Online real estate is not worth the chance

Carnage is not about any one company. Since Compass’ initial public offering last April, the S&P 500 is up more than 8%, while online real-estate stocks including Redfin, Zillow Group, Opendoor Technologies and Compass are down an average of about 58% over that period. They have had similar disadvantages despite the fact that each platform boasts a different business model—Opendoor is a pure-play iBuyer, Zillow is an iBuyer returning to the agent advertising business, Redfin is a hybrid broker that specializes in iBuying. And Compass is an old-school brokerage firm dressed as a technology company.

The group’s underperformance seemed to have more to do with the erosion of technical valuations in the market rather than each firm’s fundamentals, though Zillow’s iBuying implosion didn’t help.

But there’s an underlying commonality that could keep online real-estate stocks gloomy: Even if the tech sector sees a massive recovery this year, all rely on transaction volume to make money.

iBuying is the ability for the business to buy and flip homes over time at prices higher than what the underlying buyer paid for them. In the meantime, Zillow continues to test a flex model for its agent advertising business in which it gets paid when agents close a deal instead of posting an ad. Brokers are typically paid on commission and Compass says it generates “substantial” of its revenue from commissions paid by clients when in-house transactions take place.

US for-sale home inventory is at an all-time low. Redfin said on Friday that active listings for the week ended February 13 were down 49% from the same period in 2020. Still, so far demand has been so strong that transaction volume has increased: Data from Redfin also shows that pending home sales were up 35% over that period.

How long can the transaction volume remain high despite the product shortage? In January, Zillow reported that a panel of US economists was equally divided on the rise or fall in home sales in 2022. They were concerned about rising affordability challenges and rising mortgage rates.

On the other hand, 1.6 million homes were commissioned in 2021, the largest start for housing since 2006 last year. Building more homes should increase inventory, potentially tempering prices, although rising material and labor costs are also a factor. At the same time, mortgage rates are already at their highest level since May 2019. Data from Redfin shows that the median home sale price was up 30% in mid-February compared to the same period in 2020, while the monthly mortgage payment on the median. The asking price had increased by 31% in that period.

Zillow has long been predicting that many homes will go on the market as the pandemic eases with the assumption that homeowners are holding off on listing amid uncertainty and potential risk of infection via open houses . As prices appreciate, it’s true that these happening sellers can get top dollar – as long as they have somewhere to go. Zillow reported last week that there are now 481 US cities with a typical home value of at least $1 million. This is up from a low of 300 in early 2019.

In addition to iBuying, the core businesses of online real-estate companies also face challenges. Zillow’s first-quarter guidance for its agent advertising business was 3% below consensus estimates at its midpoint. Redfin was even worse: Guidance for its real estate services revenue released Thursday came in 15% below consensus at the midpoint. Based on that outlook, its shares fell 20% on Friday in large part. Compass’ fourth-quarter revenue also slightly missed Wall Street’s forecast, as did first-quarter and full-year revenue guidance. Notably, Compass said tight inventories would slow the rate of growth in transactions in the first quarter compared to a year ago.

Online real-estate platforms could make you money this year—it might not be in the stock market.