While no guarantees of a housing market crash exist, investors may need to start considering sector-related stocks to sell. Primarily, it’s no longer amateur doom-and-gloom luminaries broadcasting bearishness. Instead, the National Association of Realtors confirmed what the National Association of Home Builders admitted: residential real estate has entered a recession.
Per a CNBC report, home sales slipped 6% sequentially from June to July. Further, sales dropped about 20% from the same period one year earlier. However, not everyone has their hair on fire regarding real estate-related stocks to sell.
“In terms of economic impact we are surely in a housing recession because builders are not building,” said Lawrence Yun, chief economist for the Realtors. “However, are homeowners in a recession? Absolutely not. Homeowners are still very comfortable financially.”
Admittedly, I’m not sure what Yun is getting at. Ultimately, the labor market determines whether homeowners will succumb to a recession. And with many tech jobs disappearing, circumstances for gainful employment don’t look swell. Therefore, the idea of stocks to sell remains relevant.
Finally, only about 37% of U.S. households own their homes free and clear. Therefore, if we suffer a broader recession, these are the housing-related stocks to sell.
A full-service real estate brokerage, Redfin (NASDAQ:RDFN) took much of the spotlight during the new normal’s housing boom. On a year-to-date (YTD) basis, RDFN stock has hemorrhaged an astonishing 74% of market value. What makes this figure more remarkable is that over the trailing month ended Aug. 18, RDFN gained more than 18%. Even with the sentiment lift – such as a better-than-expected July jobs report – Redfin can’t run from its recent past.
From a basic level, as the Federal Reserve’s aggressively hawkish strategies spike up borrowing costs, Redfin’s addressable market declines. Moreover, its financial picture offers no encouragement.
While sales for the company’s second quarter increased 29% year-over-year, gross margins declined 20%. A continuation of this trend presents sustainability issues. Therefore, RDFN is one of the stocks to sell.
Zillow (Z, ZG)
Another name among stocks to sell in the housing sector, Zillow (NASDAQ:Z, NASDAQ:ZG) faces major problems despite its market downfall. Since the start of the year, Z stock has shed nearly 47% of value. To be fair, between June 16 and Aug. 19, shares gained 24%. Nevertheless, over the longer term, this dynamic probably represents a dead-cat bounce.
Fundamentally, Zillow operates in a dwindling consumer ecosystem. Frankly, its foray into the iBuying business provides all you need to know. For a quick recap, iBuying involves leveraging technology to facilitate instant offers on people’s homes.
Well, Inc. had something to say about that. “Recently Zillow announced the end of its iBuyer service, and unfortunately, the need to lay off 25 percent of its workforce as a result,” the publication wrote. Bluntly speaking, if the demand profile existed, iBuying ventures would be compelling. But prospective homebuyers have walked away.
On the financial side, Zillow’s Q2 report disclosed YOY revenue and operating income declines. To be fair, we’re talking about operating income, not losses. Nevertheless, the pressure has clearly squeezed Zillow, so don’t play games. Z and ZG represent stocks to sell.
When it comes to the defining narrative of Compass (NYSE:COMP), it may pay to go old school. I understand the company leverages the internet as a marketing medium in conjunction with real estate technologies. Unfortunately, you can have all the tech in the world. If people don’t want your service, you’re not going to succeed. Pretty simple.
Another no-nonsense framework to consider comes down to layoffs. Job cuts are often characterized as promoting efficiency protocols or other euphemisms. Shareholders usually respond positively, assuming greater value for their portfolios. However, a well-run, successful organization shouldn’t be conducting layoffs. Rather, they should be hiring.
Sadly, Compass moves in an undesirable trajectory. Not too long ago, the company laid off 10% of its workforce, citing rising borrowing costs cooling housing sales. Now, it plans to lay off more workers by October.
At risk of stating the obvious, if there’s smoke, there’s fire. Therefore, COMP is one of the stocks to sell.
Opendoor Technologies (OPEN)
Straight up, full stop, Opendoor Technologies (NASDAQ:OPEN) is a disaster. And don’t say I didn’t warn anyone about OPEN being one of the stocks to sell. Below is a trip down memory lane.
On Dec. 21, 2021, I warned, “Opendoor Technologies stock is a lot more vulnerable than you might think.” Shares have hemorrhaged nearly 69% since the date of publication. I reiterated my warning on Jan. 12 and Jan. 28, and revisited the topic on March 25 with much the same sentiment. You get the point.
If I may summarize, Opendoor introduces problems (unfavorable rates compared to traditional brokers) and solves almost none. Frankly, real estate transactions should be long and cumbersome. You don’t want to half-bake what could be the biggest deal of your life.
D.R. Horton (DHI)
Interestingly, homebuilders declared the real estate sector a recession before the brokers did. While both entities feature incentives to keep the spigot running, homebuilders sober quicker since they face realities first. And what are those realities? Mainly, people are rushing to the sidelines. Just take a look at the financials for D.R. Horton (NYSE:DHI), specifically its days inventory line item.
In its fiscal years 2020 and 2021 (ended Sept. 30), D.R. Horton posted days inventory of 279.2 and 263.4, respectively. Interestingly, the average days inventory between 2007 and 2019 is 352. Now, something alarming happened in the company’s most recent Q2 report. Days inventory popped up to more than 300, a staggering 20.7% increase over just one year.
For context, days inventory declined nearly 39% between 2009 and 2021. Frankly, that such an extreme swing of magnitude occurred in such a short period demands greater analysis.
Ultimately, once you perform your due diligence, I believe you will come to the conclusion I have: DHI is one of the stocks to sell.
KB Home (KBH)
As with D.R. Horton above, just look at the financials for KB Home (NYSE:KBH), a rival homebuilder. Its days inventory in 2016 amounted to about 403, but in 2017, it fell as low as 333.7. That represented a significant demand bump.
That figure remained below 400 until the coronavirus pandemic hit. The main point is housing sentiment ties in very strongly with monetary policy.
In KB Home’s quarter ended May 31, 2022, days inventory jumped to nearly 383. This represented a 13% increase from the year-ago level. With a more aggressive Fed running the show, it’s probably time to consider KBH as one of the stocks to sell.
Although imaging service and advanced camera manufacturer Matterport (NASDAQ:MTTR) doesn’t directly relate to the real estate sector, investors should still keep MTTR on their radar for stocks to sell. Unfortunately, the company features significant dependency on the housing market. When circumstances printed positive sentiment, MTTR represented a buy. Now, it’s time to take a cautious approach.
Admittedly, though, Matterport revealed some encouraging developments in its Q2 earnings conference call. Management disclosed strong subscription and services growth. Moreover, it revealed the company experienced record product backlog exiting Q2.
Nevertheless, in writing for Barchart, I presented a counterargument. “Still, the subscription revenue appears to depend heavily on the real estate market. In another section of its Q2 earnings presentation, Matterport cited information showing that 82% of prospective homebuyers would switch to an agent offering 3D tours. This breaks down to 94% of Generation Z, 83% of millennials and 63% of Gen X.”
Bottom line, with fewer people interested in acquiring real estate, providing an immersive imaging service for the sector seems moot.
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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.