We have no position in Zillow presently. However, for those who do, the time has come to rein in the gains.
On March 17th, Zenolytics published an opinion on Zillow, succinctly describing how Zillow tends to outperform during the 1st half of any calendar year. "Tends" may be too soft a description. Zillow, on average, produces gains of 50% during the front half of calendar years going back to 2012. This tendency towards outperformance becomes all the more pronounced when rates plunge, as they have in 2019 to date.
The fundamental thesis behind the trade has two pillars:
- Seasonality of real estate transactions heavily weighted towards spring and summer i.e. the first half of the year
- Low rates = cheap mortgages = attractive affordability for buyers
By now, with the employment market having gone nuclear with record job growth, rates steadily withering and the consumer being jolly one would expect that home buyers would be stampeding to get the keys to their new house, especially as price appreciation has slowed or is declining in many of the hottest markets.
Yet something is taking place. Existing home sales for April fell, coming in below expectations. This from CNBC:
"Sales of existing U.S. homes fell 0.4% in April compared with March to a seasonally adjusted annualized rate of 5.19 million units, according to the National Association of Realtors. Sales were 4.4% lower compared with April 2018. That was the 14th straight month of annual declines."
All the meanwhile, Zillow's primary publicly listed competitors in the space: RDFN, RMAX, RLGY are getting pummeled during May, with an average decline of 25% among the three.
The one bastion of safety in the sector during May has been Zillow. There is no doubt that their Zillow Offers business is providing a much needed boost to revenues, even as losses continue to grow. The controversial nature of their Offers business has caused short sellers galore to barrel into the name, with short interest on Zillow coming in at 52 week highs as of the most recent data.
CEO Rich Barton's outstanding ability control the narrative while shorts scream bloody murder with losses increasing has created a virtuous cycle of gains in the stock recently. However, once the stampede of covering ends, Zillow may be prone to some reversion back to its mean in the 30 range, especially as all of its peers are suffering an inordinate amount of pain in the face of a real estate market that certainly hasn't picked up as many thought it would this far into the spring buying season.
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