With borrowing costs likely to rise further, as the Federal Reserve attempts to control inflation, it’s time for investors to consider real estate stocks to sell. I get it. Bearish topics don’t appeal organically, as do bullish ones. However, it’s also time for a reality check. You can have higher home prices or higher interest rates. You can’t have both.
Indeed, the Fed already laid out the framework, committing to a hawkish monetary policy. Subsequently, the unwinding of the central bank’s balance sheet stoked higher borrowing rates. In turn, home prices started to fall. To really emphasize the point, Fortune labeled the downfall in certain regions as “stunning.” That’s the primary reason to consider real estate stocks to sell.
The other: The so-called experts were ultimately inaccurate about the continuation of the housing market surge. A time-targeted Google search revealed that some experts believed higher mortgage rates would incentive buying homes now, thus raising the price. Others stated that 2022 home prices will keep rising at or near double digits. That’s probably not in the cards, meaning it’s time to consider real estate stocks to sell.
Zillow (Z, ZG)
Since the beginning of 2022, both classes of shares of technology-driven real-estate marketplace company Zillow (NASDAQ:Z, NASDAQ:ZG) slipped over 50%. A hefty loss, it’s hardly a unique circumstance in this sector, thus sparking interest regarding real estate stocks to sell. Fundamentally, the case is simple. As mentioned above, you can have high prices or high rates. You can’t have both.
Financially, Gurufocus.com identifies Zillow as a possible value trap. Sure, some metrics point to an enticing contrarian opportunity, such as the 50%-plus losses. As well, Zillow’s price-sales ratio of 0.67 times sits favorably below the median ratio of 2.3 times. However, these likely represent deceptive mathematical calculations that lack broader context.
Currently, home prices remain historically high while mortgage rates stand above 7% for a 30-year fixed mortgage. Therefore, it’s not surprising that in the second quarter of 2022, Zillow’s revenue dropped 23% against the year-ago period. It’s more than likely going to fall further in the quarters ahead. Thus, Z and ZG represent real estate stocks to sell.
One of the companies that experienced a meteoric rise in market value during the post-pandemic housing boom, Redfin (NASDAQ:RDFN) now struggles for air. It’s not just that RDFN hemorrhaged nearly 90% of equity value on a year-to-date basis. During its peak, RDFN’s average share price neared $100, per Google Finance data. At the moment, shares trade hands for about $3.86.
And yet, I still believe Redfin represents one of the real estate stocks to sell. For one thing, I don’t see much indication that the volatility died down. In the trailing month, RDFN lost a staggering 31.4% of market value. That’s a lesson that just because something cratered on a YTD basis does not mean it can’t produce steeper losses. It very well can.
Financially, Gurufocus.com warns that Redfin may be another possible value trap. It’s hard to argue otherwise. While RDFN features subterranean PS ratios, for instance, the underlying company’s retained earnings line item has a loss of $541 million on a trailing-12-month basis.
Since circumstances will likely worsen from here, this is one sign among many that RDFN ranks among the real estate stocks to sell.
A compelling idea on the surface, Opendoor (NASDAQ:OPEN) initially benefitted from the idea of leveraging artificial intelligence to buy and sell real estate. This platform provided convenience for home sellers while providing data-driven upside opportunities for the underlying company. It worked when home prices kept moving higher and higher. But now that the paradigm shifted, OPEN represents one of the real estate stocks to sell.
It’s not just my opinion. Wired.com noted that Opendoor may be a canary in the economic coal mine. Specifically, the company cited data that suggested Opendoor lost money on 42% of the homes it sold in August. To be fair, management disputes this figure, stating that the loss was about 20%.
“Whichever way you slice it, iBuyers are vulnerable to swings in the market. So what amounts to an undetectable tremor for individual buyers can become an almighty rumble for iBuyers,” the publication stated.
To me, it’s going to be a herculean struggle to convince home sellers to accept far less than market value today for Opendoor’s AI-and-algorithm-driven platform to work properly. Thus, I must put OPEN on this list of real estate stocks to sell.
Although not a direct player in the real estate market, Matterport (NASDAQ:MTTR) nevertheless benefited from the housing boom. With the company focusing on specialized optics that produce spatial (3D) images, it allowed people to inspect homes at distance. Of course, with the pandemic still a massive concern at the time, Matterport enjoyed significant relevance.
However, with fears fast fading over the global health crisis, Matterport lost much of its relevance. Again, it’s not just my opinion. On Wall Street, MTTR ended up plunging over 82% of equity value. At their peak, the average price of shares stood at nearly $30. Today, they trade hands for only $3.30.
To be fair, Matterport enjoys a very strong balance sheet, with a cash-to-debt ratio in the triple digits. Therefore, I wouldn’t short MTTR. Still, it’s one of the real estate stocks to sell because of poor growth prospects. With a sharp rise in borrowing costs, people are losing interest in homebuying. And that doesn’t bode well for housing-related businesses.
D.R. Horton (DHI)
As the largest homebuilder by volume in the U.S., D.R. Horton (NYSE:DHI) benefited handsomely during the post-pandemic housing boom. Unfortunately, with the Fed taking away the monetary punch bowl, I fail to see how D.R. Horton will continue rising. Even with some modest declines in housing prices, the spike in mortgage rates significantly reduced affordability.
Sure enough, Raymond James recently downgraded DHI in terms of earnings projections. Per TipRanks, analyst Buck Horne “lowered his expectations on homebuilders, citing high mortgage rates and a hawkish Federal Reserve.” Interestingly, Horne also added that “the monthly cost of a median-priced home is nearly 42% of a median family’s gross income. This is actually higher than the 40% seen during the 2006 housing peak.”
Per Gurufocus.com, DHI ranks as a possible value trap. It might be perfectly emblematic of a value trap. On paper, the homebuilder features excellent growth and profitability metrics. But moving forward, against the backdrop of worsening affordability, these metrics no longer command reliability. Thus, DHI represents one of the real estate stocks to sell.
KB Home (KBH)
As a competing homebuilder, you might consider KB Home (NYSE:KBH) to feature the same poor prospects as D.R. Horton. On headline figures, it’s difficult not to come away with that impression. For instance, since the start of this year, KBH dropped almost 37% of equity value. As well, it faces the same fundamental challenges of higher interest rates.
Nevertheless, Gurufocus.com rates KBH as significantly undervalued. Along with strong growth and profitability metrics, KB Home features a forward price-earnings ratio of 3.6 times. That’s well underneath the industry median ratio of 5.4 times.
However, before you get too excited, you should note that Raymond James downgraded KB Home to “market perform.” Earlier, the firm had KBH pegged as a “strong buy.”
Personally, I think KBH represents too much risks given the fundamental backdrop. For example, in its quarter ended Aug. 31, 2022, KB Home’s days inventory increased by 7.5% against the year-ago level. The affordability crisis will likely exacerbate this circumstance while capping revenue growth. Therefore, I view KBH as one of the real estate stocks to sell.
Rocket Companies (RKT)
One of the leaders in providing convenient digital solutions for complex transactions, Rocket Companies (NYSE:RKT) established a reputation for its mortgage-related services. When the company made its public market debut in the summer of 2020, it had timing as a tailwind. Unfortunately, this year, the monetary paradigm shift brought severe storms against the mortgage business.
As evidence, RKT finds itself down 57% YTD. But that’s just the beginning of the problems. With the Fed committed to raising the benchmark interest rate to control inflation, Rocket will probably suffer an erosion of its total addressable market.
Financially, investors could be looking at another value trap. Sure, Rocket presently features a PE ratio of just under 5 times. In contrast, the industry median ratio is 9.42 times. Nevertheless, market participants must consider the predictability of its growth and earnings trajectories.
Again, with borrowing costs rising amid rising concerns about a global recession, homebuyer sentiment diminished rapidly. Therefore, just based on harsh realities, I must consider RKT as 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.