Should You Buy Redfin While It’s Under $12?

Housing stocks have faced an uphill battle since the Federal Reserve began raising interest rates in 2022. Rising interest rates have hurt borrowing costs and overall housing demand, leading to a challenging environment for real estate investors and homebuyers .

Redfin (RDFN 5.36%) is a company that has faced significant challenges due to the sharp decline in housing activity. The real estate company cut expenses and discontinued unprofitable activities to adapt to the difficult environment. It has also implemented changes to attract more agents to its platform as it anticipates an increase in housing activity.

The good news for the company is that the Federal Reserve is slated to cut interest rates at its next meeting in September and has signaled that interest rates are likely to be lower over the next year or so. With interest rates projected to fall and Redfin trading below $12 per share, is now a good time to get the stock?

A difficult background four housing activity

Redfin is a cyclical business that moves as the real estate market moves, and changes in market conditions can significantly impact it. As a result, its earnings are more uneven, contributing to the stock’s volatility. For example, in 2021, it had an exhausting year when it recorded revenues of $1.92 billion. Last year, its revenue was about half that amount, at $980 million.

According to data from the National Association of Realtors, existing home sales peaked in late 2020 and early 2021 and have fallen significantly since then. The latest preliminary data from July showed existing home sales at 3.9 million, down from 6.3 million at the start of 2022, just before the Federal Reserve began raising rates.

US existing home sales data by YCharts

How Redfin plans to capitalize on the next real estate boom

In recent years, Redfin has overhauled parts of its business. In 2022, the company abandoned its home loan origination system, and last year it spun off its iBuying business, Redfin Now. The company also invested in digital businesses that “immediately began to deliver significant returns,” CEO Glenn Kelman told investors in the company’s second-quarter earnings release.

One area Redfin has focused on is improving their sales force with Redfin Next, which launched in October 2023. With Redfin Next, agents can earn up to 70% with almost all expenses covered while getting support from Redfin to connect and meet with customers. .

As a result, Redfin has restructured its sales force, which is now paid entirely by commissions. This rewards those who produce and creates a win-win for Redfin and agents. The company has more than 200 agents and plans to expand its Redfin Next agent payment plan to 25 markets in August.

Early signs are encouraging. Redfin reported earnings in early August, and revenue came in slightly above expectations. During its earnings call, Kelman told investors that its agent-brokered share of home sales rose from 0.75 percent to 0.77 percent, its first year-over-year share gain in two years.

“Redfin is more efficient, more resilient and ready to scale,” said Kelman. It has done a good job in reducing operating expenses. Over the six months, it spent $278.6 million, down from $306.6 million last year, while revenue rose 14 percent to $180.4 million.

Keep an eye on mortgage rates

Falling mortgage rates could be a potential tailwind for the housing market as it would lower the cost of borrowing. This could encourage current owners who have benefited from lower rates to consider listing their homes.

US News predicts the housing market will “thaw” in 2025, but warns that sales could remain low, which could be a headwind for Redfin and others in the industry. However, US News also notes that “with more than 86 percent of homeowners with mortgage payments below 6 percent, they will need to get closer to or below that level to entice more homeowners to sell.”

Is Redfin right for you?

Redfin is an interesting stock ahead of the Federal Reserve’s rate cut. However, it is important for investors to know that it has failed to turn a profit since its initial public offering (IPO) in 2017. Over the past 12 months, the real estate company has lost $137 million.

RDFN Revenue (TTM) data by YCharts

The company is working to improve profitability and has taken steps to become more efficient during the current housing market slowdown. However, it remains to be seen whether these initiatives will bear fruit, and conservative investors will want to wait until signs of a housing pick-up become more visible.

That said, I think Redfin is positioned to do well over the next couple of years as interest rates fall, which could finally thaw the hot housing market. For aggressive stock piling investors, keep in mind the cyclical nature of stocks and the current lack of returns and increase your investments accordingly.