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Online real estate services empires that took years to build are suddenly coming unglued, with word that Shanghai property firms are joining a list of clients who have stopped giving their business to sector leader SouFun (NYSE:SFUN). I'll be quite blunt and say that anyone who didn't see this coming must be living in a cave, even though I was somewhat surprised that the stocks of SouFun and its peers quickly recovered from a selloff after similar reports emerged last month and in June. We'll have to wait and see if the stocks rebound again this time, though perhaps this latest news will finally make investors realize that SouFun and its peers could be looking at a prolonged downturn as China's real estate market finally goes through a much needed correction.

SouFun's stock certainly didn't react positively to the latest news that Shanghai real estate agents have stopped listing their properties and buying other services on SouFun's site. (Chinese article) SouFun shares tumbled around 7 percent in trading after the reports came out, reapproaching a 10-month low hit in June after a similar selloff. Shares of SouFun's 2 major New York-traded rivals also tanked, with E-House (NYSE:EJ) and Leju (NYSE:LEJU) down around 6 percent and 9 percent, respectively.

According to the latest reports, Shanghai real estate brokers joined a growing list of their peers from around China who have stopped using SouFun's services or aren't paying their bills. Brokers and property companies in Beijing, Guangzhou and Chengdu also took similar steps back in June, sparking the earlier sell off that saw SouFun's stock give back nearly all of its gains from the past year. In this latest instance, several dozen brokerages took the unusual step of actually holding a press conference to say they were going to freeze out SouFun and remove all their listings from its sites.

In this particular case, the dispute centers on brokers' unhappiness over SouFun's failure to honor a promise it made about prices for its services back in June. The agents were looking to control costs in the moribund market, and SouFun agreed to some of their demands. But now that agreement appears to be in ruins, and SouFun will probably be forced to either renegotiate the deal or abide by its earlier promises.

Of course the big picture here is that everyone in the sector is hurting and doing anything they can to cut costs. Home prices have started to fall in many markets, but are still near their all-time highs after years of supercharged gains. But real estate developers and service firms all make their money from transactions, and the volume of those transactions has plummeted in most of China's major cities.

The fact that the unrest is spreading to Shanghai must certainly be unsettling both for SouFun and the broader market, since many people believe that China's financial hub will be immune from the worst effects of any downturn. Instead, they say, China's smaller cities will feel the biggest pain since many of those are vastly oversupplied with empty homes that can never be absorbed by their limited local populations.

We'll have to see how the Shanghai situation plays out before we can determine how big a blow SouFun and the others will take. My prediction is that SouFun will reach a new understanding with local agents, since Shanghai is one of its top 3 markets in China and a loss of so much business there would have a major impact on its revenue. Look for similar situations to keep playing out in other cities throughout China, meaning revenue for SouFun, Leju and E-House could easily start to contract by the end of the year.

Bottom line: An uprising by Shanghai property agents against SouFun reflects the turmoil plaguing the industry, and will continue to pressure company stocks through the end of this year.

Disclosure: None.

Source: Shanghai Agents Rise Up Against SouFun