Redfin (RDFN, Financial) is a technology-driven residential real estate brokerage company, representing clients in over 80 markets throughout the United States. Similar to Zillow with an impressive mobile app and pulled data in its respective markets, but also working with customers to pair buyers and sellers with salaried agents. This has helped it grow to over $428 million in sales since being founded in 2004.
Earlier this month, Redfin reported earnings of 4 cents per share, beating by 2 cents, and revenue of $142.8 million, beating by $3.77 million. But the company still expects to post a loss for 2018.
The CEO, Glenn Kelman, lowered the company’s third-quarter forecast after warning of “slowing traffic growth in a weakening real-estate market," adding that the housing market slowdown could continue over the coming months.
The stock opened down 20% the following day and has rebounded only slightly since then. The price growth rate has dropped for five consecutive months and has not been this low since September 2016. It’s still up a healthy 5.3% year-over-year.
What’s often overlooked by analysts in earnings announcements is the long-term potential of the businesses. The real estate market is on the precipice of change and while many brokerage firms are still trying to catch up from a technology standpoint, Redfin is at the top of the pack and continues to grow its top line at a steady rate. Pricing in high-end markets and coastal states has waned this year, as tax reform is making homeownership less attractive.
The median home sale price in the U.S. was $307,400 in July (approximately $165 per square foot), an increase of 8% over the last year, with the rent price up to $1,695. Inflation will keep pushing these prices higher regardless of short-term slowdowns. Foreclosures are still very low, at just 1.6 homes per 10,000, while slightly more than 10% of homeowners are underwater on their mortgages.
With that in mind, the real estate market as a whole still has a lot of room left to run because as bubbles form in the stock, commodities, cryptocurrency and fiat currency markets, property assets could receive capital redistribution from those markets.
There has been a lot of press around America’s shift from homeownership to renting as ownership rates dropped to the lowest rate since 1965 last year. But someone owns these homes. Someone is taking the risk to buy and lease the assets. And to be fair, as long as renters continue to pay rent, property owners will likely be better stewards for the capital than individual homeowners because of the income received. Homeownership is a liability, at least for most, and very few people are going to buy, live in and pay off the same home, especially when millennial graduates are likely to have more than four jobs by the time they are 32 years old, which could mean moving across geographies.
This also means that the way agents are paid must change. Back 20 years ago, when people still bought a house with the long term in mind, it made more sense to pay 6% to the agents who helped list and sell your house.
Today, that’s ridiculous, and that’s why Redfin is a great choice. But the problem is that any of the other brokers could also decide at any moment to match the commission structure of Redfin. In fact, Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway HomeServices has become the second-largest U.S. real estate broker after acquiring Long and Foster, Houlihan Lawrence and Gloria Nilson in 2017. Since the real estate brokerage market is so fragmented, however, Berkshire’s brokerage unit will only account for around 3% of the agency business in 2018.
Redfin is nowhere near the size of Berkshire HomeServices, but its model will continue to gain traction. Growth rates may be declining, but price growth itself persists.
With the stock down below $20, it’s a good time to buy in or add to a position. Even though growth is slowing in the hottest markets, houses are still selling in less than 30 days. Across the country the average is about 60 days. That’s way down from the 140 days it took to sell a property back in 2010.
More importantly, the higher home prices rise, the better Redfin’s model will look. If the company’s network of agents can sell an $800,000 home for $8,000 versus $24,000 for a traditional agent, it’s only a matter of time before the market shifts like it has done at discount stock brokerage firms.
The company may be seeing a slowdown in the housing market right now, but the long-term value of its business model cannot be overstated. At some point, it could be the dominant company in the industry, and it may even lead the charge to a better market for real estate buyers and sellers.
Disclosure: I am not long/short any stock mentioned in this article.
