What happened

Shares of online real estate company Redfin (RDFN -2.81%) dropped 18% in October, according to data provided by S&P Global Market Intelligence. The poor housing market is significantly impacting Redfin stock, which is down more than 90% over the past year.

So what

Redfin is an online brokerage company that aims to disrupt the traditional real estate sales model with more buying options, better service, and cheaper services. It posted high growth in 2021, with revenue increasing 117% to nearly $2 billion.

That pace has moderated dramatically in 2022. In the second quarter, its revenue increased 29% year over year, while its net losses climbed from $28 million to $78 million. Housing prices have increased, and mortgage rates have more than doubled from a year ago. The combination has made home purchases less affordable, and the housing market has slowed as a consequence. According to Redfin, the number of homes sold in the U.S. in September fell 22.5% year over year, while the number of homes for sale increased by 3.7%. October pending home sales fell by 35% compared to last year to their lowest number since 2015. And more homebuyers are relocating to cheaper areas in an effort to stretch the buying power of their money.

While the overall state of the housing market is clearly causing issues for Redfin, the company is still demonstrating many small wins. First of all, it's still posting double-digit percentage sales growth, even in this strained environment. On top of that, it offers a discount model that should be even more attractive to homebuyers in this atmosphere. And because it's a digital and national brokerage, would-be homebuyers may find its platform better for facilitating long-distance relocations than utilizing traditional real estate agents who focus on specific locales. CEO Glenn Kelman noted that Redfin's market share in Q2 reached 0.82% of total U.S. home sales, a 0.05 percentage point increase year over year. Traffic to its platform increased by 9% to an average of 53 million active monthly users.

Redfin benefits more when the housing market is stronger, but it has a competitive advantage when the market is weak. 

Now what

The housing market is just entering its descent, so investors shouldn't expect a huge near-term rebound in sales growth. They should, however, expect Redfin to capture a greater share of the market in these strained conditions. Management offered weak guidance for the third quarter, predicting around 13% sales growth at the midpoint and a net loss expanding from $19 million a year ago to $83 million at the midpoint this time. Redfin will report its third-quarter earnings next week.

Redfin stock looks very cheaply valued, trading at a price-to-sales ratio of only 0.2. However, as its growth slows and losses widen, investors may not find reasons to bid it upward in the near future. Over the long term, it looks like it has solid growth prospects. But for now, investors may be better served to seek out other stocks to buy, and save Redfin for reconsideration when the market improves.