What happened

Shares of Redfin (RDFN -1.44%) slipped 14.5% this week, according to data from S&P Global Market Intelligence. The online real estate marketplace didn't post financial results, but a slew of data coming in about the state of the U.S. housing market has investors bearish on the stock. As of this writing, shares of Redfin are down around 40% over the past year and off 80% from all-time highs set in early 2021.

So what

Redfin makes money by taking a cut of every home sold through its platform, mortgage loan referrals, and its iBuying home-flipping business. So, the more people who are buying and selling homes in the United States, the better.  

With home prices near record highs and the average 30-year mortgage above 6%, home affordability has reached an all-time low in the United States. According to Redfin's own analysis, the monthly mortgage payment on the median asking price for a home in the United States is now $2,555, up from around $1,500 in 2020 and 2021 (and those weren't near all-time lows, either). This has priced out millions of potential homebuyers who cannot afford these monthly payments, drying up housing activity in the United States. In March, the seasonally adjusted annual rate of home sales was 4.44 million, down significantly from over 6 million during the heart of the pandemic and the post-great financial crisis average of around 5 million to 5.5 million.

It doesn't take a genius to see how this will affect Redfin's business. In the fourth quarter of 2022, Redfin's revenue decreased 25% year over year to $479.7 million, while gross profit plummeted to $37.4 million. In all of 2022, the company posted an operating loss of $363 million. Unless housing activity picks up soon, these losses will likely continue throughout 2023.

Now what

Redfin stock is cheap, but it is not out of the woods yet. The company has never proven it can generate a consistent profit even during the 2020 and 2021 housing boom. It faces major competition from legacy players and companies like Zillow, CoStar, and Opendoor. While Redfin has become a well-known brand in real estate, it doesn't mean the stock is going to do well over the long haul.