Redfin is up 50% so far in August — but here are 4 reasons why it might still be a great stock to buy now

Real estate technology company Redfin (RDFN 5.78%) took investors on quite a ride. After losing more than 95% of its peak value after the housing market slowed to an acceleration in 2022, the stock has tripled since the low and is up more than 50% in the past two weeks.

However, with Redfin still trading at a fairly small market cap ($1.3 billion) and some big catalysts that could help the business over the next few years, it could still be a great stock to buy and hold for the long term.

1. Management is focused on profit

As Redfin management rightly pointed out, the real estate market in recent years has been terrible. But the company has done a great job of setting itself up for future success by focusing on efficiency and profitability.

Just to name a few recent statistics, Redfin’s trailing 12-month adjusted EBITDA loss narrowed from $145 million in the first quarter of 2023 to $33 million in the most recent quarter. Gross margin improved 70 basis points over the past year. And while the core real estate business isn’t profitable right now (understandably in a slow market), the rental and mortgage businesses both are.

2. Interest rate tailwind

The decrease in interest rates should be a great catalyst for Redfin’s business, and for a few reasons. In fact, it’s the recent shift in expectations about the pace and timing of the Federal Reserve’s interest rate cuts that has sent stocks soaring in recent weeks.

The main reason (I’ll get to others later) is that falling interest rates could unfreeze the US housing market. Stocks of existing homes remain near a generational low as homeowners who have low mortgage rates are reluctant to sell. If mortgage rates were to drop into the 5% range, that could change.

US existing housing inventory data from YCharts

While Redfin agents certainly handle both sides of home sales transactions, the company positions itself as the most cost-effective way to sell a house. If existing home sales accelerate, it could be a major tailwind for Redfin’s business.

3. NAR settlement

The National Association of Realtors and several leading brokerage firms reached an agreement that recently went into effect. In short, it makes a big change in the way estate agents are paid and the level of price transparency that is required.

This could be a big problem for traditional agencies. Traditionally, sellers covered commissions for both buyer’s and seller’s agents, but now buyer’s agent commissions must be negotiated directly between homebuyers and their agents. And on both sides, the settlement makes buyers and sellers far more tax-conscious than ever.

While this could hurt traditional real estate brokers, it could end up being a net positive for Redfin. As the only major broker looking to disrupt the traditional pricing structure, tax-conscious consumers may flock to the Redfin platform in this environment.

4. Housing application withheld

High mortgage rates aren’t just keeping potential sellers in their homes. They also keep potential home buyers on edge.

I would argue that if mortgage rates fell from the current level of 6.5% to around 5%, it would have a much bigger impact on the market than if prices fell by 10%.

Think like this. If you wanted to buy a $500,000 home at a 6.5% mortgage rate with a 20% down payment, you would pay $2,528 per month in principal and interest. If the rate stays the same, but the price of the home dropped 10% to $450,000, your payment would drop to $2,275. If, on the other hand, the price stays the same but the interest rate drops to 5%, the monthly payment would be $2,147.

In short, if rates fell, they could have a great the impact on home affordability, and buyers could be rushed to the market.

It is not a low risk stock

On the one hand, there are some good reasons why investors may still want to consider Redfin, even after its recent rally. But on the other hand, it’s important to point out that Redfin is still a fairly speculative stock. It’s not yet a profitable business, and it needs a lot to achieve consistent profitability — especially to the extent that it would justify a significantly higher valuation.

I certainly own Redfin stock and believe the company’s brightest days are ahead of it. But it’s by no means a sure thing, and even if things go well, I expect quite a bit of volatility along the way.