Interest rates are falling: 1 Super Stock to buy Hand Over Fist right now

right Federal Home Loan Mortgage Corp. (Freddie Mac), the US 30-year fixed mortgage rate reached 7.79% in October 2023, which was the highest level since 2000. It crushed the borrowing power of consumers and also made them existing owners to hesitate to sell for fear of abandoning theirs. existing lower rate.

As a result, high interest rates have decimated the housing market. Existing home sales in the U.S. reached an annualized 3.9 million units in July, down 40 percent from a recent peak of 6.6 million in 2021. But the tide appears to be turning as the fixed-rate mortgage on The 30-year fell to 6.2% in anticipation of a series of interest rate cuts by the Federal Reserve.

Real estate technology stock Redfin (RDFN -5.61%) is up 32% so far this year as investors price in an improving housing market amid lower rates. It’s still well down from its all-time high, so here’s why it’s not too late to add it to your portfolio.

Redfin has spent the last two years preparing for this moment

Almost half of Redfin’s revenue came from iBuying in 2021, which involved purchasing homes from willing sellers with the intention of flipping them for a profit. However, the company deemed the business too risky when interest rates rose in 2022 as the Federal Reserve tried to control inflation, so it shut it down that year.

Now, Redfin is focusing on its portfolio of services, which include brokerage, mortgage and closing services. The company has 1,719 principal brokers who helped represent 0.77% of all US homes sold in the second quarter of 2024 (ended June 30). In addition, more than a quarter of Redfin’s customers also used Redfin for mortgages during the second quarter, which helped the company generate additional revenue from each of these transactions.

Redfin focuses on volume, so it charges a listing fee of just 1.5%, which is much lower than the industry standard of around 2.5%. Additionally, repeat customers are rewarded for their loyalty with listing fees of up to 1% — and accounted for 37% of the company’s sales in Q2.

Redfin’s services have a much higher gross margin than iBuying (29% versus about 1%), which helps the company improve its bottom line even in the face of a tumultuous housing market. The company managed to break even on an adjusted EBITDA (earnings before interest, tax, depreciation and amortization) basis in Q2, which was a significant improvement over the $6.9 million loss it generated during the period a year ago.

Redfin expects to be “significantly profitable” in the coming years, which will allow it to invest more aggressively in growth by hiring more agents and expanding its services. The company launched a new program earlier this year called Redfin Next, which allows agents to earn higher commissions in exchange for giving up their fixed salary. This option will be available to all agents from 2025 and could significantly improve the company’s bottom line by reducing fixed costs.

Redfin stock is up 32% in 2024, but still looks cheap

“The time has come for politics to adapt.” Those were Fed Chairman Jerome Powell’s words in August, suggesting that rate cuts are on the way. Actually according CME GroupFedWatch’s tool, experts predict the Fed could cut the federal funds rate (overnight interest rate) by 125 basis points by the end of this year alone. The recent drop in the 30-year fixed mortgage rate further supports a decisive move by the Fed.

That’s likely a key reason for Redfin stock’s 32% rise this year. However, it is still down 85% from its all-time high, which was set during the housing boom of 2021, and remains cheap relative to history.

Redfin generated $1 billion in revenue over the past 12 months, and based on the company’s $1.7 billion market cap, its stock trades at a price-to-sales (P/S) ratio of 1.7:

RDFN PS Ratio data by YCharts

Redfin’s P/S ratio is up from its lows of 0.6 earlier this year, but is still well below its peak of around 10. It also trades below its average P/S ratio of 3, dating back to when the stock first appeared in 2017. So Redfin stock may still have plenty of upside in the tank, but an improving housing market will be critical to maintaining its upward momentum.

As long as mortgage rates continue to fall, Redfin will likely be a great addition to any stock portfolio.