Dampened housing demand amid rising inflation and borrowing costs paints a gloomy picture for the real estate sector in the near future. Given this backdrop, let us probe into some real estate stocks Redfin Corporation (RDFN), CTO Realty Growth, Inc. (CTO), and Harbor Custom Development, Inc. (HCDI), which might be best avoided for the reasons mentioned throughout the article.
The Federal Reserve’s continued rate hikes to tame the multi-decade-high inflation impacted most sectors of the economy. Reduced housing demand triggered by high prices and high borrowing costs marred the real estate sector to a great extent. Home sales have taken a nosedive, with home prices dropping in many previously overheated markets.
Higher rates were challenging for home buyers, who have to cope with steeper monthly payments, and sellers, who face less demand and lower price offers for their homes. As of this week, the mortgage rate is 6.32%.
As per some housing economists, it is anticipated that the average fixed rate on a 30-year mortgage is expected to fluctuate between 6% and 6.5% this spring. Spring homebuyers could find it more challenging to qualify for a mortgage as lenders tighten their credit standards amid the banking collapse in March.
In addition to the affordability constraints, the potential sellers are also locked in place by supply shortages. Months of supply stagnated at about 3.1% due to declining demand and the weakening of new listing inflows. According to Realtor.com®’s March housing data, the number of homes newly listed for sale declined by 20.1% compared to the same month prior year, indicating a higher rate of decline than last month’s 15.9% decrease.
Furthermore, Black Knight’s Mortgage Market reports that, on an annual basis, prices are up 1.9% compared to February 2022, the smallest annual growth rate since early 2012. Black Knight expects the growth rate to fall to zero per the April Monitor report.
Against this backdrop, fundamentally weak and beaten-down real estate stocks RDFN, CTO, and HCDI, might be best avoided now.
Redfin Corporation (RDFN)
RDFN operates as a residential real estate brokerage company in the United States and Canada. The company operates an online real estate marketplace and provides real estate services, including assisting individuals in purchasing or selling homes. It also provides title and settlement services, originates and sells mortgages, and buys and sells homes.
For the first quarter of 2023, RDFN expects total revenue between $307 million and $324 million, representing a year-over-year decline between 49% and 46% compared to the first quarter of 2022. Moreover, the total net loss is expected to be between $116 million and $105 million, compared to a net loss of $91 million in the first quarter of 2022.
RDFN’s trailing-12-month gross profit margin of 12.52% is 81.4% lower than the industry average of 67.46%. Its trailing-12-month levered FCF margin of 4.67% is 87.8% lower than the industry average of 38.38%.
RDFN’s total revenue came in at $479.66 million for the fiscal fourth quarter that ended December 31, 2022, down 25.4% year-over-year. Its gross profit declined 65.3% year-over-year to $37.44 million, while its loss from operations expanded 369.8% year-over-year to $118.53 million.
Net loss and net loss per share attributable to common stock came in at $62.09 million and $0.57, up 118.7% and 111.1% year-over-year, respectively, for the same quarter.
RDFN’s EPS is expected to come in at a negative $0.36 in the fiscal second quarter ending June 2023. Its revenue for the same quarter is expected to decline 51.1% year-over-year to $296.92 million.
Over the past year, the stock has plunged 50.5% to close the last trading session at $8.49.
RDFN’s POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a D grade for Growth, Value, Stability, Sentiment, and Quality. It is ranked last out of the 55 stocks in the D-rated Real Estate Services industry.
To see the other ratings of RDFN, click here.
CTO Realty Growth, Inc. (CTO)
CTO is a publicly traded real estate company that owns income properties comprised of approximately 2.4 million square feet in diversified markets in the United States and an approximately 23.5% interest in Alpine Income Property Trust, Inc. (PINE), a publicly traded net lease real estate investment trust.
CTO’s trailing-12-month net income margin of 3.84% is 70.2% lower than the industry average of 12.89%. Its trailing-12-month ROCE margin of negative 0.35% compares to the 4% industry average.
For the fiscal fourth quarter that ended December 31, 2022, CTO’s total revenues stood at $22.53 million, down 8.8% year-over-year. Its total operating loss for the same quarter came in at $8.60 million compared to a total operating profit of $1.30 million for the year-ago quarter.
Moreover, its adjusted funds from operations attributable to common stockholders stood at $7.36 million for the fiscal fourth quarter that ended December 31, 2022, while its AFFO attributable to common stockholders per common share stood at $0.37, down 9.8% year-over-year.
CTO’s revenue is expected to be $23.24 million in the fiscal second quarter ending June 2023. Its FFO is expected to decline 14.9% year-over-year to $0.40 for the same quarter.
The stock has declined 24.1% over the past year to close its last trading session at $16.66. Moreover, it has plunged 9.5% over the past six months.
CTO’s bleak prospects are reflected in the POWR Ratings. It has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
The stock also has an F grade for Growth and a D for Value and Quality. It is ranked #39 within the same industry.
Click here to see the POWR Ratings of CTO (Momentum, Stability, and Sentiment).
Harbor Custom Development, Inc. (HCDI)
HCDI operates as a real estate development company and is involved in land acquisition, entitlements, development, construction of project infrastructure, single- and multi-family vertical construction, marketing, sales, and the management of various residential projects.
HCDI’s trailing-12-month gross profit margin of 20.03% is 42.8% lower than the industry average of 35%. Its trailing-12-month net income margin of negative 0.84% compares to the 4.56% industry average.
For the fiscal fourth quarter that ended December 31, 2022, HCDI’s sales stood at $4.80 million, down 81.8% year-over-year. Its gross loss for the same quarter came in at $5.01 million compared to a gross profit of $10.85 million for the year-ago quarter.
Moreover, its adjusted EBITDA stood at negative $8.53 million for the fiscal fourth quarter that ended December 31, 2022, compared to adjusted EBITDA of $8.29 million for the previous-year quarter.
Furthermore, its net loss attributable to common stockholders and loss per share stood at $12.55 million and $17.47 for the fiscal fourth quarter that ended December 31, 2022, compared to net income attributable to common stockholders and earnings per share of $3.67 million and $3.22 for the year-ago quarter, respectively.
HCDI’s revenue is expected to be $68 million in the fiscal second quarter ending June 2023. Its EPS is expected to be $6.60 for the same quarter. Also, the company failed to surpass the revenue and EPS estimates in each of the trailing four quarters.
The stock has declined 89.6% over the past year to close its last trading session at $4.45. Moreover, it has plunged 78.2% over the past six months.
It’s no surprise that HCDI has an overall rating of F, which translates to a Strong Sell in our POWR Ratings system.
The stock also has an F grade for Growth and Quality and a D for Stability and Sentiment. It is ranked #41 in the same industry.
Click here to see the POWR Ratings of HCDI (Value and Momentum).
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RDFN shares were trading at $8.53 per share on Thursday morning, up $0.04 (+0.47%). Year-to-date, RDFN has gained 101.18%, versus a 6.77% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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