Redfin (RDFN) stock price has gone parabolic since I wrote about it in August. It soared to a high of $14.5 on Friday, its highest level since August 2023 and 200% above its lowest level this year. This surge has brought its market cap to over $1.5 billion while its short interest has risen to over 15%.
Other companies in the real estate industry are doing well. Zillow Group’s stock jumped to $60, its highest level since February while Compass has surged to $6.40, 250% higher than the year-to-date low of $1.8.
Federal Reserve interest rates
The main catalyst for the ongoing Redfin, Compass, and Zillow is the ongoing hope that the Federal Reserve will start cutting interest rates in its upcoming meeting.
Recent economic numbers have shown why this is likely to happen. According to the Bureau of Labor Statistics (BLS), the labor market has remained under intense pressure, with the unemployment rate remaining above 4% this year.
The economy added over 112k jobs in August, and based on recent actions, there is a likelihood that it will revise these numbers downward. It recently revised the number of jobs created in the 12 months to March by over 800k.
At the same time, the US inflation has moved downwards in the past few months. The headline Consumer Price Index (CPI) dropped to 2.5% in August, the lowest level in over two years.
Therefore, there are odds that the Fed will deliver a 0.50% rate cut on Wednesday and point to more cuts later this year. Market participants expect the Fed to deliver 125 basis point cuts later this year.
From Bloomberg: “Traders boosted the likelihood of a large Federal Reserve interest-rate cut to 40% on Friday, adding to a rally in US government bonds.”
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These rate cuts have a chance of boosting the housing market in the coming years by lowering mortgage rates. Recent data shows that rates have been in a downward trend. For people with a credit score of between 700 and 719, the rate for a 30-year mortgage has dropped to 6.99% from the year-to-date high of almost 8%.
These stocks underperformed the market when the Federal Reserve hiked interest rates. Compass stock fell from a high of $22 to a low of $1.86 while Redfin fell from $98 to $3 and Zillow fell from $207 to $26.78. As such, the view is that since the stocks plunged when rates were rising, they will bounce back when they start falling.
Rightmove bid by REA Group
The other likely reason for the rebound was the announcement by REA Group that it was interested in buying UK’s Rightmove in a deal valued at over $7 billion.
Rightmove, as was widely expected, rejected the offer, saying that it grossly undervalued its business, especially because of part of the deal would be funded by REA’s stock. REA Group has until end of this month to make a binding offer or walk away.
Therefore, some analysts believe that REA, which is committed to making a big acquisition, could turn its focus to the United States market, which is often more vibrant than in the United Kingdom. REA owns a minority stake in Move, Inc, the company behind Realtor.com.
Analysts believe that the proptech industry could see more consolidation, especially after a court ruling changed how the industry works. As part of the new rules, realtors must let buyers sign a form before showing them the house, a move that is expected to lower their commissions.
Analysts are upbeat about Redfin, Zillow, and Compass
Meanwhile, analysts have started being optimistic about these proptech companies like Zillow, Redfin, and Compass, citing low interest rates and improving fundamentals. In a note this week, analysts at B. Riley upgraded Redfin to a buy, saying:
“While buy-side agent commissions may get pressured industry-wide, we find Redfin well-positioned for volume gains. We believe EBITDA margin is on track to inflect to positive in 2025 and expand further from there. At 1.8x 2025 EV/revenue, we find the risk/reward attractive.”
Analysts are also generally bullish on Compass, with those at Needham, Goldman Sachs, Barclays, and Oppenheimer having a buy rating.
Redfin, Zillow, and Compass face risks
The stocks have also jumped because of the view that they are relatively undervalued since they crashed hard in the past few years.
Still, these companies face substantial risks ahead. For one, interest rates and mortgage rates are expected to remain at an elevated level for a long time. As such, housing demand may remain weak for a while.
Second, there is the concept known as buying the rumour and selling the news. This is a situation where investors buy an asset before a big event and then sell when the event happens.
Third, the stocks have moved to an overbought level. Zillow’s Relative Strength Index (RSI) has jumped to 72 while Redfin’s has soared to 78. Compass RSI has jumped to 75, meaning that a pullback is likely to happen.
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