Zillow Inc (Z): Home Sellers Are Losing the Incentive to Negotiate

Page 1 of 2

Given all of the negative statistics that still haunt the housing industry — for instance, 25% of all homeowners are still underwater on their mortgages — you may be surprised to learn who’s gaining the upper hand in the negotiation between home buyers and sellers. If you guessed the latter, then you’d be right.

“If there was any doubt that New York City real estate has become a seller’s market,” The New York Times recently opined, “consider the following: open houses are packed to capacity, bidding wars and all-cash offers have almost become the norm, and some listing prices actually rise, not drop, after a home is listed.”

Zillow Inc (NASDAQ:Z)

Although the real-estate market in New York doesn’t always play by the same rules as the rest of the country, in this instance it is. According to real-estate website Zillow Inc (NASDAQ:Z), homes are now selling for the smallest discount to listing price since the financial crisis. At the beginning of 2009, sellers took an average of 4.6% off the listing price. By April of this year, that discount had fallen to only 2.2%.

The explanation for this somewhat paradoxical trend is tied to housing supply. As my colleague Morgan Housel has discussed on multiple occasions, the quantity of for-sale homes is exceptionally low right now. Among other things, Morgan notes that “housing construction is still well below average, and short of what is needed to keep up with population growth.”

For investors in stocks, the implications are twofold. First, there’s reason to believe that businesses like The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW), both of which look to the housing market for the majority of their sales, continue to have significant upside. Home Depot CEO Frank Blake alluded to this on a recent conference call with analysts and investors:

We’ve been tracking the relative growth rates of our Pro and consumer segments as one indicator of the housing recovery. Since 2008, our Pro segment has underperformed our consumer segment. Last year, the relative growth rates grew closer, and in the fourth quarter of 2012, they grew at approximately the same pace. Our expectation was that the Pro business would accelerate during a housing recovery and so this quarter’s outperformance from the Pro segment is a positive sign.

Page 1 of 2