Stock Redfin: Bull vs. Bear

Redfin (RDFN -2.57%) was on the roll recently.

Online real estate brokerages have surged on hopes that falling mortgage rates will spark a rebound in the housing market. The stock has doubled in the past three months as excitement about the housing recovery has grown, 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 case of the bull.

Image source: Redfin.

Mortgage rates are down, but up

Jeremy Bowman (Redfin Bull): It’s no secret that Redfin stock has rallied on hopes of a housing rebound, but investors may need a reminder of just how dead the housing market has been.

US existing home sales data by YCharts.

As you can see from the chart above, existing home sales ranged between 5 and 6 million in the pre-pandemic years, but are now under 4 million annually.

As mortgage rates continue to fall and the housing market normalizes, existing home sales should return to pre-pandemic levels. Redfin and its peers’ business should grow by about 40%, a significant boost to its business.

Beyond that secular tailwind, the recent agreement by the National Association of Realtors, which breaks with traditional realtor commission practices, also appears to favor Redfin. The company previously argued that buyers should pay their agents. The disruption from that regulation, which could lead to agent frustration at traditional brokerages, should present an opportunity for Redfin to gain market share from agents and clients.

Redfin also streamlined its business during the housing slowdown. It dropped the money-losing Redfin Now 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 deliver on its promise and deliver growth and profits. But the pieces are there for it to succeed, especially given the industry upheaval and broader concerns about the national housing shortage.

With a market cap of just $1.5 billion, the stock has a lot of upside if it can start living up to its promise.

Don’t get too excited about Redfin’s rising stock

Anders Bylund (red bear): The housing market should see a robust recovery over the next two years, driven by a stronger economy and lower interest rates. In that sense, I understand why some investors are excited about Redfin.

But there are some problems with that investment thesis.

First, the good times ahead have already been factored into Redfin stock. Share prices have more than doubled in the past three months.

Second, growth could take some time. Judging by Redfin’s latest earnings report, the good times aren’t over yet. The company set revenue guidance for the next quarter well below analysts’ consensus at the time, citing fewer deals and a tougher-than-expected housing market.

The Federal Reserve cut interest rates after that report, but everyone saw that move coming. Redfin CEO Glenn Kelman expected, but stuck with gloomy third-quarter targets anyway, as the housing market isn’t behaving as expected.

“I can’t remember a time when rates have come down so far, so quickly, 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 more buying activity, as people also have to deal with the effects of runaway inflation in recent years. Additionally, home insurance rates have skyrocketed in key markets like Florida and California, fueled by many simultaneous catalysts. Inflation again plays a role, along with increasing incidents of natural disasters and fewer regulatory caps on insurance premium rates.

My fear is that Redfin investors are getting too excited about lower mortgage rates, too quickly. Current shareholders should consider locking in these recent gains by selling a few shares. This is probably not the story you’re looking for.