Redfin plunges 26% in one day and foreshadows 4 trends shaping the 2022 and beyond real estate market.

Redfin, the darling of the real estate market the last several years  has plunged 45% over the last year.  At the same time numerous analysists are downgrading the stock based on their prospects.  What does this sudden change of fate mean for real estate in 2022?  Redfin predicts four major changes coming down the pipe.

What was in the data about Redfin?

Shares of Redfin were falling sharply Friday after the online real estate brokerage said it expected a first-quarter loss wider than analysts’ estimates.Redfin (ticker: RDFN) declined 26.2% to $21.13 on Friday. It has declined about 45% year to date.

Analysts at RBC Capital Markets downgraded their rating on Redfin shares to Sector Perform from Outperform, and lowered their price target on the stock to $23 from $60.

“We throw in the towel on RDFN as the primary points of our thesis appear broken and unlikely to show enough improvement in the coming year to warrant an Outperform rating,” RBC analysts wrote in a research note. They added that share gains at Redfin “are simply not materializing at a fast enough rate,” and said “home inventory challenges” and “lack of secular story should make for slower growth.”

Why are Redfin’s shares down 45% for the year?

Redfin, once the darling of ibuying and the new generation of real estate is down sharply as the stock market is not buying into their growth prospects and sees considerable risk ahead.  Here are three primary reasons for Redfin’s change in fortune.

1. Inventory: with inventory tight, it doesn’t take a rocket scientist to see that there will be less sales. Companies like Redfin rely on volume to make money either from commissions on closed sales to houses they own.  Without volume the cards come crashing down on Redfin.
2. I buying: Zillow was the first to bail on the ibuying spree, Redfin has stuck with it noting how they are different than Zillow.  Unfortunately, with appreciation slowing and costs increasing for rehab,  the ibuying market becomes increasingly treacherous.
3. Predicted slowdown in real estate prices: Prices cannot go up forever.  If the stock market felt prices would increase into perpetuity then Redfins shares would soar, unfortunately just the opposite is occurring which is a red flag for the future.

Is Redfin an indicator for the broader real estate market? 4 trends to watch

Real estate has been on a tear the last several years with some markets almost doubling in price.  The average appreciation last year nationwide was almost 20%, this is well above the long term average of 5-8%.  At some point the market has to slow down, it is just basic physics.  Here are four trends that the Redfin stock plunge is foreshadowing:

1. Rising rates: As rates rise, transaction volume will slow, we saw this in Redfins earnings, substantially higher rates will be the leading cause for the slowdown to come.
2. Lower inventory: with lower inventory for sale, it is no surprise that the closings are predicted to decline substantially as well. The inventory problem should correct in the next year or so in most markets, but hot markets will be dealing with low inventory for a while which will ultimately lead to lower transaction volumes.
3. Prices already extremely high: Prices are extremely high compared to any historical metric whether that is price to income or historical appreciation, what we are experiencing now in real estate I unprecedented. History will ultimately fall back into long term patters, we have seen this with every asset class from stocks, to gold, to even cars.  Assets will ultimately revert back to old ways over a longer period of time which means real estate will best case stay constant, likely have a small correction.
4. Stimulus winding down: Economists have overestimated the amount of stimulus that was provided to the economy.  With this extraordinary stimulus winding down, prospective buyers will have less money for down payments and servicing a home loan which will further slow the market down.

Summary

Redfin was a “pureplay” real estate stock with earnings coming from not just transaction volume, but ibuying, mortgages, etc… As a result whatever happens to Redfin is an indicator for the broader real estate market.  If the market felt that real estate would continue to perform in 2022, Redfin’s stock would hold constant or possibly increase, but just the opposite has happened.  Redfin plunged 26% in a day and 45% over the course of the year is a warning sign for thing to come.  The sheer magnitude and speed of the drop illustrates that big changes are underfoot including rising rates, lower prices, and a rocky road for real estate in the near future.

Additional Reading/Resources

Redfin Stock Sinks. This Analyst Is ‘Throwing in the Towel.’ – MarketWatch

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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