Insights

Why Zillow, Redfin, and Opendoor Are Falling Today

What happened
Online real estate stocks fell today along with the broader markets as new data showed that home sales in April fell short of estimates.
Class A shares of Zillow Group (NASDAQ: ZG) (NASDAQ: Z) had fallen roughly 11% as of 2:07 p.m. ET today, shares of Redfin (NASDAQ: RDFN) traded nearly 7% lower and shares of Opendoor Technologies (NASDAQ: OPEN) were down roughly 7.7%.
So what
The housing market continued to slow, as new home sales dropped yet again in April, the fourth consecutive month in which sales are down. New single-family home sales came in at 591,000 for the month, falling well short of economists’ estimates of 749,000. That number is also down 16.6% from April 2021.
Image source: Getty Images.

Rising interest rates have sent mortgage rates surging. According to Freddie Mac, the interest rate on a 30-year fixed mortgage was 5.25% as of May 19.
Data from the Census Bureau and the Department of Housing and Urban Development also showed that the median sales price of a new home grew close to 20% year over year, reaching $450,600. There were also 444,000 new homes still on the market at the end of April, the highest number since 2008.
While Zillow, Redfin, and Opendoor all operate different businesses, they are all dependent on home sales, so slowing sales is not great for any of their businesses.
Still, while the housing market seems to be slowing, economists at Zillow recently said they still think there is at least some room left to run. Over the next year, Zillow is still projecting U.S. home values to climb another 11.6%, a forecast that has been lowered but that would still represent significant growth. Zillow economists are also expecting 5.73 million home sales this year, which represents a 6.4% decline from 2021.
Here’s an excerpt from the Zillow report, which was released May 19:

Labor market conditions will be closely monitored in the coming months as future forecasts are released. Current labor market conditions are strong, but the impact of expected rate hikes from the Federal Reserve is uncertain. Continued strength in the job market would keep pressure on housing demand and thus home value growth.

Opendoor, which allows consumers to buy, sell, or swap their homes online, also recently said it thinks it can continue to perform well even in a rising rate environment. The company pointed out that it has performed solidly in recent years, which have included a rising rate environment. Management also said it is prepared to weather a slowing housing market, although it doesn’t expect to see too much of a slowdown.
Now what 
It’s clear that rising mortgage rates and slowing monthly home sales have made investors nervous about the real estate sector, which is why each of these stocks is down significantly this year. While rising mortgage rates are certainly not great for the industry, they may not stay this high forever.
I would also expect homebuyer demand to remain fairly strong, largely due to the fact that there is a shortage of housing in the U.S. and that a large group of millennials could soon be homebuyers, so it could be a good time to get into these real estate stocks as they sell off.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Opendoor Technologies Inc., Redfin, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends the following options: long May 2022 $22 calls on Redfin, short May 2022 $26 calls on Redfin, and short May 2022 $28 calls on Redfin. The Motley Fool has a disclosure policy. –

What happened

Online real estate stocks fell today along with the broader markets as new data showed that home sales in April fell short of estimates.

Class A shares of Zillow Group (NASDAQ: ZG) (NASDAQ: Z) had fallen roughly 11% as of 2:07 p.m. ET today, shares of Redfin (NASDAQ: RDFN) traded nearly 7% lower and shares of Opendoor Technologies (NASDAQ: OPEN) were down roughly 7.7%.

So what

The housing market continued to slow, as new home sales dropped yet again in April, the fourth consecutive month in which sales are down. New single-family home sales came in at 591,000 for the month, falling well short of economists’ estimates of 749,000. That number is also down 16.6% from April 2021.

Image source: Getty Images.

Rising interest rates have sent mortgage rates surging. According to Freddie Mac, the interest rate on a 30-year fixed mortgage was 5.25% as of May 19.

Data from the Census Bureau and the Department of Housing and Urban Development also showed that the median sales price of a new home grew close to 20% year over year, reaching $450,600. There were also 444,000 new homes still on the market at the end of April, the highest number since 2008.

While Zillow, Redfin, and Opendoor all operate different businesses, they are all dependent on home sales, so slowing sales is not great for any of their businesses.

Still, while the housing market seems to be slowing, economists at Zillow recently said they still think there is at least some room left to run. Over the next year, Zillow is still projecting U.S. home values to climb another 11.6%, a forecast that has been lowered but that would still represent significant growth. Zillow economists are also expecting 5.73 million home sales this year, which represents a 6.4% decline from 2021.

Here’s an excerpt from the Zillow report, which was released May 19:

Labor market conditions will be closely monitored in the coming months as future forecasts are released. Current labor market conditions are strong, but the impact of expected rate hikes from the Federal Reserve is uncertain. Continued strength in the job market would keep pressure on housing demand and thus home value growth.

Opendoor, which allows consumers to buy, sell, or swap their homes online, also recently said it thinks it can continue to perform well even in a rising rate environment. The company pointed out that it has performed solidly in recent years, which have included a rising rate environment. Management also said it is prepared to weather a slowing housing market, although it doesn’t expect to see too much of a slowdown.

Now what 

It’s clear that rising mortgage rates and slowing monthly home sales have made investors nervous about the real estate sector, which is why each of these stocks is down significantly this year. While rising mortgage rates are certainly not great for the industry, they may not stay this high forever.

I would also expect homebuyer demand to remain fairly strong, largely due to the fact that there is a shortage of housing in the U.S. and that a large group of millennials could soon be homebuyers, so it could be a good time to get into these real estate stocks as they sell off.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Opendoor Technologies Inc., Redfin, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends the following options: long May 2022 $22 calls on Redfin, short May 2022 $26 calls on Redfin, and short May 2022 $28 calls on Redfin. The Motley Fool has a disclosure policy.

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