Navigating the tumultuous housing landscape can be a nerve-racking endeavor for long-term investors. With towering home prices, escalating mortgage rates, and a shrinking inventory, the echoes of a potential housing market crash are difficult to ignore. Hence, investors may want to consider which stocks to avoid, if the housing market tanks.
The housing market’s health bears a significant impact on investors’ portfolios, particularly given its substantial weighting in the economy. A steady job market and manageable mortgage rates have kept recession fears at bay. Nevertheless, the trio of high prices, high rates, and low supply continue to create an air of uncertainty for both homebuyers and investors.
A potential recession and a consequent housing market crash could ripple through various sectors, significantly affecting certain stocks. Identifying the top stocks to avoid under these circumstances could be imperative. That said, let’s look at the three stocks to avoid during a housing market crash.
Redfin (NASDAQ:RDFN) is a technology-driven real estate brokerage that has seen big gains in the stock markets this year, doubling up on a year-to-date basis. However, as the financial landscape shifts, Redfin is likely to falter. Persistent inflation and the looming threat of more interest rate hikes from the Federal Reserve should result in increased borrowing costs, potentially cooling off Redfin’s hot streak.
The company’s first-quarter results outperformed expectations, but Redfin’s forecast for second-quarter sales fell short This triggered a modest drop in its stock price. Furthermore, troubling signs in the labor market with headline-making layoffs point to depressed home-buying sentiment. This labor market instability could reverberate for Redfin, significantly impacting its bottom-line.
Currently, Redfin remains very unprofitable, and I think margins are likely to be squeezed further.
Rocket Companies (RKT)
Rocket Companies (NYSE:RKT) is one of America’s leading mortgage underwriters. Over the past year, this is among the stocks that has witnessed a rollercoaster of fortunes.
Rocket saw mind-boggling revenue growth of 270%, with revenue surging to $15.9 billion, over the 2018 to 2020 period. This resulted in RKT stock enticing many meme investors. However, following the pandemic-induced market slowdown and weakening economic conditions, rising mortgage rates took center stage. Rocket’s revenue trajectory plunged downward.
The company’s revenue slumped by $6.0 billion in 2022, more than halving from its peak in 2020. Moreover, 2023 is expected to bring further woes, with analysts predicting a dismal revenue forecast of less than $4 billion, painting a concerning outlook ahead.
With the company teetering on the edge of profitability last year, investors in RKT stock should be bracing for a challenging year ahead, fraught with more losses. According to Tipranks, analysts have assigned a moderate sell rating for the stock, with 1.4% downside from current prices.
Opendoor Technologies (OPEN)
Opendoor Technologies (NASDAQ:OPEN) recently delivered an impressive first-quarter report, alongside promising second-quarter guidance. However, a cloud of uncertainty hangs over its long-term prospects on the back of strong seasonality and the testing conditions its business currently operates in at this time.
Surging interest rates have resulted in a major slump in the housing market, with fewer properties coming to market. This tightening housing supply has cornered Opendoor into widening the spread between its buying and selling prices, thereby stunting revenue growth rates. Indeed, revenue growth in the company’s recent quarter came in at only 8.9% year-over-year, a stark decline compared to its 5-year historical average of 85%.
Furthermore, until the company reaches considerable scale, the company’s profitability outlook remains uncertain. For now, investors might want to proceed with caution with OPEN stock, particularly if the housing market deteriorates further.
On the date of publication, Muslim Farooque 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