Low interest rates, scarcity, and the “stay at home economy” made the real estate market red hot in 2020 and 2021. Homeowners weren’t the other ones to benefit from this trend. Owners of housing stocks have benefited greatly as well.
Not just homebuilders. Real estate investment trusts (REITs) that own single-family homes have done well. So too, have shares in real estate services providers. But now, it may be the right time to consider cashing out of the housing space.
Sure, per the “experts,” even as interest rates begin to rise, and signs of an economic slowdown emerge, a looming housing crisis should be at the bottom of our list of worries. With high demand and tight supply, the sentiment remains that a repeat of the 2008 housing crash isn’t around the corner.
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Then again, much like we had the “transitory” thesis on inflation before we started to see 7.5% CPI points, the “experts” could be calling it all wrong once again when it comes to the real estate market. To lock in profits, or avoid future losses, now is the time to unload housing stocks. In particular, these seven names, which have high downside risk if the residential real estate market heads south:
- American Homes 4 Rent (NYSE:AMH)
- eXp World Holdings (NASDAQ:EXPI)
- Fathom Holdings (NASDAQ:FTHM)
- Offerpad Solutions (NYSE:OPAD)
- Redfin (NASDAQ:RDFN)
- Toll Brothers (NYSE:TOL)
- Zillow (NASDAQ:Z, NASDAQ:ZG)
Housing Stocks: American Homes 4 Rent (AMH)
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One of the largest owners of single-family homes, America’s housing boom has been a boon for investors in AMH stock. Since the start of the pandemic, this REIT has nearly doubled in value. Although it’s pulled back, the market remains positive on shares. Mainly, due to the demand/supply demand dynamic enabling it to continue to raise rents.
Yet this dynamic is more than accounted for in its valuation. At today’s prices (around $39 per share), American Homes 4 Rent trades for around 34.8x its funds from operations (FFO). FFO is a common metric used in valuing REITs, equivalent to the price-to-earnings (P/E) with regular stocks.
Yes, this is in-line with the valuation of a similar play, Invitation Homes (NYSE:INVH). But rising interest rates could put pressure on the valuation of either name. Although, admittedly, if American Homes or Invitation remains able to raise rents in tandem with inflation, this may be mitigated.
Along with this, there are some political risks with single-family home REITs. Politicians on the left and right are lambasting institutional ownership of single-family homes, seeing it as a leader driver of decreased housing affordability. This too could impact its performance going forward. After its strong pandemic-era performance, you may want to cash out of this low-yield (dividend of 1.04%) REIT.
eXp World Holdings (EXPI)
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Among housing stocks, eXp World was probably the only one that came close to achieving “meme stock” status. That is, in early 2021, speculators went bananas for this cloud-based real estate brokerage services provider.
Excited about this “future of real estate” play, traders bid up EXPI stock to prices north of $150 per share. Yet as the meme stock trend ended, and the housing market cooled, shares took a hard fall during Spring 2021. Since then, the stock has zig-zagged between around $25 and $50 per share.
At around $29 per share today, eXp trades for a fraction of its all-time high. Should you consider it “cheap,” though? Not so fast. Yes, given how quickly it’s been able to scale into a multi-billion dollar business, it’s understandable why the market continues to give it a premium valuation (P/E ratio of 57.98x).
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However, with its continued growth hinging so much on the real estate market remaining “hot,” shares could be in for another big drop if results fall short of expectation. With rival (albeit slower-growing) realtor rivals, like Realogy Holdings (NYSE:RLGY) already priced as if a housing slowdown is for certain, why pay up for EXPI stock, as it continues to price-in a robust real estate market as a certainty?
Housing Stocks: Fathom Holdings (FTHM)
Another digital-first real estate services company, Fathom Holdings went on an incredible run in the months following its summer 2020 initial public offering (IPO). Last February, it prices as high as $56.81 per share. That was a more than five-fold gain from its debut price.
Flash forward to now, and much like EXPI stock, FTHM stock has given back the lion’s share of its gains from bubblier times. At around $14 per share today, some shares may appear oversold. Especially as sell-side analysts estimate its revenues will rise more than 30% in 2022.
But besides the uncertainty over the strength of the housing market going forward, Fathom’s lack of profitability is and could remain an issue as well. As a Seeking Alpha commentator discussed back in December, the low-margin nature of its business, coupled with its inability so far to make progress getting out of the red, it’s hard to be confident when exactly its performance will improve.
That said, if it proves its critics wrong, and makes progress raising margins? There may be room for it to make at least a partial price rebound. Nevertheless, while you may want to take a second look if it falls again, hold off on it for now. The possibility of a turnaround is not a strong rationale for buying it today.
Offerpad Solutions (OPAD)
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When you hear the term “iBuyer,” Opendoor Technologies (NASDAQ:OPEN) may be what first comes to mind. Or, perhaps Zillow, and its ill-fated move into this emerging space (more below). But there’s another name in this space, Offerpad Solutions, that was temporarily popular with investors after its public debut last September.
As an iBuyer, Offerpad buys houses directly from homeowners, fixes them up, and flips them for profit. Last year, rising housing prices, and a market more favorable to high-tech “disruptors” was very bullish on these plays. Now, however, sentiment has shifted considerably.
Zillow’s exit from the market dented confidence that this was a viable business, instead of something that only works at a time where home prices are soaring at an above-average clip. These concerns have already weighed on OPAD stock, which after briefly moving above $20 per share after it began trading on the New York Stock Exchange, has since fallen to penny stock levels (around $4 per share today).
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Trading at such low prices already, it may appear like Offerpad has little more room to fall. Still, with the potential for a cooldown in residential real estate causing it to report higher losses than the 30 cents per share already anticipated? Put this on your list of housing stocks to avoid/sell.
Housing Stocks: Redfin (RDFN)
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RDFN stock is yet another “proptech” play where investor sentiment has turned negative in a big way. Its shares are down 65% over the past twelve months. With this, it may appear that this real estate brokerage, known for its low commissions, has been oversold.
Unfortunately, a housing downturn could cause more pain for those still holding it, after buying in at much higher prices. Despite seeing its annual revenue soar beyond the $1 billion mark, Redfin is still operating in the red. Like with the other “future of real estate plays,” losses could get worse if rising rates/economic slowdown cause trouble for the housing market.
Also, Redfin has exposure to the “iBuyer” business as well. Some, like a Motley Fool commentator did in a recent article, may see this as a positive for the company. Investors bullish on the company believe that it’s not making the mistakes Zillow made when it was active in this space.
Even so, a blow-up with its iBuyer segment could cause another blow-up in the price of RDFN stock. Given the still-ample downside risk, if you bought in when it was red hot, now’s the time to accept your losses and move on.
Toll Brothers (TOL)
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Despite the “expert” belief that worries about another housing crash are overblown, the market has seemingly priced this into homebuilder stocks. Look up residential construction stocks on Finviz.com, and you’ll see what I mean.
The bulk of them, including this one, trade at single-digit P/E ratios. Several of them trade at low-single digit P/E ratios. This indicates the market anticipates much lower earnings in the years ahead for each one.
With this, there may be a true bargain or two out of the whole bunch. For a few of them, the market may be overestimating how badly things will go for homebuilders. Yet among this main type of housing stocks, you may not want to put Toll Brothers in that category. At least, that’s the view of Bank of America’s (NYSE:BAC) Rafe Jadrosich.
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Downgrading TOL stock in late January, the analyst sees the homebuilder as particularly vulnerable to rate hikes compared to peers like D.R. Horton (NYSE:DHI). Its focus on the luxury segment of the housing market could leave it in a tough spot as well, if the housing market cools. Although its shares have already been beaten down (as has been the case with its rivals), there may be more moves lower ahead for the stock.
Housing Stocks: Zillow (Z,ZG)
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Winding down its failed iBuyer venture, it may seem like it’s all uphill from here for Zillow. That appears to be the view of investors. The stock has recently jumped back above $60 per share, after finally bottoming out following months of price decline.
But while the real estate services company is making the right choice getting out of iBuying, another drop could be store for Z stock/ZG stock. Why? For one, valuation. Now down to its core business, its rate of growth will come down, making it questionable whether its worthy of a 30x earnings multiple.
Second, as Louis Navellier has argued, Zillow does not yet have an alternative game plan now that it isn’t depending on iBuyer growth to move the needle. Although it may do so down the road, there’s no reason to buy it ahead of it possibly pursuing a new high-upside opportunity.
Add in the chance that real estate cools down, negatively affecting the results of its agent lead generation and real estate listing businesses, and what appears to be the start of a comeback for Z stock could prove to be a short-lived spike. After that, a continuation of its move down to lower prices.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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