• Zillow (Z, ZG): Pivoting toward tech-driven home-flipping business hasn’t worked out.
• Redfin (RDFN): Buyer exhaustion may be setting in, hurting prospects for RDFN.
• Essex Property Trust (ESS): A fixture in overpriced California neighborhoods, ESS may be unsustainable.
• Camden Property Trust (CPT): With Camden operating in some of the most overpriced housing markets, CPT is risky.
• PulteGroup (PHM): The home construction firm has printed some shaky chart patterns recently.
• Toll Brothers (TOL): Supply chain woes and inflation can take a toll on Toll.
• Jones Lang LaSalle (JLL): Even commercial real estate stocks look shaky amid soaring prices.

If you’ve heard about rising demand and shrinking supply in the housing markets, it might seem strange to write about real estate stocks to avoid.

However, average hourly earnings for all private-sector employees increased more than 9% between 2019 and 2021 while the average sales price of houses sold jumped nearly 25% between the first quarter of 2020 and Q4 2021. This mismatch creates serious challenges for real estate stocks.

Coincidentally, the money supply inflated and housing prices adjusted accordingly, which tells you something about real estate stocks to avoid.

This is not a sector in which you should exclusively take guidance from experts with a vested interest in seeing prices rise. At a certain point, these bonkers numbers just don’t make any sense. Therefore, here are some real estate stocks to avoid.

Zillow (Z,ZG)

Putting Zillow on this list of real estate stocks to avoid shouldn’t ruffle too many feathers. Sensing the opportunity to extract maximum profit from the unprecedented surge in housing prices, Zillow pivoted to the iBuyer business model, leveraging technology to flip homes quickly.

Well, the only thing that has been quick about Zillow is how rapidly its stock price has fallen. Over the trailing six months since the close of the March 24 session, Z stock plunged 39%. Against the trailing year, it’s down almost 56%. At its zenith, Zillow was a security that briefly inched past the $200 level. At time of writing, it’s trading around $55.

While we shouldn’t read too much into prior price trends, in my opinion, if the housing market justified the underlying price increases, then real estate stocks shouldn’t tank this badly. Instead, the severe loss implies that would-be buyers are simply getting exhausted.

Redfin (RDFN)

In normal circumstances, I would probably root for Redfin. However, these aren’t normal circumstances — far from it.

As with Zillow shares, Redfin is off to a disappointing start. The difference is that RDFN’s crimson stains are shockingly bad.

On a year-to-date basis, RDFN has hemorrhaged half its market value. Over the trailing six months, it’s down 65%, while over the trailing year, it has flopped 70%. Again, if housing fundamentals justified soaring prices, RDFN or similar investments shouldn’t be suffering such capitulation.

In my opinion, I think investors are better off leaving Redfin as one of the real estate stocks to avoid. The expansion of M2 money stock and average home prices in the U.S. being almost identical suggests housing is more about inflation than proper fundamentals.

Essex Property Trust (ESS)

Specializing in apartment complexes on the west coast, Essex Property Trust would normally qualify as one of the securities to put on your buy list.

Indeed, I’ve done so myself in prior publications, but the equities sector doesn’t go up indefinitely in a straight line. Unfortunately, we may have hit a cycle where ESS is due for a correction.

Essex has properties in some of the most overpriced neighborhoods in California, including San Francisco, Los Angeles and Orange County. As well, the company features apartments in Seattle. While the robust job markets in these regions typically justify rental prices, circumstances have gotten out of hand.

Average earnings in the private sector have only increased a bit over 9% from 2019 to 2021. However, in some parts of California, rents have increased more than 20% on a year-over-year basis from November 2021.

It’s a simple equation, really. When costs start to outpace earnings, the underlying market becomes unsustainable. Therefore, ESS is probably one of the real estate stocks to avoid for now.

Camden Property Trust (CPT)

While Camden Property Truet also has a presence on the west coast, it’s more focused on areas that millennials are moving to from high-priced neighborhoods.

We’re talking about cities like Phoenix, where Camden has 12 apartment properties and Austin where it has 10 communities.

With so many folks moving to these places — especially from the coronavirus-fueled boom — CPT should be a buy, right?

Well, analysts have labeled Phoenix as one of the most overpriced housing markets in the U.S. And based on a study in 2021, Austin ranks as the second-most overvalued housing market. That’s going to put upward pressure on rentals but such costs are likely not sustainable.

Again, the job market has to justify such explosiveness and the data implies otherwise.

PulteGroup (PHM)

One of the largest home construction firms in the U.S., PulteGroup should be killing it as it has since the doldrums of 2020. With so much demand and so little inventory of residential units, PulteGroup (NYSE:PHM) is supposedly in an enviable position.

But recently, the narrative has pivoted — and not in an encouraging manner. On a YTD basis, PHM is down 20.5%, confirming that even on the construction side, there are plenty of real estate stocks to avoid.

I’ve mentioned this before and I’ll mention it here: if the fundamentals of the housing market were sound, PHM shouldn’t be reacting so negatively.

My concern is that PHM and other real estate stocks accelerated largely due to inflationary pressures; that is, the expansion of the money supply. Put another way, no expansion, no ridiculous price increases.

Interestingly, PHM is at levels just before Covid-19 ruined everything. Combined with recent worrying price action, it’s possible that shares could correct before moving higher again.

Toll Brothers (TOL)

Unfortunately, the global supply chain disruption has taken its toll on Toll Brothers (NYSE:TOL) and other home construction firms.

If sourcing necessary commodities wasn’t an issue, it’s possible that TOL would be in a better place today. However, on a YTD basis, shares have plummeted almost 30%, making it a rather risky idea.

Even without the supply chain dilemma, it’s difficult to imagine that Toll can continue chugging along and impressing stakeholders.

For instance, in fiscal Q3 2021, the company generated revenue of $3 billion, up 19.5% YOY. In fiscal Q4, Toll posted sales of $1.8 billion, up 14.6% YOY. Momentum is bleeding off fundamentally, suggesting that buyers are getting priced out of the market.

Jones Lang LaSalle (JLL)

When it comes to real estate stocks to avoid, we’re not just talking about the residential sector. Indeed, you might want to be super-careful with Jones Lang LaSalle (NYSE:JLL), which specializes in commercial real estate. Here, the concern is largely about the real picture of the economy.

While so many analysts focus on headline numbers like the unemployment rate, when you consider arguably more substantive data like the labor force participation rate, you start to get a less-optimistic picture of our society.

I’d probably say this is the more realistic picture given that at some point, Americans on balance are not going to be able to sustain $7 gasoline and $3,500 apartment rentals.

Eventually, the pressures that force consumers to tighten their belts will affect the broader business community. In turn, businesses themselves will tighten up, meaning layoffs could be over the horizon.

If inflation isn’t under control when this potential pink slipping occurs, we might be looking at serious problems. Therefore, take a cautious approach with JLL and other real estate stocks.

On the date of publication, Josh Enomoto did not have (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.