What’s Going on With Zillow and Redfin?
A lot of new trends have cropped up in the market over the past few years, but few are as exciting as online real estate. Latching on to what is sometimes called the ‘uberization’ of old-world industries, companies like Zillow and Redfin have completely reformed the very boring and time-consuming business of buying or selling a property into something that can be done almost completely through your smartphone.
What’s more, these companies have even pioneered a brand new phenomenon within real estate — iBuying. By offering sellers instant cash by using algorithms to virtually assess the property, these companies have taken the idea of home-flipping to a brand new, 21st-century level.
Of the two online real estate/iBuying companies on our shortlist, Zillow has been a pretty big winner for us to date, up close to fourfold since we added it six years ago. Redfin is a more recent addition, but its journey hasn’t been quite as prodigious — the stock price being cut in half in just six short months. This period of volatility has stretched across all iBuying stocks and comes in spite of pretty good earnings reports over the past few weeks, with Redfin more than doubling its revenue year-over-year and Zillow predicting to cross $2 billion in revenue for the first time next quarter.
So what gives?
Well, some of the MyWallSt community have been asking the very same thing, so let’s look under the hood and see what’s going on.
1. iBuying stocks have been on an incredible run already
This is an argument that can be made for most of the stocks that are suffering at the moment, especially the so-called ‘stay-at-home’ stocks.
From the very pits of the coronavirus crash in March 2020 to its all-time highs in February of this year, Zillow stock had jumped more than sevenfold. At a market cap of $48.1 billion, this meant the company had a price-to-sales (P/S) ratio of close to 30 — extremely high, even for high-growth tech stocks. Redfin enjoyed an even bigger jump, its price rocketing more than eightfold in just eleven months.
Of course, what goes up must come down — at least to some degree — and this is the adage that has investors cashing in their gains on both of these stocks over the past few months.
2. What happens next with the pandemic?
Trends seen from the early days of the pandemic suited the likes of Zillow and Redfin. With workers across the globe now working from their box rooms, bedrooms, and kitchen tables — not to mention a lot of professional workers saving more money than ever before — the prospect of buying or upsizing became a lot more prevalent.
Now, we’re entering into a weird phase of the pandemic where… well, no one really knows what’s happening. Countries are opening up as more countries are locking down again and the threat posed by new variants has put a real dampener on vaccine optimism.
Essentially, the grand reopening of society hasn’t been as grand as many people expected and it’s quite hard to forecast what the future is going to look like in general, never mind for the real estate industry specifically.
That said, real estate is thriving right now, which brings us to our next point…
3. Is real estate getting too hot?
The real estate industry is one that investors are very sensitive to. Thirteen or so years later, U.S. consumers are still traumatized by the events of the Financial Crisis and, in particular, the bursting of the housing bubble.
Right now, we’re seeing falling supply (Redfin data showed total inventory was down 40% in June from January 2020) and rising costs in the housing market. With the prospects of more sellers rushing to market to make a quick buck as prices continue to rise, especially with the continuance of historically low interest rates, there is a lot of nervousness around about a new bubble emerging, even if these trends are good for the likes of Zillow and Redfin in the short term.
From the same Redfin data, for example, the median number of days a house is on the market is just 14. Wow.
4. iBuying is exciting, but essentially unproven
While iBuying has proven massively successful for these companies to date, there is a massive risk of them being left holding the bag if it all goes pear-shaped.
Remember, iBuying is just the online version of house-flipping, so these companies are buying houses to renovate and sell on again for a profit. Though it’s very unlikely to repeat itself in the exact same way again, should the housing market collapse and either Zillow or Redfin get left with a lot of houses on their books that have depreciated massively in value, it would be catastrophic.
So what do we think? Have we lost faith with Zillow and Redfin along with the rest of the market?
The short answer is no. The longer answer is no too, but with a couple of reasons including that the current pullback was always expected for stocks that had done well last year, nobody can predict what will happen next with the pandemic so it’s a fool’s errand to even try, and that iBuying — while new and scary — is also the type of breathtaking innovation that breeds multi-bagger returns. Only those brave enough to pursue them will reap the rewards.