Online Real Estate Stocks Under Pressure

Investors Shrug Off Good News for Zillow, Redfin

Zillow (ZG) and Redfin (RDFN), two online real estate companies, posted strong results for their second quarters, but the performance of their stocks did not reflect this. Both companies blew past Wall Street forecasts, but investors are wary of buying their stocks—partly because the stocks have surged over the past year and the real estate market is cooling down.

Zillow and Redfin benefited from huge demand for their automated home-buying platforms during the pandemic, and their stock prices surged as a result. However, business is expected to slow down a bit as people return to offices, children go back to school, and home inventory increases. All these factors are weighing on the share prices of Zillow and Redfin.

They Really Aren’t Cheap

Online real estate stocks may seem like a bargain at the moment. Zillow and Redfin shares are down about 28% over the past six months while rival Opendoor (OPEN) is 45% lower. However, over the past 11 months they have seen meteoric rise.

Zillow and Redfin are up about 400% from lows in March 2020, which could explain why investors did not pile into the stocks on the positive earnings news and forecasts. Even though Zillow’s revenue target for the third quarter was nearly 40% higher than what Wall Street forecast, this was not enough to send the stock higher.

A Return to Seasonality Expected

Investors are betting the real estate market will start to see a return to more normal seasonality. As more people get vaccinated, businesses reopen, and children head back to school, it could slow the demand for homes. In normal years, home sales decline in the winter and that could happen this year. These factors could cause home prices to fall.

Redfin alluded to these trends when reporting earnings. The company said it expects price appreciation to slow down in the second half of 2021. Zillow had a similar sentiment, warning its iBuying returns should begin to moderate later this year. That does not mean business is going to fall off a cliff, but Wall Street is wary of investing in these stocks.

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