Redfin stock price is facing multiple headwinds: what next?

Redfin Corporation (NASDAQ: RDFN) stock has gone through a rough patch in the past few years as concerns about the real estate industry have continued. It has dropped from a high of $98.22 in 2021 to $7.26. 

Redfin is not the only proptech company in trouble. Zillow stock has tumbled by over 74% from its highest point in 2021 while Compass has retreated by almost 80% in the same period. Other companies like Opendoor Technologies, Offerpad, RE/MAX, eXp and Anywhere Real Estate have dropped.

Changes in real estate commission

One of the top reasons why the Redfin and other stocks have tumbled in the past few years is that the real estate industry is changing.

Because of a recent court ruling and settlement in the US, real estate agents will need to change how their businesses operate. The most important change is that agents will be blocked from offering compensation on multiple listing services.

As a result, the changes mean that buyers and sellers will find it difficult to negotiate fees as they have done for many years. The average commission has historically been between 5% and 6% of the house price. 

These changes are expected to have a major impact in the housing sector. Ideally, buyers should now be able to buy houses for a cheaper price. However, analysts believe that house prices will continue being more expensive in the long term.

Redfin’s growth has slowed

The challenges in the housing sector have led to a sharp decline in Redfin’s revenue growth in the past few years. 

For example, its annual revenue rose from over $779 million in 2019 to over $1.099 billion in 2022. It then dropped to over $976 million last year.

The most likely reason for this is that the Federal Reserve maintained low interest rates during the Covid pandemic. As a result of low mortgage rates and low inventories, demand for houses continued rising, leading to its higher revenues.

Recently, however, interest rates have remained at an elevated level, leading to higher mortgage rates and weak demand. 

The most recent financial results showed that Redfin’s revenue came in at $295 million in the last quarter. The 7% revenue increase was better than what most analysts were expecting. Its net loss came in at $27.9 million, an increase from the previous $27.4 million. Also, website and app visitors remained intact at 52 million.

In a statement, the company noted that its financial results were strong in a declining market as it continued to restructure its brokerage sales business to reflect the changes in the industry. 

The management expects its revenue growth to continue stalling in the third quarter. Its revenue is expected to grow by between 1% and 6%, which will bring its revenue to between $273 million and $285 million. Analysts expect its revenue to come in at $280 million and its annual revenue will be $1.04 billion.

Interest rates and house demand

A potential catalyst for the Redfin stock price will be the upcoming interest rates by the Federal Reserve. Most analysts believe that the bank will start cutting rates in its September meeting since the economy is slowing. 

The most recent economic numbers showed that the US unemployment rate rose to 4.3% in July as the economy created just 114k jobs during the month.

If this happens, there are chances that mortgage rates will continue falling. The most recent data shows that mortgage rates have dropped in the past few months while refinancing applications have jumped. The average mortgage rate for a 30-year fixed loan moved to 6.49%.

Lower mortgage rates could lead to more housing demand in the coming months. However, the risk is that this will not translate to lower house prices because of low inventory in the country. 

Therefore, there is a likelihood that Redfin and other similar companies like Zillow, Offerpad, and Compass will continue going through major challenges in the coming years. 

On the positive side, there are chances that the industry will start to consolidate as companies bet on scale. In this case, Redfin could become a good buyout target because of its low valuation. Its market cap has dropped to about $900 million, down from almost $10 billion a few years ago.

Redfin stock price analysis

The weekly chart shows that the RDFN share price has moved sideways in the past few months. As a result, the Average True Range (ATR), which is often seen as the best volatility indicator, has continued falling.

Redfin’s stock has found a strong support, which is shown by the blue line that connects its lowest points since early 2023. It also remains below the 50-week and 100-week moving averages.

On the positive side, the accumulation/distribution indicator has risen, meaning that some investors may be buying it. Therefore, while the outlook looks dark, there is a likelihood that it will stage a comeback that could push it to $8.5. The risk is that if it moves below the trendline, the stock could fall to $5.