Discussing publicly-traded securities to exit rarely represents a favorable discussion, but for housing stocks to sell, it’s unavoidable. Two housing stocks to consider selling are RDFN and DHI. With the Federal Reserve set to aggressively raise the benchmark interest rate, mortgage rates will likely continue to jump. In turn, this dynamic will at least hurt demand for real estate, if not catastrophically so. Essentially, the segment can enjoy one of two factors: high prices or high interest rates, but not at the same time.
Indeed, the Fed already signaled the framework for housing stocks to sell months ago. With skyrocketing inflation killing consumer sentiment, the central bank began raising interest rates, which in turn effectively raised borrowing costs. Invariably, housing prices – which were already onerous – became downright unaffordable for several would-be homebuyers. In September, Reuters reported that home sales dropped for the seventh straight month.
Interestingly, one year ago today, home sales soared despite rising rates. The marketing pitch at that time was that homebuyers needed to secure a low interest rate before mortgages went any higher. Sadly, people bought into this narrative, not understanding that homeowners can always seek to refinance their homes so long as they have equity. However, buying real estate at an overvalued price risks leaving owners upside down, thereby preventing any refinancing opportunities.
Today, mortgage rates are already elevated. While borrowing costs will almost surely rise over the next several months, prospective homebuyers now understand that the underlying market has crossed the Rubicon. Essentially, it makes more sense for buyers to wait until housing prices come down. That’s not great for real estate-dependent companies, thus emphasizing the case for housing stocks to sell.
In addition, the reduction in global oil supplies stemming from production cuts means that one of the primary sources of inflation – skyrocketing energy costs – will likely remain elevated. At the same time, if the Fed raises interest rates too aggressively, broader economic conditions may deteriorate. That would lead to stagflation, a central banker’s worst nightmare.
As well, stagflation won’t do any favors for real estate affordability. Therefore, investors must think carefully and soberly about the below housing stocks to sell.
A real estate brokerage firm, Redfin, enjoyed a meteoric rise in equity value following the spring doldrums of 2020. It’s no surprise. At the time, an influx of monetary and fiscal stimulus programs helped the U.S. avert disaster. Naturally, these initiatives caused borrowing costs to dwindle to historic lows, enabling those with money to scoop up significant deals.
Now, the paradigm shifted in the opposite direction. With borrowing costs rising, cash is king. If cash is king, it quite literally means sitting on one’s hind end would be more beneficial than making a risky move. That’s because under a rising interest rate environment, the purchasing power of the dollar – all other things being equal – will increase. In other words, apathy leads to risk-free expansion of wealth.
Obviously, then, buying real estate would be a super risky move because people would be exchanging a commodity of rising value (cash) for an asset of declining value (residential property). Therefore, RDFN is one of the stocks to consider selling not out of spite but rather due to economic realities.
Investors should also note that on paper, RDFN represents a possible value trap. Sure, the company enjoyed tremendous growth from the first two years of the new normal. However, the Fed’s hawkish pivot implies that Redfin’s negative profitability margins will become even more of a liability in the future.
Is RDFN Stock a Buy, According to Analysts?
Turning to Wall Street, RDFN stock has a Hold consensus rating based on one Buy, 10 Holds, and one Sell rating. The average RDFN price target is $9.83, implying 103.94% upside potential.
D.R. Horton (NYSE:DHI)
Billed as America’s largest homebuilder, D.R. Horton likewise enjoyed significant upside following the initial impact of the COVID-19 crisis. Again, while the fiscal and monetary stimulus may have saved the U.S. economy, these actions eroded the dollar’s purchasing power. Therefore, astute individuals rushed to secure their net wealth. Some turned to the equities market. Others turned to real estate.
Again, though, this framework has now shifted in the other direction. Sitting on cash represents one of the smarter “actions” to take because of the Fed. By reducing the money supply, the central bank aims to have fewer dollars chase after more goods. That’s deflationary, which ultimately isn’t positive for physical asset valuations. Thus, DHI qualifies as one of the stocks to consider selling.
Of course, a persisting argument that circulates in mainstream media is the housing shortage dynamic. However, this assertion is likely a myth. It simply doesn’t match economic realities.
First, just because the number of people in the U.S. increases does not mean the number of qualified homebuyers also rose to the same proportion. More importantly, the share of total net worth held by the middle class has been steadily declining since 2003. By logical deduction, fewer qualified homebuyers exist.
If anything, the number of extremely qualified homebuyers jumped higher, but that has no bearing on the middle class.
Financially, DHI also qualifies as a potential value trap. Sure, a cursory look at the financials right now will reveal excellent growth and profitability metrics. However, D.R. Horton faces an ecosystem where assets are likely to diminish in value. Therefore, DHI is riskier than many investors think.
Is DHI Stock a Buy, According to Analysts?
Turning to Wall Street, DHI stock has a Strong Buy consensus rating based on nine Buys, one Hold, and zero Sell ratings. The average DHI price target is $86.60, implying 19.9% upside potential.
Conclusion: Just Look at the Hard Data
While no one likes a Debbie Downer, the discussion regarding housing stocks to sell must be had for investors’ protection. Fundamentally, it comes down to reading the hard data. Arguably every indicator screams that skyrocketing rates and prices cannot exist in the same space at the same time. Thus, investors must go into damage-limitation mode.