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Does Wall Street Finally Understand Zillow and Redfin?

 

In the past several weeks, the shares of Redfin, Zillow, Realogy and RE/MAX have fallen. Some of these declines are due to the failure or inability of the particular firm to hit its quarterly financial and/or operational targets.  The investment community usually punishes firms that miss their targets.  There are; however, two other reasons for the decline in the shares of Redfin and Zillow that differ from those of Realogy and RE/MAX.

Investors Woke Up

The first is that the investment community seems to have woken up to the fact that Redfin and Zillow are not Google and Apple. They are not purely technology firms across a broad swath of the economy.  They operate totally in the residential real estate industry.  While they certainly have great technology offerings, their major clients and customers are in the residential real estate business.  That is a business that Wall Street is woefully short of deep understanding.

Housing Market Has Stalled

Secondly, the housing market has clearly stalled.  According to the National Association of Realtors® (NAR), existing homes sales are down in six of the last seven months as the lack of inventory and affordability issues have finally hit home.  Not only are unit sales stalling, but price increases are starting to settle down. It could be that when the final tallies come in at the end of the year, total sales volumes for existing homes sales will barely exceed those of 2017.

With the average commission rate declining somewhat over the past years—a condition we expect to continue in 2018—it also means that total commission revenues may decline in 2018 from 2017.  We don’t think they will decline by much but enough to get everyone’s attention.

So the investment community finally understands that Zillow and Redfin, along with Realogy and RE/MAX, are fully in the residential real estate industry. They now see that the housing market is stalling in terms of growth and that Zillow and Redfin’s growth is likely to slow as well. So,  you get a hit to their stock prices, at least in the short term.

Future is Bright

We think that the future prospects for all four companies are bright.  For RE/MAX and Realogy, both are furiously retooling their offerings to enable them to be in a position to accelerate their growth in future years.  Further, if history is consistent, flat markets tend to favor larger participants in residential brokerage.

For Zillow and Redfin, they have solid businesses with significant room grow. Perhaps their lofty valuations were based on those future prospects and based on Wall Street’s lack of understanding of which business they are both in—real estate. That lack of clarity is likely gone now and their stock prices will be based more on what they actually achieve and their future prospects along with the health of the residential housing market.

(Writers note:  Neither REAL Trends nor any of its employees have ever owned shares in any of these companies nor others in the residential real estate industry)

 

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