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Earnings season is here again, and, finally, the vibes aren’t terrible.

After more than two years of high mortgage rates and low inventory, the real estate industry is currently basking in the prospect of rate cuts and a healthier spring buying season.

At the same time, major companies are about to share what they earned in the final quarter of 2023. To understand how to make sense of it all, Intel reached out to Wall Street analysts who specialize in real estate.

The tone of these conversations was generally one of cautious optimism. Though 2023 was rough, most investors appear to be focused on the future, rather than on the actual Q4 numbers. And while there’s still plenty of uncertainty, the consensus seems to be that there’s a good chance the hardest times are now in the past.

A forward-looking earnings season

Everyone who spoke with Intel for this story generally agreed that the future outlook is more important than the past. Why? Because the fourth quarter of 2023 saw mortgage rates hit their highest point in decades, meaning those final three months of the year were uniquely punishing for real estate companies. However, rates have since retreated — meaning Q4 2023 conditions have already changed and are not expected to return.

“You’re reporting on an environment that has changed a lot,” John Campbell, a managing director at Stephens, told Intel. “So you want to look at the results, but, more so than usual, it’s all about the outlook.”

• The average 30-year, fixed-rate mortgage peaked on Oct. 26 at 7.809 percent, according to Optimal Blue.
• Rates have since fallen considerably, with the average landing at 6.723 percent as of Monday.

The chart below highlights what happened in recent months, with a notable drop-off in rates visible at the end of 2023. That explains why analysts who spoke with Inman generally agreed that CEO commentary, company outlooks and other forward-looking metrics will be the main event this earnings season.

Data from Optimal Blue | Chart by Jim Dalrymple II

The vibes are good

Predicting the specific outcomes of earnings season is a fool’s errand, but there are reasons to be optimistic.

Data and analytics firm Wall Street Horizon has developed the Late Earnings Report Index, which looks at the timing of companies’ earnings announcements.

Christine Short, vice president of research at the company, told Intel the tool is based on research showing that when “companies report later than they usually do, that’s correlated with bad news.”

The LERI uses a baseline score of 100. Scores above 100 indicate uncertainty, while scores below 100 suggest that “companies feel they have a pretty good crystal ball for the near-term,” Short said. Therefore, low scores are better.

• Right now, the LERI score stands at 74, which is actually the lowest reading in two years.
• Short said the current rating stands in “stark contrast” to the LERI of Q2 and Q3 of 2023, which both “showed CEOs at their most uncertain since the COVID-19 pandemic.”
• Anywhere, specifically, is reporting its numbers a week earlier than Wall Street Horizon expected. Short said the choice to move the report up by a week means they may be “preparing to share ‘good news’ with investors.”

Short brought up the LERI while talking about the “vibe” going into this earnings season. Her point was that the data ultimately suggests “the vibe is pretty good.”

There is still uncertainty on Wall Street — a hoped-for rate cut in March is now unlikely — but other analysts’ anecdotal observations seem to confirm that the market is in a cautiously optimistic mood right now. For instance, Bernie McTernan, a senior analyst at Needham & Company, told Intel that in conversations, investors are more curious about “how high can profit go” than about losses or future hard times.

Multiple analysts also mentioned ebbing inflation, the lack of a recession, strong employment and other factors as positive economic signals.

Commission lawsuits loom large

This earnings season will be the first since the infamous Sitzer | Burnett verdict. That means it’ll be the first time many CEOs have a chance to publicly weigh in on the case and the spiraling number of copycat suits.

It’s unlikely the commission lawsuits will already have had a major impact on any company’s bottom line. However, analysts who spoke with Intel will be looking for executive commentary on agent training, company policies, and general adaptation strategies in response to the suits.

“We do expect there to be a change long term,” Tommy McJoynt-Griffith, director of research at KBW, told Intel. “And I expect the companies and management will be hammered pretty heavily with questions.”

The commission suits will impact every company in the housing industry, but big firms such as Anywhere, RE/MAX, Compass, eXp World Holdings and others sit on the front lines of the issue, so investors are likely to be watching them closely for commentary.

The portal war battlegrounds

This earnings season is also the first since CoStar announced a massive new marketing campaign for its Homes.com brand.

• CoStar wouldn’t say exactly how much it was spending on the campaign, but told Inman it “rounds up to a billion.”
• To put that into perspective, Zillow spent in the mid $100 million range on marketing for each of the last two years. The company’s Q3 2023 shareholder letter also touted the ability to attract “users with modest marketing spend.”

Given CoStar’s increased efforts to claw away market share, this earnings season will be a pivotal moment for seeing how the incumbent portals react — and if they’re willing to increase spending in response. Zillow was the first of those incumbents to report earnings this season, with its report landing Tuesday. The report revealed that the company’s revenue rose year over year in Q4, but perhaps more notably CEO Rich Barton touted his company’s “leading real estate audience and a brand that is a household name” — comments that intentionally or not functioned as a response to CoStar’s blitzkrieg into the residential sector.

Barton also said Zillow has not yet seen any impacts to its business from CoStar’s efforts.

More generally, it’ll also be worth watching during this round of earnings to see if non-portals wade into the conflict, as Compass’ Robert Reffkin did in January.

Either way, though, CoStar’s aggressive spending has already set the stage for this to be the portal war earnings season.

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• Source: https://www.inman.com/2024/02/14/the-vibe-is-pretty-good-as-first-earnings-season-of-2024-kicks-off/