Redfin: Shaky Ground

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There's very small uncertainty astir it: nan lodging marketplace has entered into a heavy chill. After nan excesses of nan pandemic successful which moving activity was successful a frenzy and debased liking rates sparked homebuyer exuberance, nan Fed's monolithic complaint increases connected apical of a recessionary situation that has seen wide layoffs to agency workers person formed a pall complete existent estate.

Brokerages are emotion nan pain, and Redfin (NASDAQ:RDFN) is nary exception. The comparatively newer agency, initially known arsenic being a discount brokerage that offered little commissions and purchaser refunds, has seen a monolithic retrenchment successful its existent property fees earned arsenic good arsenic marketplace share. In spite of these reddish flags, nan banal has gained astir 2x twelvemonth to date, a reflection of nan market's displacement successful sentiment toward maturation stocks and risk-taking.

Data by YCharts

Toward nan tail extremity of past year, I expressed a neutral sentiment connected Redfin and noted nan banal could person upside erstwhile it was trading successful nan mid-$5 range. Since then, 2 things person transpired:

• The banal has dramatically risen, adding astir $400 cardinal successful marketplace cap
• Redfin has released Q4 net that show continued deterioration successful existent property fees and web traffic, which is expected to proceed into Q1.

Given nan dual operation of a much costly banal pinch added risks, I person reset my expectations to bearish on RDFN stock. For nan clip being, it's champion to spell backmost to nan sidelines.

Declining brokerage fees, traffic, and marketplace share

Here's nan halfway rumor pinch Redfin: nan institution was already struggling to support maturation rates from decelerating earlier nan lodging marketplace entered into a downturn; now, nan business has devolved overmuch worse.

In Q4, Redfin saw its brokerage gross diminution by -35% y/y to $146 million. Note that declines are owed to some a simplification successful lead agents (tied to Redfin's caller layoffs) arsenic good arsenic little productivity per agent. Agent count is down -19% y/y to 2,022, while nan mean transactions per supplier has besides fallen -19% y/y to 6.3.

Redfin existent property services conception (Redfin Q4 net deck)

Of course, nan diminution successful request present is chiefly an interest-rate story. With owe rates clocking successful supra 6% for a modular 30-year fixed deal, buyers are capable to spend overmuch little (especially successful a recessionary situation wherever either really layoffs aliases fearfulness of being laid disconnected is preventing galore imaginable homebuyers from making semipermanent commitments).

This isn't conscionable a demand-side story, but a supply-side communicative arsenic well. Potential location sellers who are sitting connected low-cost mortgages are besides wary to waste their homes to waste and acquisition into a caller location astatine a overmuch higher costs of debt. Tightness successful inventory has led to persistently precocious prices that person not substantially surgery yet, adding other unit connected income volumes.

And while this is simply a chiefly macro-driven phenomenon, Redfin appears to beryllium emotion a somewhat worse effect than nan remainder of nan market. The company's marketplace stock fell -2bps y/y, and -4bps sequentially from 80bps successful Q3 to 76bps successful Q4 - indicating that Redfin is doing somewhat worse than its adjacent U.S. brokerages amid nan existent downturn.

Redfin postulation information (Redfin Q4 net deck)

This inclination additionally plays retired successful Redfin's mean monthly visitors, down -2% y/y to 43.8 million.

Redfin doesn't expect this downturn to get immoderate amended successful Q1. Its outlook for nan existent 4th calls for a y/y diminution of -31% y/y to -27% y/y successful its existent property services arm:

Redfin outlook (Redfin Q4 net deck)

Glenn Kelman, Redfin's CEO, doesn't expect nan inventory problem to subside successful 2023. Per his prepared remarks connected nan Q4 net call:

We still judge that our 2023 budgeting presumption of 4.3 cardinal existing U.S. location income is reasonable. Rate volatility and buyers' geriness astir rates conscionable make that marketplace unusually difficult to predict. We're moving Redfin retired of nan rate registry successful 2023. So nan existing location income look apt to travel $4.3 million, we'll trim our spending.

Regardless of what happens to rates successful 2023 and beyond, inventory will apt enactment low. What's astir singular astir this lodging downturn is that nan number of homes for waste hasn't meaningfully accrued from nan calamitous lows of nan pandemic. Sure, nan number of homes connected nan marketplace astatine nan extremity of January 2023 was up 40% since January 2022, but it was still astatine astir half nan pre-pandemic level it was from 2016 to 2019 during a beardown seller's market.

Our agents study that would beryllium sellers pinch 30-year mortgages astatine a complaint beneath 3% are choosing to support their homes alternatively of trading either to unrecorded successful aliases to rent out. This is why from May 2020 to May 2022, location prices accrued 40%, but person fallen only 3% since. The millennial procreation that mostly came of location buying property conscionable aft location prices and owe rates changeable up still faces an affordability situation pinch nary existent alleviation successful sight.

Because of debased inventory, we proceed to judge that income measurement will beryllium much volatile than location prices."

Focus connected profitability whitethorn lead to much marketplace stock losses

In nan aftermath of nan expected downturn successful location income persisting done 2023, Redfin's scheme is to trim costs and attraction connected profitability. It already began a information of layoffs successful November: needless to say, while letting spell of unproductive agents successful a tight lodging marketplace is simply a bully move, little supplier sum will besides mean little transactions and marketplace stock losses.

Redfin profitability scheme (Redfin Q4 net deck)

Another less-publicized move that Redfin is making, however, is eliminating its purchaser refund. Previously, a homebuyer utilizing a Redfin buyer's supplier would beryllium entitled to a rebate (essentially a mini trim of nan buyer's supplier commission), which customers would typically use toward closing costs. Long billed arsenic a discount brokerage, this purchaser committee was 1 of nan main vehicles Redfin utilized to tie successful homebuyers (I myself person made usage of nan Redfin purchaser commission).

In my view, eliminating this rebate successful December 2022 is simply a awesome move from a gross profit standpoint - but it hampers 1 of Redfin's cardinal distinguishers versus accepted "full-service" brokerages.

Redfin is targeting to deed adjusted EBITDA profitability successful 2023, versus a -$192 cardinal nonaccomplishment successful 2022. The cardinal chartless here, however, is nan gait astatine which existent property brokerage transactions diminution - and successful my view, nan little supplier guidelines positive nan deficiency of a purchaser rebate will sap Redfin's marketplace stock moreover further successful an already-decaying existent property market.

Key takeaways

In my view, Redfin has an uphill climb this twelvemonth arsenic nan lodging marketplace continues to suffer from precocious liking rates, debased inventory, and a recession successful which galore would-be homebuyers are fearing layoffs. The stock's accelerated emergence since nan commencement of January, successful my view, intensifies nan consequence of a crisp reversal. Steer clear here.

With mixed acquisition of covering exertion companies connected Wall Street and moving successful Silicon Valley, and serving arsenic an extracurricular advisor to respective seed-round startups, Gary Alexander has vulnerability to galore of nan themes shaping nan manufacture today. He has been a regular contributor connected Seeking Alpha since 2017. He has been quoted successful galore web publications and his articles are syndicated to institution pages successful celebrated trading apps for illustration Robinhood.