Online real estate group Zillow [Z] saw its share price continue to plunge this week as key investor Ark Invest sent out a warning on its shares and the US housing market.
Zillow’s share price dropped 1.7% to $56.11 on 19 November after Ark Invest founder Cathie Wood dumped just over 31,000 shares of the stock from its ARK Innovation ETF [ARKK]. It now owns just over 800 Zillow shares.
Zillow’s iBuying woe
It follows Zillow’s decision to close its iBuying unit because, according to analysts, two-thirds of the houses it had bought to sell quickly had reduced in value. It is looking to offload 7,000 homes worth $2.8bn to institutional investors.
iBuying is where firms use algorithms to decide whether they can make a profit by buying a home and then re-selling. They consider factors such as ZIP code, age and the condition of the house. Zillow, popular during the COVID-19 pandemic as people searched its website for their dream post-pandemic homes, has seen its share price collapse 72% since mid-February.
Wood said that the crisis hitting Zillow could be a sign of a general weakening in the US housing market, raising fears that other real estate stocks could soon be dropping down the stock market ladder.
Number of Zillow shares Cathie Wood dropped from ARK's Innovation ETF last Friday
A slowing real estate market?
Wood is particularly concerned that the housing market is already starting to slow amid a rise in bond yields.
“Zillow shut down its iBuying, so that could be a bit of a warning on housing,” Wood said, as reported by CNBC. “There is so much speculation because of private equity funds just ploughing money into real estate and the iBuying race to buy homes and then renovate them and flip them. That came to a bit of a screeching halt, at least the iBuying.”
Wood said that she was following the views of Ivy Zelman, chief executive of Zelman & Associates and revered for calling the top of the housing market pre-financial crisis..
Zelman told CNBC that she felt there was overbuilding of single and multifamily homes “clouded by dual ownership and institutional capital”.
Others take a different view, such as Goldman Sachs, which sees home prices climbing a further 16% next year.
What then of other real estate stocks? Should they be worried?
Not so, says The Motley Fool’s Matt Frankel. “I don’t think that the Zillow news will play a role in ending the boom in housing prices. Zillow's iBuying represents something to the effect of 0.2% of the entire housing market. They've already said that there's institutional interest for the 7,000 or so homes they're holding,” he said.
Online real estate group Opendoor Technologies [OPEN], which is the biggest player in the iBuying space, also seems robust. Its share price has fallen from $23.14 to $19.73 in the last 10 days, but remains up from $14 in August.
Data, data, data
Eric Jackson, president of EMJ Capital and an Opendoor investor says its advantage over Zillow was the strength of its algorithms.
“Z ceding the market to OPEN is like the equivalent of Yahoo/Ask Jeeves/Lycos/Excite giving up on search in 2001,” he said on Twitter. Later, in a direct message to CNBC on the platform, he added: “Opendoor’s advantage is all about data data data.”
Market experts believe it was Zillow tweaking its algorithms to make higher offers that got it into trouble rather than the model itself.
“I think they leaned into home-price appreciation at exactly the wrong moment,” Ed Yruma, an analyst at KeyBanc, said, as reported by Bloomberg.
“[Zillow] ceding the market to OPEN is like the equivalent of Yahoo/Ask Jeeves/Lycos/Excite giving up on search in 2001" - EMJ Capital president Eric Jackson
Data in the real estate sector has also helped drive the share price of spatial data group Matterport [MTTR] higher. It has leapt nearly 50% over the last month, helped by deals including with commercial real estate group Cushman & Wakefield [CWK], which adopted its Matterport Capture Services. This digitises property portfolios and gives potential buyers a virtual walk through.
“Standardising on Matterport meets today’s commercial real estate market demands by offering eager buyers and tenants the ability to virtually view properties 24/7, while helping property owners accelerate time to occupancy,” said Oliver Skagerlind, global head of client and business solutions at Cushman & Wakefield in an October press release.
Real estate is by nature prone to volatility, particularly in these uncertain times. But investors can still profit if they are smart about digital, data and pricing.