Real estate companies have been absolutely crushed as interest rates soared and the housing market stumbled. Redfin (RDFN 0.36%) is the No. 1 real estate website by visitors, with more than five times the traffic of its nearest competitor. It uses the traditional model of real estate agents, but in a new and improved version for the digital age.
As you might expect, Redfin was up and coming before inflation took off in early 2021. Its shares have plunged more than 90% since then. With the stock so cheap, is the potential reward worth the risk?
This is not the real estate industry's moment
It isn't Redfin's fault that interest rates were raised and the housing industry dried up, but this is how cyclical businesses work. Homebuyers aren't looking to move out in this climate, which means fewer houses for sale, and fewer options for anyone who would buy. It's a depressing housing market.
Although Redfin has posted sharp revenue declines, it reported only a 2% year-over-year decrease in the 2023 fourth quarter, and its net loss narrowed from $63 million in 2022 to $23 million in 2023. As it manages through an environment in which it can't generate higher sales, it's been focusing on becoming more efficient. Gross profit increased 14% year over year in the fourth quarter, and real estate services' gross margin expanded from 18% in 2022 to 22.5% in 2023.
However, this could be rock bottom. Management has forecast revenue to increase as much as 4% in the 2024 first quarter.
The Federal Reserve has said it would start cutting interest rates this year, but they're still high and probably will remain so. It's not getting easier to buy a house yet.
According to a Redfin report, the median down payment for U.S. homebuyers rose 24.1% from $44,850 last year to $55,640 this year in February. The average down payment was 15% of the purchase price, up from 10% in 2023. Home prices soared 6.6% year over year. These are continuations of trends that have been going on for a while.
Homebuyers are coming out of their caves
There are also signs that things might be at a tipping point. According to a more recent Redfin report, new listings were up 13% year over year in the first week of March, the largest annual increase in almost three years, and the total number of homes for sale increased 3%, the largest increase in nine months.
A Redfin analyst explained that potential homebuyers are coming out of the woodwork now as time has gone on, although prices aren't likely to decrease in the near term. Expanded inventory should generate even more interest and lead to a cycle of more sellers and buyers. Another indication that things might be changing is the uptick in mortgage applications in recent weeks.
Redfin is in a good spot to benefit from a surge in new listings. Its agents make almost three times the average industry rate of transactions. It claims that it saved sellers $127 million in 2023 with its low listing fees, and that Redfin agents close deals on average four days faster than the industry standard, while selling for $11,453 more.
Investors bet on potential
One of the reasons it's important for investors to focus on the long term is that you can't time the market. Its forces could push a price down, even if it seemed like it was going to go up.
Sometimes you miss the window to sell because you thought a price would keep rising, and then it plunges. It could get ugly. If you think about a company's long-term prospects and plan to hold, these kinds of short-term movements won't phase you (or at least they shouldn't).
Redfin stock rose 7% last week after it released its new report demonstrating a surge in listings. This represents investors betting on a housing rebound, even though the company hasn't actually reported any improvement in its business. The stock is still down 37% this year.
The company has a strong business model and fundamentals, and its poor performance says more about the operating climate than internal problems. It has a huge market opportunity and could eventually become a standout stock. But it's a risky play, because until you see the results, you can't be sure they'll be as good as you might imagine.
Even if they are, they might be awhile in coming. The stock could also be volatile as it records various wins and losses in the overall real estate industry. Risk-tolerant investors with a long time horizon might want to take a small position right now.
But those who are risk-averse might want to play it safer with more secure investments in a future housing boom, such as buying Home Depot (HD 0.26%), or following Warren Buffett into one of the commercial housing development companies Berkshire Hathaway (BRK.A -0.03%) (BRK.B -0.10%) bought last year.
