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$400 Million Drop in This Company’s Stock Could Signal Trouble for the Housing Market

Shares of Zillow dropped more than 7% to $34.26 on Wednesday, erasing roughly $400 million from its market cap, after the online real estate listing company forecast a larger than expected loss for the rest of year.

Although predicted revenue was in line with analysts’ expectations, the company said it could lose as much as $40 million in 2017, significantly higher than the $600,000 in red ink Wall Street had been looking for.

Zillow (Z), which runs brands such as Trulia and StreetEasy, reported positive figures for unique monthly web traffic to its sites and beat revenue and adjusted earnings estimates, but investors seem to be more focused on potential trouble on the horizon for Zillow, but also the housing market in general.

The housing market had a very strong 2016, but cooled off a bit as the year closed out. There were 5.45 million sales of existing-homes last year, the highest level since 2006, according to data from the National Association of Realtors. But existing-home sales fell 2.8% in December to a seasonally adjusted annual rate of 5.49 million. The regression meant total sales only rose 0.7% from the previous year.

Part of the December decline can be linked to a drop in housing inventory, which fell 10.8% in December to 1.65 million homes on the market, the lowest level since NAR started tracking the supply of all housing types in 1999. That drove the average sales price of a home in the U.S. up year-over-year for the 58th consecutive month to $232,200. The ever-rising prices will likely serve to push many buyers out of the market, and thus hurt Zillow’s bottom line.

If the Federal Reserve manages to raise interest rates this year, as it has indicated it would like to do, then that would certainly be another hit to the housing market. Higher mortgage rates would tack on another layer of cost to housing prices that already appear to be getting too high for many. And with the uncertainty that Donald Trump’s presidency brings, the housing market may be one of the first dominoes to fall if the economy turns south.