U.S. Housing Market
The U.S. housing market has been on a tear during the past 5-6 years, mainly driven by an economic recovery post the 2008 financial crisis and investors from abroad. However, the run of housing could be coming to an end soon (if it hadn't slowed already) due to over appreciation, over supply of new constructions, and inflow restriction on foreign money.
About Zillow Group (NASDAQ:ZG)
Zillow acts as an information marketplace, on both the Web and mobile, to help people find information about homes. It focuses on all stages of home lifecycle, including buying, selling, renting, and financing.
Currently, Zillow is valued at $5.8B with a negative P/E. It trades at around $32.50 per share, down from $39 per share since its Q2 earning report release.
How does Zillow make money
Zillow's revenue comes from two streams:
- Real Estate Agents - Realtors and brokers use Zillow to promote themselves and also their listings. A listing as "featured properties" helps agents sell homes quicker. This is Zillow's largest revenue stream.
- Other Ads - From companies associated with a property, such as Best Buy (NYSE:BBY) (new fridge for new home) and Time Warner (NYSE:TWX) (cable tv, phone, internet).
- Real estate market follows a predicable cycle, which repeats itself every decade or so, as evidenced by historical trends (see below chart). We have clearly moved out of the recovery phase as unemployment rate went from over 9% to now below 5%, and are now in the end of the expansion phase as key interest rates will soon increase. For study on real estate cycle, refer to Teo Nicolais's blog.
- In my opinion, the U.S. is about to entered the "hypersupply" phase, particularly in cities such as Miami and New York, and other metropolitan areas soon to follow.
- Based on recent consumer spending data published by Bank of America, shoppers at home improvement store "tumbled" in July. The same pattern applied to furniture stores as well. These indicators serve as another point to housing slowdown. For more red flags, refer to Tyler Durden's article on Zero Hedge below.
- In August, existing home sales declined 0.9%, it is the second consecutive decline, and missed market expectation.
- I have privately interviewed several seasoned real estate agents and loan officers at major banks across the country, and the general feedback is that traffic has reduced drastically since Q4 2015. One of them even said to me, "it seemed that the music had stopped, but people are still dancing" - referring to those developers and buyers chasing the high priced market.
According to Zillow's SEC filings, from August 2016 to the date this article is written, there has been 10+ insider disposal of shares between $34-36, which is not an encouraging sign to investor.
Zillow will face a challenge soon when rates increase and real estate transactions and housing activities decrease. When the slowdown occurs, Zillow's revenue stream will take a hit and its stock will have a tough time justifying the high valuation given the current negative EPS. I see the stock trading below $30 and would recommend getting rid of any long position now.
I look forward to seeing how the management reacts to the potential correction in housing and if Zillow can strategize itself through a housing correction.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in ZG over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.