Real estate stocks have faced an uphill battle ever since the Federal Reserve began raising interest rates in 2022. Increased interest rates have affected borrowing costs and the overall demand for real estate, leading to a challenging environment for real estate investors and homebuyers.
Redfin (RDFN -1.44%) is one company that has faced significant challenges due to the sharp decline in housing activity. The real estate company has reduced expenses and discontinued unprofitable ventures to adapt to the tough environment. It has also implemented changes to attract more agents to its platform as it anticipates a pickup in housing activity.
The good news for the company is that the Federal Reserve is slated to cut interest rates in its upcoming September meeting and has signaled that the path of interest rates will likely be lower over the next year or so. With interest rates projected to fall and Redfin trading under $12 per share, is now a good time to scoop up the stock?
A difficult backdrop four housing activity
Redfin is a cyclical business that goes as the housing market goes, 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 a blowout year when it raked in $1.92 billion in revenue. Last year, its revenue was about half that amount, at $980 million.
According to data provided by the National Association of Realtors, existing home sales peaked at the end of 2020 and early 2021 and have fallen significantly since then. Most recent preliminary data from July shows that existing home sales were 3.9 million, down from 6.3 million in early 2022, just before the Federal Reserve began raising rates.
US Existing Home Sales data by YCharts
How Redfin plans to capitalize on the next housing boom
Over the past few years, Redfin has overhauled parts of its business. In 2022, the company abandoned its home-grown loan origination system, and last year, it wound down its iBuying business, Redfin Now. The company also invested in digital businesses that "immediately began contributing significant profits," CEO Glenn Kelman told investors in the company's second-quarter earnings release.
One area that Redfin has focused on is improving its sales force with Redfin Next, which launched in October 2023. With Redfin Next, agents can earn as high as 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 entirely paid on 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 pay plan to 25 markets in August.
Early signs are encouraging. Redfin reported earnings at the beginning of August, and revenue came in slightly ahead of expectations. During its earnings call, Kelman told investors that the share of home sales brokered by its agents increased from 0.75% to 0.77%, its first year-over-year share gain in two years.
"Redfin is more efficient, resilient, and ready to scale," Kelman said. It has done a good job of reducing operating expenses. Through six months, it spent $278.6 million, down from $306.6 million last year, while revenue has increased 14% to $180.4 million.
Keep an eye on mortgage rates
Falling mortgage rates could be a potential tailwind for the housing market since it would lower the cost of borrowing. This could encourage current homeowners who have locked in lower rates to consider listing their homes.
U.S. News projects 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, U.S. News also notes that "with over 86% of homeowners with mortgage paying rates under 6%, they'll have to get closer to or below that level to entice more owners to sell."
Is Redfin right for you?
Redfin is an intriguing stock ahead of the Federal Reserve's interest rate cuts. Still, it's important for investors to know that it has failed to turn a profit since its 2017 initial public offering (IPO). Over the last 12 months, the real estate company has lost $137 million.
RDFN Revenue (TTM) data by YCharts
The company is working on improving profitability and has taken steps to become more efficient during the current housing market slowdown. However, it remains to be seen if those initiatives will pay off, and conservative investors will want to wait until signs of a housing pickup become more visible.
That said, I think Redfin is positioned to do well over the next couple of years as interest rates decline, which could finally unfreeze the tepid housing market. For aggressive investors scooping up shares today, keep in mind the stock's cyclical nature and current lack of profits, and size your investments accordingly.
