What happened

Shares of Redfin (RDFN -1.75%) gained ground Tuesday as growth stocks largely continued to march higher. Ironically, the key news driving stocks up was that the Case-Shiller Index showed that home price growth decelerated in August faster than in any month since the index began tracking it.

While that might sound like bad news for an online real estate brokerage like Redfin, it actually seemed to encourage investors to bid up its shares, based on the premise that this news makes it more likely that mortgage rates will soon stop rising.

The stock closed the session up 6.6%.

So what

Mortgage rates have skyrocketed this year as the Federal Reserve has aggressively raised the benchmark federal funds rate in its efforts to get inflation in check. The average 30-year fixed rate mortgage is now at a 20-year-high, hovering around 7%, according to data from Freddie Mac. The result has been a rapid cooling off of the housing market as both sales volumes and prices are declining.

On Tuesday morning, the Case-Shiller report said that U.S. home prices rose by 13% year-over-year in August, down from a 15.6% year-over-year rise in July. It also reported that home prices peaked nationally in June.

While falling home prices in isolation could be viewed as a negative for Redfin, they could make it more likely that the Fed will ease off its strategy of aggressive interest rate hikes. The higher mortgage rates climb, the more likely a crash in housing prices becomes, as higher rates make buying a home less affordable.

Now what

Shares of Redfin are down by more than 90% from their early 2021 peak, and the company has already responded to the real estate market slowdown with layoffs. It cut 8% of its workforce in June. 

The next few quarters are likely to be tough for the company as home prices come down and the housing market cools off, but the stock price already reflects a significant degree of pessimism.

With its disruptive, digital-first model, Redfin should continue to gain market share even in a slow housing market. If the real estate broker can take strides toward profitability, the stock market should reward it with higher share prices.