Home Prices Soar: 1 Growth Stock That Could Win Big

Earlier this week, the Case-Shiller 20-city home price index data for October was released, and it showed a significant 18.4% jump compared to the same month last year. That follows a strong 19.1% result in September, and it highlights how consistently robust U.S. housing has been in 2021. 

The 20-city index measures residential real estate prices across 20 major metropolitan areas, including New York, Los Angeles, Detroit, and Chicago, in an attempt to offer a broad overview of prices across the country. October’s result is well above the index’s 10-year average of 7.16%. 

Stock market investors might be wondering how to gain exposure to this rapid growth in home prices, and innovative real estate company Redfin (NASDAQ:RDFN) might be the answer. 

Image source: Getty Images.

Broking, but at scale

Selling a home is a complex process that involves input from a range of professionals, including appraisers, bankers, and lawyers. Attempting to sell your home and navigate the sales 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 equivalent to 2.5% of the sale price of their home (on average). Not only does it reduce risk to the seller, but agents also invest in marketing the home to potential buyers, which can result in a faster sale for a much higher price. Most agents either operate independently or in small teams confined to one geographical area, building comprehensive experience in that market.

Redfin is a large, publicly traded company that’s attempting to disrupt the small real estate firms. It has reached an unprecedented level of scale by recruiting thousands of agents across the U.S., and that allows it to charge listing fees of just 1% — heavily undercutting the average broker. 

Consumers are flocking to list with Redfin, and why wouldn’t they? The company says it has saved sellers over $1 billion in listing fees since 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. 

Soaring revenue growth

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

When that’s combined with an increase in market share, it’s not hard to see why Redfin is winning big right now — and could continue to do so. 

Metric

2018

2021 (Estimate)

CAGR

Revenue

$486 million

$1.88 billion

56%

Share of U.S. 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 business. The company’s RedfinNow segment buys homes directly from sellers and attempts to flip them for a profit, and in the recent third quarter, this accounted for 44% of total revenue. Redfin hasn’t achieved scale in this business yet, so it doesn’t make any gross profit from flipping homes, but it has achieved a break-even result this year, so it’s certainly inching closer. 

Direct buying can be risky, though. It works well when home prices are surging higher, but if prices fall, Redfin could be stuck holding an inventory of depreciating houses — it’s an issue facing competitor Zillow Group, which failed to be appropriately selective with respect to the quality of properties it was buying. 

Why Redfin stock is a buy

With a $4 billion market capitalization, Redfin’s stock trades at just 2.1 times sales. In 2022, analysts expect the company to generate $2.54 billion in revenue — which would represent 35% growth year over year. It would also shrink that price-to-sales multiple to just 1.5 (assuming the stock price remains the same).

In both instances, Redfin is still cheaper than Zillow, which is having issues with its business right now — and that doesn’t make sense to me. Redfin’s stock deserves to be higher, especially with the strength of the real estate market, which should result in continued growth in the company’s broking business. 

The total value of the U.S. housing market exceeded $36 trillion in 2020, and with the growth so far in 2021, it looks sure to top $40 trillion. Redfin has enormous room to expand on 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 writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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