Homestore.com Has a Deep Hole to Claw Out Of

These are extraordinary times, to put it euphemistically, so it's understandable that some companies would fall short of their goals in an extraordinary way.

Look at Homestore.com(HOMS Quote), the operator of the nation's biggest real estate Web site. In early September, about a week before terrorist attacks hit the U.S., the company reiterated guidance for the quarter ending Sept. 30, then more than two-thirds complete. Last week, the company said revenue would be down 14% for the quarter. Per-share earnings, excluding certain items, would evaporate from the expected 16 cents to a loss ranging from 1 cent to 6 cents, Homestore said.

The problem isn't that Homestore.com suffered a setback, like so many other businesses; rather, it's the magnitude of the setback and the time it will take the company to recover.

Ever since the Nasdaq started sliding down its slippery slope 18 months ago, real estate watchers have been waiting to see how and when the faltering economy would affect the housing market. Because, after all, it always does.

As the Internet's barometer for the housing market, Homestore.com has managed to hold up pretty well. The first shoe for the company finally dropped with last week's preannouncement, though. And it looks as if there's not going to be just one more shoe dropping: Homestore looks more like it's going to be a centipede.

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When the housing market slows, it really slows. Look at the last big slowdown, in the late 1980s, early 1990s. According to the National Association of Realtors, the number of real estate agents dropped about 15% over a period of about eight years. Remember, each time the profession loses a realtor, Homestore.com loses a potential subscriber.

About 70% of the company's revenue comes from professional subscribers who pay an average of about $850 a year for Homestore.com's services. So that's worrisome. The remainder comes from advertising, and that's worrisome, too. Classified advertising for real estate at newspapers, for example, fell in the first two years of the early-1990s downturn; industrywide newspaper statistics aren't available to indicate how many years it took before that market turned.

Add to this Homestore.com's challenges renewing its current subscriber base, a situation documented in August by Salomon Smith Barney analyst Lanny Baker. According to Baker, about 49% of Homestore.com professional subscribers this summer were realtors, affiliated with Homestore.com shareholder Cendant (CD Quote), who had bought their one-year memberships in bulk at a discount rate. Surveying 176 of those Cendant realtors, however, Baker found that half of them didn't even know they had the subscription to which they were entitled. Of those who did know, Baker found that half said they probably wouldn't renew.

Imagine half of HBO's subscribers not knowing they could watch the pay channel, and only half of the remaining subscribers saying they planned to renew. With challenges like that, Homestore.com faces a long time before it can get moving again.