Compass revises market share after NAR changes its math

The residential real estate world is guilty of some fuzzy math.

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

Within Compass’ second-quarter earnings report released last week was a note explaining that the firm had updated its market share estimates for 2020, 2021 and the first quarter of 2022. The changes, it said, were a result of a change in methodology NAR made in July in order to better account for luxury home prices.

At first we thought no one was paying attention to it, I wanted to scrap it.
Lawrence Yun, National Association of Realtors

“This resulted in higher monthly average (mean) sales prices of existing homes than what was reported prior and increases in total market [gross transaction value] than what was reported prior,” Compass said in its earnings report.

Compass’ revised national market share estimate for 2020 was 3.4 percent, down from 4 percent, and its for 2021 was 4.5 percent, down from 5.6 percent. Its estimate for the second quarter of this year was 4.9 percent, meaning that Compass claims its market share is rising.

For years, when calculating the monthly national average sales figures, NAR had capped high-end sales at $750,000, according to Lawrence Yun, the trade group’s chief economist. Any transaction above that threshold was counted as if it were a sale of $750,000 — a number 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 U.S. Census Bureau and the Department of Housing and Urban Development.

In July, NAR raised the cap fourfold to $3 million after realizing the average wasn’t rising as it should have been during 2021’s supercharged real estate market. Yun said the metric wasn’t tracked as closely as other statistics NAR tracks because median price calculations are usually more useful.

“At first we thought no one was paying attention to it, I wanted to scrap it,” Yun said of the monthly average. “But then we got some requests, asking ‘could you please compute what the average would be?’”

While median sale price is the more reliable statistic because it’s less prone to fluctuations based on extremes at either end of the market, average price is used to calculate market share because it better reflects the total dollar value of the transactions.

Yun drew an analogy to the car industry: if you’re trying to understand how much money people spend on cars, you can’t count a Ferrari like a Lexus.

“One would need to get the average because the median would discount all the Ferraris as being a nominally expensive car, instead of super-expensive,” he said.

Reached by phone Thursday, an executive at Compass stressed that the brokerage didn’t lose market share relative to its competitors.

“It’s not any 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 thought we had 50 percent 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., how dominant it is in the specific markets it operates in.

Two market analysts pointed the finger squarely at NAR, which is the residential industry's largest trade group, with over 1.5 million agent members coughing up nearly $230 million in dues over the first nine months of 2021, according to Real Trends.

Compass calculates market share thus: it divides the company’s gross transaction volume by the industry's. By raising the average sale price, NAR increased the industry GTV.

It’s not like we thought we had 50 percent market share in the United States and now we have 5 [percent].
Compass executive

“Assuming the industry is using actual figures, everybody would have decreased equally,” said David Friedman, founder of WealthQuotient and former president of Wealth-X, an analytics firm focused on high-net-worth individuals “Everyone’s numerators are accurate based on their own data.” (It’s unclear, however, if all residential brokerages use the same methodology to determine their own sales activity.)

Jonathan Miller, CEO of Miller Samuel, an appraisal firm that compiles popular residential market reports for Compass rival Douglas Elliman, said enduring problems with NAR’s methodology call the accuracy of the figures 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 fixed, it is.”

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Miller remains dubious about market-share claims because NAR didn’t scrap its cap – it merely increased it – and because its data doesn’t capture the entire market: NAR’s data is fed by the MLS, which does not account for sales in Manhattan and certain sales in other markets, like pocket sales in Los Angeles, which he said can make up for more than a fifth of the market.

And he said NAR should not have put out data that isn’t robust – whether or not anyone paid attention to it.

“Why are you putting out any information that doesn’t stand the test of scrutiny for the reason you don’t think anybody reads it? That’s simply bad analytics practice,” said Miller, who added that high-end market caps are problematic because they degrade over time. “It’s arbitrary and that means
that it becomes irrelevant as you go back in time because that number meant something different 10 years ago or 20 years ago.”

On top of its narrative that it’s a tech company, Compass has also positioned itself as a luxury real estate brand, particularly in California, where it reported being the leading luxury brokerage last year. In a release published in March, the company stated it had just under 20 percent of Los Angeles’ luxury market and 40 percent of the Bay Area market. It also released its first ultra-luxury market report earlier this year.

And the firm, which RealTrends ranked as the country’s top brokerage by deal volume last year, has long made national dominance a key part of its story to investors. In 2017, it announced a plan to capture 20 percent of market share in the country’s top 20 cities by 2020. At the end of 2019, CEO Robert Reffkin acknowledged that although Compass had made significant progress, it had not quite hit that goal. In March 2020, The Real Deal published an analysis of Compass’ performance in key national markets, including New York City, the Bay Area, Los Angeles and Chicago, also illustrating how it had fallen well short of those figures.

Last week, Compass reported a $101 million net loss for the second quarter, and said it would embark on austerity measures in a bid to reach profitability. CFO Kristen Ankerbrandt, who joined Compass from Carlyle Group in 2018, will be leaving the brokerage next month.