1 real estate stock to play in the housing market and 2 to avoid

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Wedbush analyst Jay McCanless downgraded Redfin stock.

Stephen Brashear/Getty Images for Redfin

Housing inventories soared in 2021, benefiting from a competitive real estate market as consumers took advantage of ultra-low interest rates.

But the market is cooling rapidly as rising borrowing costs discourage potential buyers. Pending home sales fell 13% in June from the same period last year, while mortgage purchase applications fell 24%, according to

red fin
.

For potential buyers, a slower market could offer a ray of hope. This does not bode well for stocks that depend on strong housing demand, such as online brokerages or homebuilders.

Analysts are adjusting their sector equity calls accordingly, picking potential winners and losers. On Monday,

Swiss credit

downgraded

Knowledge base home

(teleprinter:

KBH

) to neutral to outperform. Analyst Dan Oppenheim lowered his target for the stock price to $35 from $42.

“Our neutral rating reflects our concern that KBH’s strategy remains overly optimistic in a tougher housing market and will lead to larger cancellations, higher inventory and earnings below consensus expectations,” it said. he writes.

Knowledge base home

sells and builds new homes across the country. In mid-June, the company said it expects to meet its revenue targets this year, even as the housing market slows. In a press release, CEO Jeffrey Mezger said the company’s business model of building homes after they are ordered would help the company navigate these conditions.

Oppenheim believes that rapid changes in mortgage rates between signing an initial contract and closing a sale could scare off many first-time buyers, prompting them to back out of their offers and hurt KB Home’s profits. He predicts “unstable” conditions over the next few quarters.

The company did not immediately respond to a request for comment. KB Home fell 0.9% to $30.35, for a 32% loss in 2022.

Wedbush analyst Jay McCanless also predicts a few rough quarters for housing inventory. He demoted

red fin

(

RDFN

) on Monday, rating the stock Neutral, down from Outperform. He lowered his price target to $9 from $14. Redfin was down 9% at $8.64 on Monday, for a loss of 77% so far this year.

In his opinion, the online real estate broker will find it difficult to navigate in a difficult environment. McCanless is particularly concerned about Redfin’s new foray into mortgage services, which he called “an ill-timed decision in hindsight”. He thinks the segment is likely to lose money for the rest of the year as home sales slow. He is also skeptical of the efficiency of Redfin’s operations.

“Redfin has consistently lost money in one of the best sell/demand/price environments we’ve seen for housing in 2021,” he wrote.

Redfin did not immediately respond to a request for comment. The stock was down more than 9% at $8.62 on Monday, taking its loss so far this year to 78%.

Competitor

Zillow Group

(

Z

) may be a safer way to bid on real estate in a volatile market, McCanless wrote. He upgraded the stock from Neutral to Outperform on Monday and raised his price target to $41 from $37.

The company has a strong cash balance sheet after closing its home flipping division, McCanless wrote. It could channel those funds into initiatives that could help it gain long-term market share, such as developing its “housing super app,” he said. McCanless also expects Zillow to repurchase stock on a regular basis over the next six quarters. The stock fell 4% to $33.67 on Monday.

Analyst sentiment cooled on Zillow, with 35% rating it a buy, 52% rating it a hold, and 13% rating it a sell. But it’s still better than Redfin’s ratings. Only 6% of analysts rated it a buy, while 83% rated it a hold. Sentiment is more bullish on KB Home: 71% of analysts rate the stock buy, according to FactSet, while 24% hold it. Only 6% consider it a sale.

Write to Sabrina Escobar at [email protected]

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