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Sometimes what would ordinarily be viewed as bad news is seen as good news for a specific company. On Thursday, investors responded to rising unemployment numbers by bidding up shares of Redfin (RDFN 12.70%) as much as 12%.
The Federal Reserve has made it clear it needs to see economic pain before it slows interest rate hikes. For a company like Redfin, a surge in unemployment might be what it takes to ease the rate pressure on the housing market.
The year 2022 will go down as the worst for housing since the 2008-2009 recession, and Redfin shares have taken a beating as a result. Shares of the company have lost 89% of their value since Jan. 1, as the Fed’s effort to cut inflation by hiking interest rates has led to a slowdown in real estate sales.
The Fed is attempting to cool the economy without throwing it into a recession, but Chair Jerome Powell has made it clear he won’t ease back on the hikes until there are clear signs of inflation pressures easing. The relatively robust job market has been one of the data points the Fed has cited in arguing for continued rate hikes.
With that in mind, this week’s unemployment weekly claims report is bullish for companies like Redfin that are closely linked to the hikes. The U.S. Department of Labor said that initial jobless claims rose by 9,000 to 225,000 for the week ending Dec. 24, in line with forecasts. Continuing claims, the number of people already collecting unemployment benefits, rose to 1.71 million, its highest reading since February.
Though that’s still a relatively healthy labor market by historical standards, it is at least a sign of stress and a potential indicator that the rate hikes are having their desired impact. The market responded by rallying higher, with Redfin enjoying an oversize reaction.
These day-to-day movements are mostly noise — emotional reactions to the latest data — and tend to only sustain until the next data point is released. The longer-term move, in this case Redfin’s 89% decline, is more important for investors to focus on.
Truth is, Redfin faces a difficult environment for the foreseeable future. The company does best in periods of strong real estate sales volume, and even if the Federal Reserve halts rate hikes tomorrow, it could still take time for buyers and sellers to adjust to the new realities of higher mortgage rates and for transaction volumes to recover.
For long-term-focused investors, it is possible Redfin’s lower-cost model will be even more appealing to home sellers in a market where prices are under pressure. And Redfin is taking prudent steps to make sure it has staying power through the slowdown. But those considering buying in today need to realize there is likely to be more volatility ahead, and patience will be required if Redfin is going to turn into a winning investment.
Lou Whiteman has positions in Redfin. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends the following options: short February 2023 $7 calls on Redfin. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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