• Tue. Jun 21st, 2022

Home prices skyrocket: 1 growth stock that could win big


Earlier this week, the Case-Shiller Home Price Index data in 20 cities for October was released, and it showed a significant jump of 18.4% from the same month last year. This follows a strong result of 19.1% in September, and it shows how robust housing in the United States has always been in 2021.

The 20-city index measures residential property prices in 20 major metropolitan areas, including New York, Los Angeles, Detroit and Chicago, with the aim of providing a broad snapshot of prices across the country. October’s result is well above the index’s 10-year average of 7.16%.

Stock market investors may be wondering how to expose themselves to this rapid growth in house prices and an innovative real estate company Red tuna (NASDAQ: RDFN) maybe the answer.

Image source: Getty Images.

Brokerage, but on a large scale

Selling a home is a complex process that involves input from a range of professionals, including appraisers, bankers and lawyers. Trying to sell your home and navigating the selling process without the help of a qualified real estate agent can cause a world of pain.

That’s why so many people willingly pay a real estate agent a listing fee of 2.5% of their home’s selling price (on average). Not only does this reduce the risk to the seller, the agents also invest in marketing the home to potential buyers, which can result in a faster sale for a much higher price. Most agents operate either independently or in small teams confined to a geographic area, thus accumulating comprehensive experience in this market.

Redfin is a large publicly traded company trying to disrupt smaller real estate companies. It has reached an unprecedented level of scale by recruiting thousands of agents across the United States, which allows it to charge a listing fee of just 1%, which is significantly lower than the average broker.

Consumers are flocking to sign up for Redfin, and why shouldn’t they? The company claims to have saved sellers over $ 1 billion in listing fees since its inception thanks to its business model. It’s a win-win for all parties involved, and Redfin is now responsible for 1.16% of all home sales in America, according to Redfin management.

Dazzling income growth

Since Redfin’s listing fee is based on the selling price of a home, the business naturally makes more money as home prices rise. If Redfin earns 1% on a sale of $ 500,000, that represents a fee of $ 5,000. But if that house hit $ 600,000 and was sold again by Redfin, then its 1% fee would result in $ 6,000 in income.

When this is combined with an increase in market share, it’s not hard to see why Redfin is winning big right now – and may continue to be.

Metric

2018

2021 (Estimate)

TCCA

Income

$ 486 million

$ 1.88 billion

56%

Share of US home sales

0.81%

1.16% (current)

N / A

Data source: Redfin. CAGR = Compound annual growth rate.

Part of its success comes from the diversification of its activity. The company’s RedfinNow segment buys homes directly from sellers and tries to make them profitable, and in the recent third quarter that was 44% of total revenue. Redfin has yet to reach scale in this industry, so it’s not making any gross profit flipping homes, but it has achieved a break-even result this year, so it’s definitely getting closer.

Buying direct can be risky, however. It works well when house prices are skyrocketing, but if prices fall, Redfin could be stuck holding an inventory of depreciating homes – this is an issue facing competitors. Zillow Group, which was not sufficiently selective when it came to the quality of the properties it was purchasing.

Why the Redfin share is a buy

With a market cap of $ 4 billion, shares of Redfin are trading at just 2.1 times sales. In 2022, analysts expect the company to generate $ 2.54 billion in revenue, which would represent 35% year-over-year growth. It would also reduce that multiple price / sell to just 1.5 (assuming the stock price stays the same).

Either way, Redfin is still cheaper than Zillow, which is currently having issues with its business – and that doesn’t make sense to me. Redfin’s share deserves to be higher, especially with the strength of the real estate market, which should translate into continued growth in the company’s brokerage business.

The total value of the US real estate market exceeded $ 36 trillion in 2020, and with the growth recorded so far in 2021, it is sure to exceed $ 40 trillion. Redfin has enormous leeway to grow its 1.16% share of real estate sales, and the value of that market share continues to climb.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.