On Thursday morning, eXp World Holdings announced that it had grossed $ 583.3 million in the first quarter of 2021 – an increase of 115 percent over the same period last year.
It’s hard to rate this news as anything but positive. Yet the company’s shares actually fell more than $ 2 in the hours after eXp announced its profit. As of Friday noon, the eXp share was priced at around USD 28.40 per share, after over USD 30 per share at the end of Wednesday – and well after a high of more than USD 80 per share in early February.
EXp isn’t the only company affected by this phenomenon.
On Tuesday, Zillow announced that it was having its most profitable quarter ever. But that wasn’t enough for investors; The stock closed at nearly $ 124 per share on Tuesday but fell to just over $ 109 per share over the next two days. It recovered a bit on Friday but still wasn’t there for the week.
On Wednesday, Redfin exceeded analysts’ expectations for the fifth straight quarter. And his share price fell instantly. On Friday afternoon, the company’s shares were trading at just over $ 56, a steep drop from just five days earlier when they hit over $ 71.
The examples could go on. At RE / MAX, for example, the stock has been falling steadily for the past few days, including a decline immediately after Thursday’s mostly positive earnings report. Compass hasn’t reported any gains yet, but since going public on April 1, the stock has largely fallen.
Most of the companies mentioned in this story have followed a similar path, with their stock prices falling for weeks after highs in February.
What exactly is going on here? Most of these companies are making strong profits in the face of soaring house prices. Why aren’t their stock prices rising?
One answer is that markets, especially in the short term, can be irrational. The increase in stock prices many real estate companies have seen recently is easy to explain. Perhaps investors should now bid up stock prices with all this good news, but they are not. That could just be irrational.
While every company is of course different, there seem to be a handful of factors that dampen investor enthusiasm for the real estate sector. Here are some of them:
Headwinds in the real estate market
As is well known at this point in time, real estate industry stocks are currently extremely low compared to demand. This is driving up property prices, which is currently having a positive effect on the company’s earnings. But it could also be a challenge if the supply doesn’t increase.
During his merit interview with investors, Redfin CEO Glenn Kelman noted that while his company has hired many new agents over the past few months, they have struggled to close their first deals. There just aren’t enough houses.
Kelman noted that inventory shortages were highlighted as “headwinds” that could become a challenge in the coming months.
In the case of Redfin, this could hurt the company’s efforts to increase market share, according to Kelman.
But the same headwind is blowing on all players in real estate. And while many industry leaders are optimistic that inventories will rise in the coming months, Wall Street investors seem less convinced.
Inventory alone, however, is unlikely to be enough to explain declining stock prices. Finally, there is also a shortage of stock on the timber market, but the timber stocks have developed very well in the last few weeks.
However, there is another major headwind that may discourage investors: mortgage rates. Specific estimates vary, but most projections suggest that rates should rise steadily in 2021 and over the next few years. And that has fueled some speculation that buyers’ appetites for homes may be waning.
All of this means that a combination of tight inventory levels and the specter of declining demand is likely an integral part of what is currently going on with real estate company stocks.
In other words, while economists and industry leaders were largely unanimous in saying they don’t see a bubble on the horizon, Wall Street investors can hedge their bets against a short-term downturn that could negatively impact various real assets, according to real estate companies.
Also, while mortgage rates and inventory are the biggest problems facing real estate headwinds right now, some investors may be looking at a large and fragmented landscape and not sure who will ultimately emerge victorious.
“When you talk about Redfin and Zillow, they compete and who knows who will be the winner,” Adam Gower, who specializes in crowdfunding, investment and digital real estate platforms through his GowerCrowd company, told Inman.
Gower pointed out that digital adoption accelerated during the coronavirus pandemic. That change itself can add volatility in real estate stocks as some companies are better positioned to thrive than others.
In a broader sense, however, the real estate landscape in particular is highly fragmented, with newer tech companies competing against deeply rooted old-guard companies.
In some ways it is similar to online trading in the late 1990s. At the time, Amazon was on the rise, but before the dotcom bankruptcy, there were a number of other online retailers vying for consumer attention. Meanwhile, brick and mortar retailers – from bookstores to department stores – didn’t seem to have much to worry about.
Amazon’s share price reflects this. In 1998, the company’s stock began rising, eventually peaking at more than $ 100 per share before collapsing in 2000. At one point in 2001, you could buy a share of Amazon for just $ 10. It wasn’t until 2009 that Amazon stock crossed the $ 100 mark again, and it wasn’t until 2017 that shares traded above $ 1,000.
Today, however, a single share of Amazon costs nearly $ 3,300. And it’s also clear that Amazon won. For better or worse, the company has acquired or closed numerous competitors.
Real estate may experience something similar, with investors unsure which model will ultimately dominate the space.
“They just don’t know how this thing is going to play out,” said Gower.
Gower expects consolidation in the future, with companies with unique intellectual property likely to “find targets to be adopted by larger companies.” To borrow again from the Amazon analogy, think of the company that buys Zappos, Whole Foods, or Twitch. And Gower believes that “the greatest threat Redfin and Zillow pose is less to each other and more to the established agency model.”
This process takes time, of course, and may explain the longer-term performance of real estate stocks better than the downturns of recent weeks. In both cases, however, it can be assumed that at least some Wall Street investors are still unsure which real estate player is likely to follow an Amazon-like course.
In both cases, however, there is a change in the air that is likely to have a long-term impact on real estate company stock prices.
“Consumers are getting used to doing business online,” said Gower, “including large transactions like buying a home.”
Email Jim Dalrymple II