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COMP Stock: Did Compass just signal a housing market crash?

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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 real estate crash. COMP stock is down another 6% today as the housing sector weighs on Compass’ second quarter financial report.

One of America’s Largest Real Estate Brokers, Compass Reported minimal revenue growth only 4% in Q2. The company posted sales of just $2.02 billion, below Wall Street’s consensus estimate of $2.12 billion. Compass also reported plummeting adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of just $4 million, down from $72 million previously. Finally, it missed earnings per share (EPS) estimates, posting a loss of 24 cents, well below estimates of -14 cents.

Real estate has been in the midst of a downturn in response to rising interest rates. As such, real estate companies like Compass are likely to suffer larger losses due to a slowdown in home purchases and reduced growth in home prices.

Compass CEO Robert Reffkin commented on the turmoil of the past quarter:

“Compass continued to grow revenues 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 ahead, Compass has set its expectation to become free cash flow positive in about a year and a half. Unfortunately, this has been accompanied by reduced revenue prospects for the full year. The company now expects revenue of between just $6.15 billion and $6.45 billion, down from a previous forecast of around $7.8 billion.

What do COMP shares and Compass’ disappointing US housing results say? Let’s dive into it.

COMP Stock drops as housing market crash rumors swirl

The idea of ​​a major drop in house prices has been perpetuated for some time now. Home prices have seemingly risen steadily since the start of the pandemic, largely due to a limited supply of homes available for sale.

Things are changing, however. As the Federal Reserve imposed its fourth interest rate hike of the year last month, mortgage rates also rose iteratively. Currently, 30-year fixed rate mortgages are hovering around 6%, one of the highest levels in recent memory. As mortgage rates climb amid rising inflation, home sales have fallen sharply. In fact, according to the National Association of Realtors (NAR), sales of existing homes fell 5.4% last month.

As housing demand declines, some are waiting home prices to suffer a potentially drastic decline. According to analysts at Fitch Ratings, the risk of a real estate crash remains a very real concern.

“The likelihood of a severe US housing downturn has increased; however, our rating scenario projects a more moderate pullback which includes a mid-single-digit decline in real estate activity in 2023 and further pressure in 2024 […] ratings could face pressure in a more pronounced downturn scenario that would likely include a decline in real estate activity of around 30%, or more, over a multi-year period and a decline of 10% to 15% in house prices.

House prices tend to rise over time in the absence of a bubble or a larger economic downturn. However, the current state of macroeconomic uncertainty is generating new speculation in the real estate market. The slowdown in Compass could be a sign of an impending house price correction.

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As of the date of publication, Shrey Dua does not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.