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Why Real Estate Stocks Plunged Wednesday

What happened 

Many housing-related stocks plummeted on Wednesday, following the release of mortgage application figures that were sharply lower than the prior-year period. 

Shares of Zillow (NASDAQ: Z) (NASDAQ: ZG), Redfin (NASDAQ: RDFN), and Meritage Homes (NYSE: MTH) all fell more than 10%.

So what

As the number of cases of COVID-19 continues to surge in the U.S., government leaders have issued stay-at-home orders and other social distancing guidelines in an attempt to slow the spread of the disease caused by the novel coronavirus. While helping to save lives, these measures are likely to drive the economy into a severe recession.

During difficult economic times, people pull back on making large purchases when possible. And for most people, a house is the largest purchase they'll ever make. In turn, many people are choosing to forgo buying a new home. Housing-related metrics are beginning to bear this out; mortgage applications to purchase a home plunged 24% year over year this past week. 

Two miniature houses in front of a downwardly sloping chart.

New home sales are expected to fall sharply due to COVID-19. Image source: Getty Images.

Now what

Despite more than $2 trillion in stimulus measures designed to mitigate the economic damage brought about by COVID-19, it's looking increasingly likely that we're about to enter a deep and prolonged recession. People are getting sick, losing their jobs, and suffering large losses on their investments. Amid this backdrop, the housing market is likely in store for a brutal spring -- and potentially a very difficult year ahead.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Redfin, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends Meritage Homes. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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