Why Experts Think a Housing Market Crash Will Drag Into 2023

  • Redfin (RDFN) is the talk of Wall Street today, enjoying a spontaneous 31% rally despite its bleak third-quarter earnings call.
  • The company failed to meet analyst expectations in Q3, warning of dwindling home sales through 2023.
  • Yesterday’s better-than-expected inflation report seems to have saved RDFN stock.
housing market crash - Why Experts Think a Housing Market Crash Will Drag Into 2023

Source: shutterstock.com/Lerbank-bbk22

Real estate mega-giant Redfin (NASDAQ:RDFN) is on a rollercoaster this week. Yesterday morning, RDFN stock sunk in response to its recent earnings call, in which the company announced sweeping layoffs ahead of a housing downturn they expect to bleed into 2023. Since then, shares have regained their footing. RDFN closed the day with a staggering 31% gain on the back of a strong inflation report. Notions of a housing market crash continue to swirl, however, as Redfin leadership warns of housing companies “in the jungle.”

Redfin reported its third-quarter financial results on Wednesday afternoon, leaving some investors notably spooked over the state of housing going forward. Indeed, the real estate brokerage laid out a rather grim timeline for the company over the next year or so. It also failed to meet Q3 guidance, rather handily.

Specifically, the company posted a net loss of about $90 million. That’s a more than four-times-wider loss than it reported in Q3 2021. According to CEO Glen Kelman, the company is expected to continue siphoning cash, amounting to at least $22 million in additional losses, excluding operating costs, for the full-year 2022.

Redfin has been one of the major victims of this year’s mortgage rate rise. As mortgage rates have soared upwards of 7% this year, Redfin’s margin strength has reduced dramatically. As a result, Redfin has been eating major losses in the now-shutdown home-flipping segment of its business, RedfinNow.

Due to falling demand, the company was forced to sell many homes for far less than they purchased them for, resulting in record losses. Even now, the company is sitting on a sizable stockpile of homes it hopes to sell off by the end of Q2 2023. This largely explains why the company opted to close down RedfinNow, just five years after its launch.

Perhaps most startling, Redfin announced laying off 13% of its staff, adding to the 8% workforce cuts made this past June.

Clearly, housing is in a delicate state, what does Redfin’s latest bearish indicator mean for the industry going forward?

Redfin Leadership Paints Grim Picture of Housing Market Crash

According to Kelman, the housing slump will likely put downward pressure on home sales through the next year, at least:

“The problem with demand is that housing has become unaffordable. From October 2020 to October 2022, the monthly payment for an American family buying the median-priced home increased by 71%. For that same family to rent a median price department, the monthly payment increased by 24%, still far faster than income growth.The rate of household formation in late 2022 was less than one quarter what it was at its summer 2020 peak. It will remain that way until the cost of housing declined substantially.”

Looking ahead, the future of housing remains at the whim of greater macroeconomic forces. The Federal Reserve’s interest rate hikes this year have been the primary driver of climbing mortgage rates, and at present, the central bank doesn’t appear to be stepping off the gas anytime soon.

Despite October’s better-than-expected Consumer Price Index (CPI) report, many projections still have the Fed raising rates in December. This would amount to the seventh rate hike of the year, following the gargantuan 75 basis-point hike in early November.

If the past year has been any indication, mortgage rates will likely follow suit, with some economists projecting 30-year fixed-rate mortgages to hit 10% sooner or later. This may mark a substantial decline in home values, with some regional markets expected to drop as much as 30% in value.

On the date of publication, Shrey Dua did not hold (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.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

Article printed from InvestorPlace Media, https://investorplace.com/2022/11/why-experts-think-a-housing-market-crash-will-drag-into-2023/.

©2023 InvestorPlace Media, LLC