The Rocket Companies' announcement of the acquisition of Redfin has sparked a wide range of responses from across the world of residential real estate. After all, the major real estate portals have been trying to add on mortgage products for almost ten years with mixed results. With this move, a tech and consumer-focused mortgage player is coming after the established portals - plus traditional brokers and builders.
That's not hyperbolic language - and I'm not just reading the tea leaves. I read their investor deck on the SEC.gov website. In it, they detail their goal to reduce the total expense of their customers from title fees, listing fees, buyer's agent fees, and mortgage fees by 50%. By bundling services, intensive consumer advertising, combined data from both organizations, and Redfin's web and app ecosystem (widely considered among the best user experiences in the industry), I think they have a legitimate shot at hitting that goal.
(from their SEC filing)
Lennar's CEO, Stuart Miller, has gone on record for favoring focusing on volume and taking market share over margin per home, and they have been successful at putting pressure on their competition by squeezing the extra oxygen out of individual markets. Zillow and Rocket are both taking a similar approach, but because they are also marketplaces where a much wider selection is available to the consumer than any single builder could ever dream of, their potential scale is intoxicating to CEOs and investors.
Zillow announced a singular focus on creating a "super app" in 2022 to provide consumers further convenience (and mortgage and ancillary service attachment rate). Rocket did so this week with the purchase of Redfin, but starting from the other direction. By bundling as many services as possible, they can let go of margin per unit and focus on volume - using their scale to muscle their way to the dominant spot in the hearts and minds of consumers. Zillow still has the upper hand in mindshare with the general population, but Rocket believes it is building a better mousetrap, and by layering in Redfin's 50 million monthly visitors, they hope to see 1 in 6 purchase mortgages originations and continue growing from there.
(from their SEC filing)
For builders, the fastest impact will be the marketing prowess of Rocket Mortgage and the new life it gives to used homes. Great marketing won't remove the cat smell from that 1985 vintage split-level home, but proactively offering buy-downs on the mortgage can make it much more attractive to today's buyers. Rocket has offered free-refinance programs, buy-downs, and other creative responses to shifts in consumer concerns related to purchasing a home.
Builders have enjoyed the lack of competition to their rate buy-down incentives, and most credit this specific tool as a big reason for their success against the resale market. This unique advantage will go away soon as Rocket brings it in force to the Redfin listings, forcing others to follow their lead aggressively.
This could further impact home builder margins if they must compete more directly on price and rate against their most significant competitor. Especially if the number of used homes across the country rises with any relief from lowering mortgage rates due to economic uncertainty.
While traditionally, builders have used modern designs that cater to shifting consumer preferences, energy efficiency, lower maintenance, and other product-specific benefits to differentiate themselves, over the past few years, the mortgage (rate) has become an ever larger part of how the consumer views our homes and communities. The lack of affordability, and in many cases attainability (I view the difference between these two as preference and capability), of a home has given more power to the financial packaging around the product itself. Rocket Mortgage + Redfin is poised to have an outsized impact on how homes are bought and sold if they execute at a high level, but this industry has dashed many high-tech homes before - stay tuned.
