The Federal Reserve held the federal funds rate at a historic low of 0.25% during the worst of the pandemic to offset its negative economic impact. But with inflation hitting a 40-year high by the end of 2022, the central bank had no choice but to aggressively hike rates. By Aug. 2023, the federal funds rate was at a 23-year high of 5.50%, where it remains today.
It dealt a serious blow to the real estate market. U.S. existing-home sales hit a 28-year low of 4.09 million in 2023, and that was very bad news for Redfin (RDFN 8.49%), which runs one of the country's largest brokerages.
Redfin stock has been sliding lower for the last three years as conditions in the real estate market gradually deteriorated, and it now trades 92% below its all-time high. But with the Fed considering three rate cuts in 2024, here's why now might be a great time for investors to pounce.
Redfin has positioned itself for success in a tough market
Redfin's core business is real estate brokering, where it employs 1,692 lead agents across the U.S., though that number is down from a peak of 2,750 due to cost cuts. Layoffs and cost controls have been a theme for the company over the last couple of years as it tries to offset the effects of the cooling housing market.
Redfin even closed down its RedfinNow iBuying segment, which bought homes with the intention of flipping them for a profit. Falling real estate prices created significant issues for the iBuying business because Redfin risked sitting on a large inventory of property that was declining in value.
The company's goal now is to focus more on brokering and other real estate services. It has the advantage of scale so it can charge listing fees as low as 1%, compared to the industry standard of 2.5%, which is a win-win for all parties.
Last year, Redfin's agents were responsible for 0.76% of all home sales in the U.S. While that number sounds small, there are an estimated 2 million licensed agents across the country, so Redfin's workforce is punching far above its weight.
Processing so much volume also gives Redfin a big opportunity to cross-sell other services. For example, 25% of people who bought a home through Redfin in the fourth quarter of 2023 (and required a mortgage) also used it for financing, an all-time high percentage.
Revenue is in a rut
Unfortunately, the challenges within the real estate market have only worsened over the last two years with the rise in interest rates. As a result, Redfin's services revenue came in at $976.6 million in 2023, an 11% drop from the prior year.
However, it was a 57% drop from the company's total revenue in 2022 of $2.3 billion, which included the now-shuttered iBuying segment.
On a positive note, the company managed to reduce its full-year net loss by 59% to $130.0 million. Its net loss in the fourth quarter was just $22.9 million and should continue to improve as the company further manages its cost structure.
In fact, management expects Redfin to deliver a full-year profit in 2024 on the basis of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
It would be a welcome milestone considering the company has only $191 million in cash, equivalents, and short-term investments on its balance sheet. Therefore, if it doesn't achieve positive EBITDA this year, it could be forced to raise fresh capital through an equity offering or by taking on debt -- both of which can be challenging in the current climate.
Image source: Getty Images.
Why Redfin stock is a buy now
As I mentioned previously, the Fed has indicated its intention to cut interest rates three times in 2024 now that inflation is trending downward. Lower rates are sure to take some of the pressure off the housing market by increasing consumers' buying power.
And U.S. sales of existing homes did tick higher in January to 4.0 million annualized units. While still historically low, Redfin expects 4.0 million to be the floor for home sales during the first half of 2024. Then, if those interest rate cuts begin during the spring, that could set up a strong second half of the year.
Following the 92% plunge in Redfin stock, the company is now worth just $825 million. That's less than the amount of revenue it generated in 2023, and Wall Street's early forecasts suggest its 2024 revenue could return to growth and tick back above $1 billion. Lower interest rates and a stronger housing market would probably drive that estimate even higher throughout the year.
Owning Redfin stock comes with risk (it wouldn't be down 92% if that weren't the case), but investors have an opportunity to buy it now at a rock-bottom price.
It's an enticing proposition considering the worst of the housing slump could be over, mainly because the Fed is now focused on rate cuts rather than hikes. When investors look back on this moment five years from now, they'll likely be glad they took a chance on Redfin at this level.
