Real estate technology company Redfin (RDFN 8.49%) was a massive winner in 2023, but is still well below its 2021 highs, reached when the real estate market was booming. While I don't necessarily think Redfin will reach those levels again in the near future -- doing so would require roughly 10x returns -- it could still be a massive winner over time.
Specifically, recent developments are making consumers aware of the massive commissions being paid to agents when buying and selling homes, and this could be a big catalyst for Redfin, especially as the real estate market starts to normalize.
The war on fees could gain momentum
To be sure, Redfin has been trying to sell homeowners on its lower commission structure for years. The typical seller's agent fee has been 3% for decades, and Redfin charges half of that. And the progress has been impressive: Since its launch in 2006, Redfin customers have saved about $1.5 billion in commissions, and more than 80,000 transactions were completed through Redfin agents in 2022, the latest year for which complete data is available.
However, a big part of the problem so far is that many consumers simply accept the standard commission rate or (in the case of buyers) are blissfully unaware of real estate commissions.
Here's why. As mentioned before, the standard real estate commission has been 3% for decades, with the buyer's agent and seller's agent each receiving the same, for a total of 6% of the selling price. However, it has also been standard practice for the seller to pay both agents, so buyers generally don't know and/or care what the transaction costs.
A recent legal decision could be a game changer
A recent lawsuit accused the National Association of Realtors and a couple of the largest real estate brokerage firms in the U.S. of keeping real estate commissions artificially high by forcing the seller's agent to pay the buyer's commission as a condition of access to the multiple listing service (MLS). The argument is that if a buyer had to hire and pay their own agent, they'd be more likely to negotiate the fee, and in many cases, choose not to use a buyer's agent at all.
A judge agreed, assessing $1.8 billion in damages. And while there will almost certainly be a long appeals process, this sends a clear message that the antiquated commission structure's days are numbered.
To be sure, a fee-conscious real estate market is a good thing for Redfin, much in the same way that a fee-conscious brokerage market led so many investors to Robinhood Markets when it pioneered zero-commission stock trading. Redfin's platform aims to make the listing and showing process easier for sellers and their agents, and also makes it easier for buyers to shop for and view homes, as well as get mortgage and title services, without using an agent.
In a nutshell, it's difficult to overstate what a positive catalyst I think this could be for Redfin, as the only tech-focused brokerage that has been actively looking to disrupt the traditional fee structure.
Two other big reasons to take a closer look
In addition to the long-tailed catalyst of fee disruption, there are a few other things to keep in mind.
First, after some questionable business moves in the pandemic-fueled growth era, Redfin has been laser-focused on efficiency and maximizing its core real estate platform. The results so far have been impressive, with positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the most recent quarter and a net loss that is less than one-fourth of what it produced in the same quarter of 2022. If profitability keeps improving, it could be a big win for investors.
Second, the real estate market has been slow for the past couple of years. Most experts expect mortgage rates to fall in 2024, and that could result in a surge in homebuying activity. Plus, keep in mind that Redfin has a large mortgage business that could benefit as more recent homebuyers refinance their loans.
To be fair, although there has been a bit of an uptick in mortgage applications as rates have fallen from 8% to the high-6% range, it has been rather muted so far. But keep in mind that rates are expected to fall even more in 2024 and that the winter is a historically slow time for the real estate market. As we head into the peak selling season in a few months, don't be surprised to see a surge of pent-up demand, especially if rates get significantly lower.
