Would Lower Interest Rates Make Redfin Stock a Buy? Here's What You Need to Know.
Central bank policy affects all publicly listed U.S. businesses, more or less. Among the more directly affected companies is Redfin, (NASDAQ: RDFN) which operates a digital residential real estate marketplace.
The Federal Reserve sets the federal funds rate, which in turn affects America's mortgage interests rates. After roughly two years of elevated rates, the tide may finally turn in Redfin's favor if the Fed finally starts to reduce interest rates, thereby incentivizing the borrowing and homebuying activity that allows Redfin to make money.
Redfin Senior Economist Sheharyar Bokhari connected those dots in a recent report, observing first-time homebuyers coming "off the sidelines, buoyed by falling mortgage rates and an increased number of homes hitting the market." It may be too early to breathe a sigh of relief, however, as Redfin and its shareholders shouldn't over-rely on "lower for longer" interest rate policy that hasn't actually started yet.
What the Fed said
The financial markets have anticipated a pivot to interest rate cuts for a while now. The 30-year fixed mortgage interest rate has already cooled off from 8% to about 6.5%. Yet recent remarks from Fed Chairman Jerome Powell confirmed that the end of restrictive monetary policy is at hand -- or at least, that's the market's interpretation of what was said.
On Aug. 23, at this year's economic symposium at Jackson Hole, Wyoming, Powell declared the "time has come for [interest rate] policy to adjust." Redfin stock shot up 19% to $11.08, its highest closing price in at least a year.
Evidently, the market assumes the Fed's interest rate cuts will be swift and deep. However, this is a risky assumption as Powell added that the "timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks." The "incoming data" will include the August jobs report, which could run hot, cold, or anywhere in between.
Powell also stated at Jackson Hole, "The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions." Again, short-term stock traders immediately priced in the assumption that the Fed's responses will be deeper and faster rate cuts. Yet, there's no telling what the data will show or how the central bank will respond. Thus, Redfin stock and other highly interest rate-sensitive assets are vulnerable to a "buy the rumor, sell the news" price pullback.
The perils of connecting the dots
Before Powell's Jackson Hole speech, Redfin reported in early August that the average U.S. mortgage interest rate had declined to 6.34%, the lowest level since April 2023. The company also noted a decline in the median home sale price at that time.
However, Redfin acknowledged that greater affordability doesn't necessarily immediately translate to a ramp-up in buying activity. Home sales, Redfin admitted, had "yet to improve as the affordability crunch eases." Moreover, pending home sales declined 6.7% year over year, the "biggest decline in nine months, and there wasn't an increase in offers written with Redfin agents" at the time despite falling mortgage interest rates. The takeaway, then, is that it's hasty to connect the dots between more affordable homebuying conditions and actual buying activity via Redfin's platform.
Besides, Redfin still has some proving to do. The company's second-quarter 2024 financial report revealed a $27.9 million net loss, slightly wider than the $27.4 million net loss in the year-earlier quarter. Redfin projected a net loss of $22 million to $30 million in the third quarter, the midpoint of which is $26 million. This implies possible improvement, but it's not exactly a cause for celebration.
Redfin released its second-quarter results and current-quarter outlook before Powell's remarks. Still, Redfin's management (and practically everyone else, for that matter) certainly anticipated an imminent shift to more accommodative central bank policy by the time of Redfin's early August quarterly earnings release.
And now, after the share price rally, the risk-to-reward balance for Redfin stock just doesn't look quite as favorable. This, then, is a call for prudence and patience as more data -- from the Bureau of Labor Statistics, sure, but also from Redfin itself -- should precede any eager pushing of the buy button.
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David Moadel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends the following options: short November 2024 $13 calls on Redfin. The Motley Fool has a disclosure policy.
Would Lower Interest Rates Make Redfin Stock a Buy? Here's What You Need to Know. was originally published by The Motley Fool