Redfin Waves A Red Flag Warning At The Housing Market

Redfin (RDFN) may have provided one of the first validations of the (presumed) investor fears that have weighed down the stocks of home builders since the February sell-off. In its last earnings report on August 9, 2018, RDFN provided this brief, yet significant, warning:

“We expect U.S. home sales growth to slow and even perhaps reverse in August and September…”

In several Housing Market Reviews this year, I have pointed out the patterns of deceleration in several important housing market data sets. So, RDFN’s forecast is not shocking. Still, it was a rare acknowledgement from a player in the U.S. housing market. The guidance was based on the last four weeks of housing market activity, making these expectations fresh and forward-leaning from the earlier earnings reports from home builders. The housing market slowdown will have a material impact on RDFN’s business. From the Seeking Alpha Transcript of the earnings conference call:

“We’re now forecasting slower revenue growth for the third quarter, based on an unexpected drop in Redfin’s bookings growth in the past three weeks, slowing traffic growth and a weakening real estate market.”

RDFN’s stock dropped 22.4% to a new all-time low in the wake of its earnings report. As if the slowing housing market was not enough, RDFN also reported a plunge in earnings per share due to a ramp in marketing spending and other costs. Investors never want to hear that a company’s business growth is highly dependent on the success of increased marketing (and/or sales) costs well in advance of revenue growth and during a year where the company expects to operate at a loss. Marketing spend in the second quarter increased a whopping 40% year-over-year (revenue increased 36%) and increased 35% year-over-year over the previous two quarters. Spending specifically on advertising media ramped 53% year-over-year in the second quarter. Fpr the third quarter RDFN expects to increase year-over-year growth in spending on selling and marketing. From the Business Outlook section of the earnings report: