What happened
Redfin (RDFN 1.25%) stock tumbled 17.8% in April, according to S&P Global Market Intelligence. The real estate tech stock suffered after negative news about the housing market created uncertainty for Redfin's medium-term operational prospects.
So what
Recent data in the housing market has been somewhat of a mixed bag, but warning signs in April had investors on edge. On April 19, Redfin announced that home prices were down 3.3% from the prior year, which was the largest drop since 2012. The report noted especially steep declines in areas that had seen real estate booms during the pandemic. The following day, the National Association of Realtors announced that new home sales volume had declined 2.4% from February to March, marking a 22% drop from the prior year. Unsold inventory also expanded significantly, though it remains low.
None of this news was particularly shocking given the Fed's interest rate hikes over the past year and the banking sector turmoil that's leading to tighter lending standards. Nonetheless, it was still noteworthy confirmation of pessimism around the real estate sector. February's housing data was better than expected for both existing home sales and new residential construction starts, so the March updates squashed some of the optimism building in that industry.
Image source: Getty Images.
Redfin's financial results are driven by the volume and pricing of home sales, so the stock was hit hard by housing market uncertainty. The stock was down nearly 90% from its all-time high, but its price-to-book ratio was still over 12, and its price-to-free-cash-flow ratio was over 50. Those valuation ratios are still high enough to create volatility when stock market conditions turn sour.
Now what
It's not all bad news for the housing market in either the short or long term. Demand for homes varies significantly among different regions in the U.S., and the market has held up relatively well in some places, even with mortgage rates climbing to the highest level in years. The Case-Shiller Home Price Index ticked slightly higher in March, so real estate prices aren't simply plunging everywhere. Longer term, there are key catalysts for housing and Redfin. The number of households created since 2010 has far outpaced the number of homes built, so that should stimulate demand for years to come.
Redfin published quarterly earnings on May 4. The company exceeded analyst estimates for revenue and earnings despite sales dropping 45% year over year. The slowdown was attributed to lower home sales volume, and the company asserted that it had gained market share from its primary competitors. Despite posting a net loss, Redfin generated significant free cash flow thanks to the sales of inventory as it winds down RedfinNow operations.
Redfin has established itself as a key technology vendor in today's real estate industry, and it has plenty of room to grow by penetrating that market more deeply. Conditions will remain tough for the next few quarters, but the stock's enormous losses from its all-time high reflect these exact issues. If the company executes its growth strategy over time, then it should benefit from the long-term demand catalysts.
