Goldman Sachs analyst Michael Ng, CFA, downgraded Redfin Corp. (NYSE: RDFN) from Neutral to Sell on Monday, citing growing competition, agent commission pressures and affordability challenges in the U.S. housing market.
According to the expert, Redfin currently screens rich valuations despite a still weak U.S. housing market.
Redfin shares have gained 22% in the past 12 months, lagging the S&P 500's 29% rise. The stock now trades at 88x its 2025 enterprise value-to-EBITDA (EV/EBITDA), far above Compass Inc. at 14x and Zillow Group (NASDAQ: ZG) at 25x.
Housing Affordability At the Worst Level On Record
"Housing affordability is the worst-on-record," according to the National Association of Realtors (NAR).
Goldman Sachs metrics based on the ratio of monthly mortgage payments to U.S. median household income, incorporating the median home sales price and 30-year fixed mortgage rates, show affordability is at its worst level since at least 2004.
As of November 2024, the average 30-year fixed mortgage rate stood at 6.79%, a slight decline from 7.5% a year ago. Despite this drop, affordability remains deeply constrained due to persistently high home prices and stagnant income growth.
In September 2024, U.S. existing home sales fell 3.5% year-over-year to a seasonally adjusted annual rate (SAAR) of 3.84 million - the slowest pace since 2010 outside of the pandemic, NAR data shows.
Fannie Mae projects U.S. existing home sales to rebound by 11% in 2025, reaching 4.5 million SAAR. However, Ng sees risks to this outlook, citing elevated mortgage rates, unaffordable home prices and limited income growth.
"We believe affordability could weigh on a housing recovery, creating risk to forecasts including Fannie Mae's outlook for 4.5 mn U.S. existing home sales in 2025," Ng wrote
Agent Commissions and Rentals Competition Add Pressure
Declining agent commission rates across the real estate industry pose another challenge for Redfin's business model.
Following the Sitzer/Burnett v. NAR ruling in 2023, buyer agent commissions fell to 2.34% as of October 2024, creating additional headwinds for Redfin's revenue growth.
"Industry agent commission pressure may result in Redfin further lowering its commissions or result in a headwind to conversion as its low-commission model becomes less differentiated," Ng said.
In the Rentals segment, Redfin's 2023 revenue rose 19% year-over-year, driven by rising U.S. rental vacancy rates, which reached 6.9% in Q3 2024.
However, competition from Zillow is intensifying. Zillow's rentals revenue surged 30% year-over-year to $430 million, dwarfing Redfin's $201 million (+14%), and Zillow continues to invest heavily in scaling its platform.
"Zillow's greater scale and growth visibility," will hit on Redfin's profits.
The company's gross margins from Real Estate Services declined by 260 basis points year-over-year in the third quarter of 2024 to 27.8%, falling short of consensus expectations.
"Redfin Rentals is seeing competition intensify as larger, more well-capitalized competitors like Zillow also pursue the Rentals opportunity," Goldman Sachs wrote.
Ng also flagged Redfin's "Redfin Next" program, which offers agents commission splits up to 75% for self-sourced sales, as a key driver of margin pressures.
Market reactions: Shares of Redfin fell 3.82% to $8.05 on Monday, hitting the lowest levels in three months. Goldman Sachs analyst Ng foresees a 12-month price target of $6.50 on Redfin shares, reflecting a 23% downside.