Shares of Redfin Corp. took a dive Monday, after Wedbush backed away from its long-time bullish stance, just as the online real estate services company revealed data showing that home buyers are canceling deals at the fastest rate in more than two years.
Wedbush’s Jay McCanless cut his rating on Redfin to neutral, after being at outperform since before the start of the COVID-19 pandemic. He lowered his stock price target by 36% to $9.
McCanless said Redfin’s promise in May to provide more data on its business segments for the second quarter will help provide more clarity on results, but the enhanced disclosure “cannot change the fact that Redfin consistently lost money during one of the best sales/demand/pricing environments we have ever seen for housing during 2021.”
The company had reported a 2021 net loss that widened 8.9% from 2020 to $104.7 million even as revenue soared 117% to $1.92 billion. In the first quarter of 2022, losses grew 140% from a year ago to $91.6 million while revenue increased 123% to 597.3 million.
McCanless said he also believed Redfin’s entrance into the mortgage market does increase the breadth of its business, but was “a poorly timed decision” in hindsight.
The company said it abandoned Redfin Mortgage, which it build from scratch, in January as it acquired mortgage lender Bay Equity Home Loans. The purchase was announced at a time when 30-year fixed mortgage rates were still in the mid-3% range; the latest data showed mortgage rates were at 5.3%, leading to a drop in housing affordability.
Also read: U.S. homeownership rate tumbles to 1980s levels.
Besides downgrading Redfin, McCanless also cut his second-quarter revenue forecast to $608 million from $621 million and increased his net loss estimate to 84 cents a share from 65 cents.
“Based on recent results from our mortgage origination coverage we are inclined to believe revenues and losses in that segment may be below management’s guidance,” McCanless wrote in a note to clients. He believes the mortgage business is likely to lose money for the rest of the year.
Redfin is expected to report second-quarter results in early August.
Separately, Redfin said early Monday that in June, about 60,000 home-purchase agreements across the country, or 14.9% of homes that went under contract, had fallen through. That’s the highest percentage since March and April 2020, at the onset of the COVID-19 pandemic.
The company said its data show that home buyers are using declining demand and reduced affordability to try to renegotiate deals.
“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” said Redfin Chief Economist Taylor Marr. “Rising mortgage rates are also forcing some buyers to cancel home purchases.”
In addition, Marr said buyers are increasingly keeping inspection and appraisal contingencies, which can give them other reasons to call deals off.
Despite Redfin’s stock tumbling on Monday, it was still up 5.7% so far in July. That follows an eight-month losing streak in which it lost 84% of its value.