Why Redfin stock fell 20.9% in December

what happened

shares of redfin (RDFN 4.39%) It fell 20.9% in December, according to data from S&P Global Market Intelligence. Online real estate platforms published a number of reports that month, highlighting the slowdown in the real estate market that is affecting businesses. Rising interest rates and falling home prices are making both buyers and sellers hesitant to enter the market at this time.

As of this writing, Redfin’s stock has fallen 50% over the past six months and 86% over the past year, making it one of the worst performers of the period.

So what

In December, the Federal Reserve Board (Fed) decided to raise its benchmark interest rate for many times in 2022. The current effective funding ratio is just over 4%, which is the benchmark for other lending institutions nationwide. Real estate mortgage rates have been hit hard by this, rising from a record low of 3% in early 2022 to a hefty 6% today.

According to Redfin’s own research, home buying transactions are on hold until late 2022. one year ago. Even though mortgage rates have doubled from what he did a year ago, home prices in many markets have barely fallen or are still rising year-over-year, prompting prospective buyers. I am currently on the sidelines. In the United States, mortgage payments are now on average 36% higher year-over-year.

So what impact will that have on Redfin’s business? The company makes money from people transacting homes on its platform. This means that it works well in hot residential environments and does not work well in cold residential environments. The housing market is ice cold right now and it’s starting to show up in Redfin’s financial statements. Redfin’s gross profit for the last quarter ended September was down 54% year-over-year to his $58.1 million. The company also posted a net loss of $90.2 million. That’s significantly worse than his $18.9 million loss in the same period last year.

So

Unless the Federal Reserve changes course, the next few years will be tough for Redfin and the residential real estate market. The company has struggled to generate profits and will likely see lower earnings in 2023. With a market capitalization of just $500 million, Redfin stock may be worth buying if you plan to hold it for the long term, but be confident that the company will survive this downcycle first. That’s why Redfin stock is an incredibly risky bet at the moment, and why investors continued to sell the stock in his December.