Though the housing sector represented one of the most remarkable developments of the post-coronavirus new normal, the subsequent paradigm shift necessitates a discussion about real estate stocks to sell. To be clear, it’s not that this segment suddenly became irrelevant. As well, there are many fine professionals that work in this space. It’s just that macroeconomic dynamics no longer favor booming housing valuations.
Earlier, everyone acknowledged that the Federal Reserve committed to raising the benchmark interest rate to attack inflation. However, the latest jobs report for November demonstrated that those rate hikes did jack. In other words, the central bank must take the gloves off, which is a scary thought. However, the folks selling residential housing will probably feel it the worst. Therefore, the concept of real estate stocks to sell is unavoidable.
On a final note, this narrative isn’t about hating an industry or what have you. Rather, it’s about providing warnings against overexposure to a risky market. With that, here are real estate stocks to sell while you still can.
| Z ZG | Zillow | $34.30 |
| RDFN | Redfin | $4.75 |
| OPEN | Opendoor | $1.32 |
| RKT | Rocket Companies | $8.45 |
| HMPT | Home Point Capital | $1.28 |
| KBH | KB Home | $31.93 |
| PHM | PulteGroup | $44.50 |
Zillow (Z, ZG)
When I last discussed the topic of real estate stocks to sell, investment resource Gurufocus.com labeled Zillow (NASDAQ:Z, NASDAQ:ZG) as a possible value trap. However, with the technology-empowered real estate marketplace firm’s latest earnings print, Gurufocus.com now considers Zillow as significantly undervalued. Outside of math “tricks,” I’m not really seeing how Z and ZG could be considered discounted opportunities.
In particular, I have a problem with the company’s margins. On top, the gross margin declined from 44.1% in 2020 to 15.1% in the trailing 12 months. Further, Zillow rarely posts positive earnings. On a diluted basis, the company features a TTM earnings loss of $1.16 per share. And while it might be attractively priced against TTM sales, the problem is that revenue has been declining conspicuously over the last four sequential quarters.
Now, I realize that presenting negative data under the current social climate is a disliked characteristic. Nevertheless, it’s time for investors to be realistic. Macro forces don’t bode well for housing sales, making Zillow one of the real estate stocks to sell.
Redfin (RDFN)
Moving over to rival Redfin (NASDAQ:RDFN), Gurufocus.com presents a more intuitive assessment. Per the investment resource, the real estate brokerage rates as a possible value trap. As with Zillow, one of the problematic circumstances centers on Redfin’s profitability (or lack thereof).
In the most recent quarter that ended Sept. 2022, Redfin’s gross margin pinged at 9.67%. This metric slipped 59% against the year-ago quarter. As well, it noticeably fell sequentially from the second quarter’s gross margin of 19.4%. Moving down the line, the company’s operating and net margins sit at losses (on a TTM basis) of 10.3% and 11.7%, respectively.
Therefore, it’s hard to describe Redfin as anything other than a value trap. Sure, like its rival, the market prices RDFN at 0.22 times sales. That looks incredibly cheap until you realize that revenue has generally faded since Q4 2021. Some of these valuation figures are simply deceptive based on current run rates along with outside fundamentals (i.e. monetary tightening).
Unless you see something different, RDFN ranks as one of the real estate stocks to sell.
Opendoor (OPEN)
If I had free editorial reign, I’d state that Opendoor (NASDAQ:OPEN) is garbage but with a choice adjective in front. It begins with an “F” in case you’re curious. Unfortunately, the enterprise – which specializes in the iBuyer business model of flipping homes through data-driven protocols – became utterly toxic. For instance, OPEN stock hemorrhaged more than 91% of its equity value since the start of the year.
How do you come back from this mess? I’m not sure it’s possible, thus rendering OPEN one of the real estate stocks to sell.
If you want to deep dive into the fundamental realities of Opendoor’s business model, you should consider reading Wired.com’s many takes. For instance, in October of this year, the publication warned that OPEN represented a canary in the economic coal mine. The bottom line, the iBuyer business model doesn’t work in a rising interest rate environment. Now, if you’re still a believer, I supposed the good news is that you can buy OPEN for super cheap. It’s practically a penny stock. For everyone else, it’s clearly one of the real estate stocks to sell.
Rocket Companies (RKT)
Late last year, I was surprised to see how bullish housing experts were on the underlying market. Overall, most felt that prices would rise in 2022. Now, in late 2022, the narrative centers on the real risks of home prices incurring a double-digit correction. Even if the truth was somewhere in the middle, it’s not great news for Rocket Companies (NYSE:RKT).
A fundamental headwind affecting the mortgage provider is the labor market. Sure, the November jobs report came in hotter than expected. However, the composition of job gains was not the most desirable outcome. In addition, major enterprises have announced or planning to reduce headcount – significantly in some cases – implying fewer people with high-paying occupations.
Further, with the Fed looking to get “serious” about inflation, the upcoming rate hikes in 2023 could be incredibly onerous. That’s going to impose a severe affordability crisis for Rocket Companies, making it one of the real estate stocks to sell.
Home Point Capital (HMPT)
Another mortgage provider, Home Point Capital (NASDAQ:HMPT) unfortunately made its public market debut at the wrong time. When the company launched its initial public offering in early 2021, HMPT immediately popped higher. But just as quickly, its market value eroded sharply. Heading into an environment of evermore rising interest rates, Home Point may suffer from sharp spikes in volatility.
On a financial note, HMPT draws unwanted attention because of concerns regarding its balance sheet. At the moment, the company carries a cash-to-debt ratio of only 0.07 times. This ranks worse than 96% of the competition. As well, Gurufocus.com raised two red flags associated with the company, specifically citing poor financial strength.
Further, its operational profile draws plenty of worries. Since at least Q3 2021, revenue has been on the decline. In fact, in Q3 of this year, the company posted negative revenue, a circumstance that’s sure to spark anxieties. Sadly, too many problems exist. Therefore, HMPT ranks among the real estate stocks to sell.
KB Home (KBH)
At the moment, homebuilding giant KB Home (NYSE:KBH) does not appear particularly problematic. For instance, the company enjoys a solid revenue growth rate along with decent profit margins. Further, KB Home’s return on equity – a measure of how well it converts equity financing into profits – stands at 24.5%. This metric beats out nearly 81% of the competition.
Nevertheless, if a global recession materializes, KBH could be in a world of hurt. Per Google Finance, KBH did not perform well heading into the Great Recession. Looking back through the lens of hindsight, shares managed to pop higher following bouts of volatility. Ultimately, these represented periods of temporary upside which allowed astute stakeholders to sell into strength.
Interestingly, KBH cuts a choppy profile, down 27% for the year but up over 11% in the trailing month. However, with poor fundamentals on the horizon – rising interest rates and increased layoffs – KB Home could be one of the real estate stocks to sell.
PulteGroup (PHM)
On paper, homebuilding specialist PulteGroup (NYSE:PHM) also seems like an undervalued opportunity, even more so in this case. For instance, PulteGroup features a much stronger balance sheet than KB Home. Also, the company benefits from a solid revenue trek and overall excellent profit margins. For example, its net margin hit 15.6% and ranked better than 80% of the competition.
While PulteGroup is making the best out of a bad situation, I remain concerned about the bigger picture. Back during the worst of the Covid crisis, a factor that bolstered housing sales across the nation centered on working from home. Now that white-collar workers were no longer tethered to expensive metropolitan areas, they could move into cheaper areas.
Effectively, this dynamic sparked a “raceless” gentrification. However, the impact is similarly harmful to the displaced as the more common form of social gentrification. Nevertheless, with 90% of companies set to recall their workers in 2023, this imbalance may soon be off the cards. This might hurt PulteGroup, making it one of the real estate stocks to sell.
On the date of publication, Josh Enomoto 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.