Real estate brokerage company Compass (NYSE:COMP) fell 5% on Tuesday after a disappointing earnings call. For some economists, this is the long-awaited sign of an impending housing market crash. COMP stock is descending 6% again today as the housing industry weighs Compass’ second-quarter financial report.
One of the largest U.S. real estate brokerages, Compass reported minimal revenue growth of only 4% in Q2. The company reported sales of just $2.02 billion, below the Wall Street consensus estimate of $2.12 billion. Compass also announced plummeting adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of just $4 million, down from $72 million. Finally, it missed earnings per share (EPS) estimates, logging a loss of 24 cents, well below estimates of -14 cents.
Real estate has been in the midst of a slowdown in response to rising interest rates. As such, real estate companies like Compass are liable to suffer wider losses due to a slowdown in home purchases and reduced home price growth.
Compass CEO Robert Reffkin commented on the turbulence this past quarter:
“Compass continued to grow revenue in the second quarter despite extremely challenging market conditions. This performance highlights the strength of our agents and our commitment to enabling their success through superior technology and other programs.”
Looking forward, Compass laid out expectations to become free-cash-flow positive within roughly the next year and a half. Unfortunately, this came alongside a reduced full-year revenue outlook, however. The company now expects revenue of between just $6.15 billion and $6.45 billion, down from previous guidance for about $7.8 billion.
What do COMP stock and Compass’s underwhelming earnings say about U.S. housing? Let’s dive in.
COMP Stock Falls as Rumors of Housing Market Crash Swirl
The notion of a wide downturn in housing prices has been perpetuated for some time now. Home prices have seemingly risen ceaselessly since the start of the pandemic, largely due to a limited supply of available homes for sale.
Things are changing, however. As the Federal Reserve levied its fourth interest rate hike of the year last month, mortgage rates have climbed iteratively as well. Currently, 30-year fixed rate mortgages are hovering around 6%, one of the highest levels in recent memory. As mortgage rates climb amidst rising inflation, home sales have seen a sharp decline. In fact, as per the National Association of Realtors (NAR), existing home sales fell 5.4% last month.
As the demand for homes falls, some expect home prices to take a potentially drastic downturn. According to Fitch Ratings analysts, the chance of a housing market crash remains a very real concern.
“The likelihood of a severe downturn in U.S. housing has increased; however, our rating case scenario provides for a more moderate pullback that includes a mid-single-digit decline in housing activity in 2023, and further pressure in 2024 […] ratings could face pressure under a more pronounced downturn scenario that would likely include housing activity falling roughly 30%, or more, over a multi-year period and 10% to 15% declines in home prices.”
Home prices tend to rise over time in the absence of a bubble or greater economic slowdown. However, the current macroeconomic state of uncertainty begets further speculation into the real estate market. Compass’s slowdown could come as a sign of an impending home price correction.
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On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
