Public Market Valuations
Real estate brokerage firms or tech businesses?
You may have noticed that, over the last few months’, Wall Street has been punishing real estate¬-related stocks based on the news that housing sales are down year-over-year. As of this writing date, Realogy, RE/MAX, Redfin and Zillow are all well off their peak stock prices from earlier this year.
It’s fair to say that companies like these are trading at lower prices today than a year ago due to the decline in housing sales. It makes sense. While it doesn’t appear that anything like the 2006-2010 debacle is in the offing, this cyclical downturn is driven by the rise in mortgage rates, the decline of affordability and the shortage of inventory that still pervades most markets, although that too is easing.
The Market is Catching On
What is surprisingly refreshing is that even Zillow and Redfin are affected. The market seems to have finally caught on to the fact that they, too, are deeply dependent on the housing market and the brokerage market. They are no different than Realogy or RE/MAX in that regard.
While it appears that Zillow’s valuation is also affected by their entry into the iBuyer segment, and the comments from Wall Street that bemoan them doing so, we think instead that Wall Street is dead wrong. Zillow’s entry into this market further fulfills their mission to serve housing consumers of all kinds and monetize their audience by delivering customers and clients to their premier agent and brokerage network. We think the iBuyer program has the potential to do that extensively.
The other question then is the private market value of Compass. Many have asked us how a company that is deeply embedded in the real estate brokerage space, and which, to date, has no published earnings, can be worth more at this time than Realogy and RE/MAX combined? The short answer is that they are showing far faster rates of growth than these incumbents, and, well, Wall Street loves a growth and disruptor story. How this plays out in the future remains to be seen.
The main story to us is that all of these companies are dependent on the health of the housing sales business and, ultimately, the stock market will price them accordingly.