can even get off the runway.

It’s a dog eat dog world out there, and let’s face it, I’m probably pretty tasty.

It’s a total disgrace Because they set the pace It’s always a race And the best I can do is Walk.

They’re coming to take me away Ha haa, hee hee to the happy home

How about mortgage broker companies? Remember Countrywide? This should be another epic round of destruction.

In the little SE Utah town I’m currently in (pop. 6000), 14% of the houses on the market have been reduced in the last two weeks. It seems like just yesterday there were only a half-dozen on the market, all selling literally overnight, and now there’s 71, nothing selling that I can tell. And several of those houses are gutted and obviously belong to flippers who panicked or can’t get supplies to finish them. Prices range from 100k to 450k. A slowly dying coal mining town.

Like others have said, it’s happening very fast. The resort town in Colorado that I’m from has seen about 20% of listed properties reduced in the last month. Prices range from around 750k to upwards of many millions, and there appear to still be some sales, though much slower. The town has a population of around 8k, but is a popular resort town and sees many tourists. All very impressionistic stats, I know, but data points to add to the mix.

The few people I know who have recently bought are all of the mindset that whew, I got in just before the rates increased, when they should be thinking, oh man, I screwed up and bought at the top.

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Margin debt issued warnings starting in early 2021 that the Big S would hit the fan. Folks blew it off.

Something has to give. And it’s going to be price.

From SPAC merger to Chapter 7 bankruptcy in 12 months. That was fast! Congratulations on the speed and on being first!

Folks looking for yield have options now. Won’t beat inflation, but won’t get their face ripped off either.

Still way too much wild craziness, including the ultimate bag-holder gamble: Why the bottom isn’t anywhere near.

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