Redfin (NASDAQ: RDFN) has been on a roll recently.
The online real estate brokerage has surged on hopes that falling mortgage rates will trigger a rebound in the housing market. The stock has doubled over the last three months as enthusiasm about a housing recovery has mounted, but is Redfin a buy now?
To answer that question, we asked two of our contributors to weigh in with the bull and bear cases. First, let's hear the bull case.
Image source: Redfin.
Mortgage rates are falling, but there's more
Jeremy Bowman (Redfin Bull): It's not a secret that Redfin stock has been rising on hopes for a housing rebound, but investors might need a reminder of just how dead the housing market has been.
U.S. Existing Home Sales data by YCharts.
As you can see from the chart above, existing home sales ranged between 5 million and 6 million in the years before the pandemic, but they're now below 4 million annually.
As mortgage rates continue to fall and the housing market normalizes, existing home sales should return to pre-pandemic levels. Activity for Redfin and its peers should increase by about 40%, a significant boost to its business.
Beyond that secular tailwind, the recent National Association of Realtors settlement, which breaks up traditional practices around realtor commissions, also seems to favor Redfin. The company has previously advocated for buyers to pay their agents. The disruption from that settlement, which could lead to frustrated agents at traditional brokerages, should present an opportunity for Redfin to gain market share from agents and customers.
Redfin also streamlined its business during the housing slowdown. It ditched the money-losing Redfin Now home-flipping business and issued several rounds of layoffs, cutting costs.
Investors will likely have to wait for a rising tide in the industry to see if Redfin can fulfill its promise and deliver growth and profits. But the pieces are there for it to be successful, especially given the upheaval in the industry and the broader concerns about a national housing shortage.
With a market cap of just $1.5 billion, the stock has a lot of upside if it can start to deliver on that promise.
Don't get too excited about Redfin's soaring stock
Anders Bylund (Redfin Bear): The real estate market should see a robust rebound over the next couple of years, driven by a stronger economy and lower interest rates. On that note, I understand why some investors are excited about Redfin.
But there are some issues with that investing thesis.
First, the good times ahead have already been priced into Redfin's stock. Share prices have more than doubled in the last three months.
Second, the upswing could take a while. Judging by Redfin's latest earnings report, the good times aren't rolling yet. The company set next-quarter revenue guidance well below the analyst consensus at the time, citing fewer transactions and a tougher real estate market than expected.
The Federal Reserve lowered interest rates after that report, but everybody saw that move coming. Redfin CEO Glenn Kelman expected it, but stuck with his gloomy third-quarter targets anyway, because the housing market isn't behaving as expected.
"I can't remember a time when rates came down this far, this fast, and the market has been so muted in its response," he said, on the second-quarter earnings call.
Lower mortgage rates don't automatically inspire higher buying activity, since people also have to deal with the effects of galloping inflation in recent years. Moreover, home insurance rates have skyrocketed in key markets like Florida and California, powered by many simultaneous catalysts. Inflation plays a part again, on top of rising natural disaster incidents and fewer regulatory limits on insurance premium rates.
I'm afraid that Redfin's investors are getting too excited about the lower mortgage rates, too fast. Current shareholders should consider locking in those recent gains by selling a few shares. This is probably not the game-changing turnaround story you're looking for.
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Anders Bylund has no position in any of the stocks mentioned. Jeremy Bowman has positions in Redfin. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends the following options: short November 2024 $13 calls on Redfin. The Motley Fool has a disclosure policy.
