Real estate tech stocks have been battered over the last year as surging mortgage rates and elevated home prices have led many prospective homebuyers to wait on the sidelines.
As a result, real estate brokerages like Redfin (RDFN 8.49%) and Compass (COMP 2.48%), as well as home-flipping specialists like Opendoor Technologies (OPEN 3.38%), and other companies that rely on real estate transactions for their business have all plunged in recent years.
However, those stocks got some good news today as the sector rallied in response to remarks yesterday from Federal Reserve Chair Jerome Powell that are being interpreted as raising the likelihood that the central bank is done raising interest rates this cycle. At its meeting, which ended yesterday, the Fed maintained the benchmark Fed funds rate at 5.25% to 5.5%, and Powell also downplayed the Federal Open Market Committee's "dot plot" forecast from its September meeting, which called for one more 25-basis-point rate hike this year and for rates to remain elevated through the next year or two.
Stocks soared broadly on hopes that interest rates had peaked, and real estate stocks were among the big winners today. Opendoor finished the day up 16.4%; Redfin gained 6.7% after trading up as much as 11%, and Compass was 3.2% higher with a peak of 9.5%.
Image source: Getty Images.
Mortgage rates rule the industry
All three of these stocks have plunged since their pandemic-era peaks, down more than 90%, when the real estate market was booming, and they've seen revenue fall and losses mount as the housing market has slowed. The chart below helps illustrate the challenges facing these companies.
30 Year Mortgage Rate data by YCharts
As the chart helps illustrate, there's an inverse relationship between mortgage rates and existing home sales, and transactions have plunged as rates have jumped. For brokerages including the companies above, existing home sales represent essential inventory, and they can't make money without those transactions. They also built their businesses for a much higher rate of home sales, and as a result, they've had to issue layoffs and have posted losses as they adjust to a new reality. As you can see above, existing home sales have fallen by roughly half over the last three years.
Recent results from all three of these companies show the impact that the decline in transactions has had. Opendoor has sharply cut back its own home-buying activity in response to falling prices and ongoing volatility. Homes sold at Opendoor, for example, have fallen by nearly 50% over the last year to 5,383 in the second quarter, and revenue is down by more than half at $2 billion. The company also reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $168 million compared to a profit of $218 million.
Compass, the nation's largest real estate brokerage by transaction value, saw its gross transaction value fall 26% to $56.8 billion in the second quarter, and revenue was also down 26% to $1.5 billion. However, layoffs and other cost cuts have helped drive profitability as adjusted EBITDA rose from $4 million to $30 million.
Finally, Redfin has issued several rounds of layoffs over the last year or so and shuttered its own home-flipping business, Redfin Now. In its just-released third-quarter earnings report, Redfin reported a revenue decline of 12%, though gross profit jumped 8%. It also posted an adjusted EBITDA of $7.7 million compared to a loss of $12.5 million in the quarter a year ago, offering some evidence that the business may be turning the corner.
Is it time to buy real estate stocks?
Beaten-down cyclical stocks like these three can offer opportunity, especially considering how far they've fallen from their previous heights. However, the housing market is still on unsteady ground. The Fed has promised to keep rates elevated, and Powell dismissed any talk of cutting rates.
In other words, it could be at least a few quarters before mortgage rates pull back and the housing market wakes up again, which these stocks need to start gaining traction.
