RealTrends and RTC Consulting analyzed the performance of 12 of the largest publicly held real estate enterprises over the past 12 months. While the declines were significant for all these firms, the totality of the decline may surprise readers.
We measured the equity prices of these firms from their 12-month recorded high to the price as of July 14, 2022. Collectively, the decline of the equity value of these firms was $57.7 billion, a decrease of 75.2%.
From a collective high of $76.8 billion, these twelve firms were worth $19.1 billion as of July 14.
There are some significant differences. For instance, RE/MAX was only off 32.9% and Anywhere Real Estate was down 53.6%. Others were down much more, such as Offerpad (down 89.3%) and Redfin (down 86.4%) and Opendoor (down 80.3%).
The overall downturn is driven by two factors
From our view, the overall downturn is driven by two large factors.
Rise in rates. First, the one affecting all these firms is the rise in rates, which historically drives down housing sales, which drives down housing revenues. Investors expect that all housing-related firms will see a decline in their revenues and earnings in the expected downturn in housing sales. Related firms in mortgage, title insurance and homebuilding are also seeing declines in their equity value.
Positioning as tech firms. The second factor is a bit harder to grasp and explains some of the differences in the change in equity values, say between RE/MAX versus Opendoor, Redfin and Compass.
At some point in the latter part of 2021, investors suddenly began to understand that many firms that had positioned themselves as technology firms and not real estate services firms, were not so much technology organizations as they were real estate services firms.
It is as if over a period of a few short months, the investment community realized that while they may be interesting businesses, they should not be afforded valuations as tech firms but rather as financial services businesses.
So, firms like RE/MAX and Anywhere did not see their equity values diminish as much as other firms, because they had never been seen or valued as tech firms in the first place. Thus, it is our view that the market never gave them the premiums that the real estate tech companies received. The decrease in their values were based on housing market fundamentals, not on some theory or view that they were tech firms.
Our view is that many of these firms are oversold, or undervalued, at this point. There are some in this group that are profitable or have positive cash flow (eXp and Zillow come to mind) and have a clear path to achieving this.
However, there are others in this group that may never grow enough, or achieve enough cash flow, to have supported the valuations they had last year.
Steve Murray is a senior advisor for RealTrends and a partner in RTC Consulting, a real estate brokerage M&A and valuation company.