A year ago, something weird started happening.
The housing market was on fire, with home prices soaring and listings flying off the market in days, or sometimes hours. Interest rates were at record lows and would linger or even fall further in the coming months. There was some uncertainty thanks to the coronavirus pandemic, but all in all it was for many people an incredible time to be in real estate.
And yet, despite all of that, share prices of publicly traded real estate companies were falling.
Now, a year later, it turns out those falling prices weren’t a fluke. In fact, many of the biggest names in real estate have seen their share prices steadily tumble for months and months on end at this point — collectively costing them billions in valuation.
So what’s going on? Why is it that investors are cool on real estate companies on the heels of what proved to be one of the best years on the books?
The answer has to do with rising rates, a struggling stock market and tepid financial outlooks, among other things. And while the future is uncertain, the story of dropping share prices may not be over yet.
Big drops
First things first, it’s worth noting that many real estate companies’ share prices have had a good few days lately.
As of late Friday afternoon, for example, Realogy’s share price was up about a dollar-and-a-half compared to five days earlier. Compass was also up over that period, in its case by about $0.50, while Zillow rose more than $1.33 over the course of last week. Other companies, such as Opendoor, Offerpad, Redfin, eXp World Holdings and RE/MAX all also saw their share prices rise over the course of the last five market days.
And those gains are nothing to sneeze at.
Many companies saw those price bumps at the end of the week, when a new report indicated inflation was slowing. The report helped boost the market overall, and the fact that real estate companies benefited from the news highlights how their share prices are sensitive to overall stock market dynamics.
However, over the last year-and-a-half, most major real estate companies’ share prices are way down. Over the last 12 months, for example, Compass has fallen about 37 percent, Realogy about 25 percent, Zillow more than 65 percent, and Opendoor more than 52 percent.
Some of the share price drops are quite stark when put in dollar amounts.
Zillow, for example, was trading shares for more than $200 last February and $100 in the fall. But as of Friday, the company’s shares were only fetching about $41.
Opendoor shares were trading for less than $8 Friday, down from a high of nearly $35 in February 2021, and $24 in the fall of last year.
Redfin shares were trading Friday in the mid $10 range, also a huge fall from more than $50 a share in the fall and nearly $100 in February 2021.
EXp was trading Friday in the mid $14 range, also down from around $50 in the fall and from an all-time high of nearly $80 in February.
The list could go on, but you get the point. Most major real estate companies’ share prices today are a faint shadow of what they were just last year. As it turns out, Inman’s report last year on faltering real estate company stocks was just the beginning of a long-running story.
This graph shows the last 12 months of share prices for Compass (grey), Zillow (blue), Realogy (orange) and RE/MAX (magenta). Credit: barchart
The overall stock market has been taking a beating lately too, and that trend definitely accounts for some of what is going on.
On the other hand, over the last 12 months the Nasdaq Composite was only down 11.77 percent on Friday, compared to one year earlier. The S&P 500 was only down about 1 percent.
Credit: Google
What this means is that while stocks generally struggled of late, over the last year real estate companies, in particular, have significantly underperformed the market.
So why is this happening?
Some of it is probably attributable to specific, and relatively isolated, incidents. Last fall, for example, Zillow announced it was shuttering its iBuying business Zillow Offers. The news immediately sent Zillow’s share price plummeting and it hasn’t recovered since.
That shock didn’t just impact Zillow, though. Following the news of Zillow’s stumble, both Opendoor and Redfin — rivals of various parts of Zillow’s business — also both saw their share prices dip, apparently a sign of investors’ wariness about the property technology sector.
The lesson, then, is that problems in one company can hurt rivals in the minds of investors.
Earnings outlooks
Another factor that may be at play here is real estate companies’ own financial outlooks.
It’s always curious when companies report strong earnings results, and then see their share prices immediately fall. And yet, that has happened again and again to real estate companies over the last year — including during the most recent earnings season earlier this month.
However, what was significant about this last earnings season was that while many companies posted strong numbers and beat analysts’ forecasts, they also almost universally adopted a cautionary tone. “Headwinds,” for example, was the buzzword in multiple earnings calls with investors. And the general consensus among leaders of major companies — Zillow, Redfin, eXp, Compass, and others — was that the coming months are likely to be slower than the preceding two years.
Investors may have been paying attention to those cautious earnings reports. Or they may have just been seeing the same headwinds the reports mentioned. Either way, though, the fact that real estate companies themselves have been sounding the alarms about a slowdown — which based on the latest data appears to be happening right now — potentially helps explain at least in part, why the sector has underperformed compared to the broader market.
Mortgage rates are key
One of the primary reasons real estate is slowing down somewhat right now —though generally it remains a seller’s market and experts don’t foresee a bubble — is that mortgage rates are rising. Indeed, this shift away from the historically low rates of the last two years has been arguably the most significant real estate story of 2022 so far. The rate increases are making it more expensive to borrow money, and cutting into homebuyers’ ability to afford houses.
Interest rates — which are set by the Fed and influence, but are not the same as, mortgage rates — have also been rising, and that has weighed on the stock market generally. But real estate gets a kind of double whammy in these sorts of situations; interest rate hikes impact the broader market, and then real estate companies suffer again because their end users have to contend specifically with mortgage rates as well.
Real estate’s “Wile E. Coyote moment”
Adam Gower — who through his GowerCrowd company specializes in crowd funding, investment and digital real estate platforms — described this as real estate’s “Wile E. Coyote” moment.
Adam Gower
“Remember how he runs at extremely high speed and keeps going even when he’s left the edge of the cliff,” Gower said. “That’s where I think the housing market is right now.”
Gower pointed to falling sales volume, saying that typically in a downturn “volumes will drop off but prices will continue to rise.”
“It’s like that feeling you have when you’re right about to tip off your chair,” he added. “Thats the moment we’re in now.”
Gower doesn’t specialize in the stock market, but he does work with investors who buy large properties, such as apartment buildings, among other things. And he said lately it has become more difficult and more expensive to find leads and to convert them into closed deals. His point: The kinds of investors he works with are “pulling back from the market.”
Gower speculated that the same thing could be happening in the stock market as all of the above factors weigh on traders’ minds.
The takeaway, then, is not just that real estate stocks had a rough go over the last year. Instead, it’s that the rough go is still going, and will likely continue. Thanks to rising rates, lukewarm outlooks, and a broader market that has been sputtering lately, real estate company stocks may not ultimately catch a break any time soon.
“For stocks all these trends that I’m seeing on the private equity side you’re seeing on the public side,” Gower said. “These things speak to a general malaise in the real estate market.”
