Redfin Stock: Bull vs. Bear

Redfin (RDFN -2.57%) he’s been on a roll lately.

Online real estate brokerage has gained popularity on hopes that falling mortgage rates will trigger a rebound in the housing market. The company’s shares have doubled over the past three months as enthusiasm grows over the housing market recovery, but is Redfin worth buying now?

To answer this question, we asked two of our authors to consider the cases of bulls and bears. Let’s hear the case of the bull first.

Mortgage rates are falling, but that’s not all

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

U.S. Existing Home Sales Data by YCharts.

As you can see in the chart above, existing home sales ranged from 5 million to 6 million in the years before the pandemic, but are now below 4 million annually.

As mortgage rates continue to decline and the housing market normalizes, existing home sales should return to pre-pandemic levels. Redfin and its competitors’ activity is expected to increase by about 40%, which will be a significant boost to its business.

In addition to this secular tailwind, the National Association of Realtors’ recent settlement, which breaks with traditional real estate agent commission practices, also appears to favor Redfin. The company has previously recommended that buyers pay agents. Disrupting the deal, which could lead to frustrated agents at traditional brokerages, should present an opportunity for Redfin to gain market share from agents and customers.

Redfin also improved its operations during the slowdown in the housing market. It abandoned money-losing house-flipping company Redfin Now and issued several rounds of layoffs, cutting costs.

Investors will likely have to wait for the industry to recover to see if Redfin can deliver on its promises and deliver growth and profits. However, all indications are that the project will be a success, especially given the upheaval in the industry and broader concerns about the country’s housing shortage.

With a market capitalization of just $1.5 billion, the stock has a lot to gain if it can deliver on this promise.

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

Anders Bylund (Redfin Bear): The real estate market is expected to see a strong rebound over the next few years, driven by a stronger economy and lower interest rates. As such, I understand why some investors are excited about Redfin.

However, there are some problems with this investment theory.

First, the good times ahead have already been priced into Redfin’s stock price. Share prices have more than doubled in the last three months.

Secondly, growth can take time. Judging by Redfin’s latest earnings report, the good times are not yet here. The company set revenue forecasts for the next quarter well below analyst consensus at the time, citing fewer transactions and a tougher real estate market than expected.

After this report, the Federal Reserve lowered interest rates, but everyone saw this move coming. Redfin CEO Glenn Kelman expected this, but stuck to his grim third-quarter goals anyway as the housing market doesn’t perform as expected.

“I can’t remember a time when interest rates have fallen so far, so quickly, and the market reaction has been so muted,” he said during a second-quarter earnings conference call.

Lower mortgage rates do not automatically result in more purchasing activity, as people also have to deal with the effects of runaway inflation in recent years. Moreover, home insurance rates have skyrocketed in key markets like Florida and California, thanks to multiple simultaneous catalysts. Inflation is once again playing a role, in addition to the increasing number of natural disasters and tighter regulatory limits on insurance premium rates.

I’m concerned that Redfin investors are getting too excited about lower mortgage rates too quickly. Existing shareholders should consider locking in recent gains by selling a few shares. This probably isn’t the groundbreaking story you’re looking for.

Anders Bylund has no position in any of the companies mentioned. Jeremy Bowman has positions at Redfin. The Motley Fool takes positions on and recommends Redfin. The Motley Fool recommends the following options: short November 2024 $13 calls on Redfin. The Motley Fool has a disclosure policy.