What happened

Shares of Redfin (RDFN 3.05%) sank 20.9% in December, according to data from S&P Global Market Intelligence. The online real estate platform put out numerous reports during the month highlighting the slowdown in the real estate market, which is affecting its business. With rising interest rates and falling home prices, both buyers and sellers are hesitant to dip their toes into the market at the moment.

As of this writing, Redfin stock is down 50% in the past six months and 86% over the past year, making it one of the worst-performing stocks over that time frame. 

So what

In December, the Federal Reserve decided to raise its benchmark interest rate again, one of the many times it did so in 2022. Its current effective funds rate is just above 4%, which sets the benchmark for other lending institutions across the country. Mortgage rates for real estate have been massively affected by this, rising from record lows of 3% at the start of 2022 to just above 6% today.

According to Redfin's own research, homebuying transactions have ground to a halt through the second half of 2022. For the four weeks ending Dec. 4, the typical home sold was on the market for 37 days, up from 17 in June and 28 days a year earlier. With mortgage rates doubled from where they were a year ago but with home prices barely falling or still up year over year in many markets, prospective buyers are sitting on the sidelines right now. On average, mortgage payments are up 36% year over year in the United States right now.

So how does that affect Redfin's business? The company makes money when people transact for homes on its platform, meaning that it does well in a hot housing environment and poorly in a cold housing environment. Right now, the housing market is ice cold, which is starting to show up in Redfin's financial statements. Last quarter, which ended in September, Redfin's gross profit sank 54% year over year to $58.1 million. The company also posted a net loss of $90.2 million, significantly worse than the $18.9 million loss it posted in the same quarter a year ago.

Now what

Unless the Federal Reserve reverses course, it looks as if the next few years are going to be tough for Redfin and the residential real estate market. The company is struggling to generate a profit and will probably see a revenue decline in 2023. At a market cap of just $500 million, there might be some value in buying Redfin shares if you plan to hold for the long term, but you need to be confident the company will survive this downcycle first. That makes Redfin stock an incredibly risky bet at the moment and is why investors continued to sell their shares in December.