US housing starts fell to lowest level in over a year. Is this bad news for real estate services stocks like Redfin, Opendoor, and Zillow?
The rate of U.S. home construction fell in May to the slowest pace since April 2021, as rising mortgage rates and inflation weakened demand for housing. U.S. housing starts fell 14.40% month on month, while permits granted to build homes fell 7% from the previous month.
This slowdown in the construction industry is due to weaker demand as the Fed’s interest rate hikes begin to affect consumers. Mortgage rates had their highest jump in 35 years, reaching 5.78%. Consumers are, therefore, pushing back their home purchases due to the increasing cost of financing to buy already expensive homes.
So what will this mean for real estate services companies?
Opendoor Technologies, Inc
Opendoor Technologies (NASDAQ: OPEN) is predominantly engaged in the iBuying sector. As of Q1 2022, the company had an inventory of 13,360 homes — up 455% from the previous year. 9,020 of these properties were purchased in the first quarter of this year when house prices were increasing. The slowing demand for property may result in Opendoor discounting its property value over the short to medium term. This, in turn, may lead to lower revenues and larger losses on recently purchased properties. The company’s share price is down 68% year-to-date (YTD) and 86% from its all-time high in February 2021.
Zillow Group, Inc
Zillow (NASDAQ: Z) no longer has an iBuying segment due to a decision to pivot from the division in 2018. As a result, the damage from falling demand will likely be lower for Zillow, as it does not have a large stock of properties on its balance sheet that need to be sold. However, the company is the largest online real estate advertising network, meaning a fall in demand will result in lower advertising revenues. The company’s stock is down roughly 54% YTD and down 85% from its all-time high in February 2021.
Redfin (NASDAQ: RDFN) is a technology-enabled real estate brokerage with an iBuying segment. iBuying represents the largest share of the company’s revenue, at 64% in Q1 2022. During this period, it increased its purchasing of properties by 55% year-over-year to 398 homes. Although Redfin is exposed to the fall in new home demand, it does have some advantages over its competitors. These include a mortgage division following its recent acquisition of Bay Equity Home Loans, and a rental search segment. These new avenues may help shield Redfin from some of the worst effects of the mortgage rate increases, but due to the small size of these segments, it may still be negatively affected. The company’s share price is down 80% YTD and down 92% from its all-time high in February 2021.