Why Real Estate Stocks Popped This Week

What happened

Real estate stocks were moving higher this week, especially ones hit hard by the post-pandemic sell-off in the sector as mortgage rates spiked, home prices fell, and the once red-hot housing market cooled off.

Among this week’s winners were Offerpad (OPAD -3.35%), Compass (COMP 1.99%)and SmartRent (SMRT 4.19%). As of the market’s close on Thursday, Offerpad had gained 15.4%, Compass was up 16.6%, and SmartRent had risen 11.3%, according to data from S&P Global Market Intelligence.

Worker looking at blueprints and standing outside a house being built.

Image source: Getty Images.

So what

Enthusiasm for real estate stocks continues to build as more data points to strengthen the housing market. This week, the most important update came from the new home sales report, showing the key number rising for the third month in a row in May, up 12.2% from April and 20% from a year ago.

The trend seems to show that Americans are anxious to get back into the housing market after the earlier slowdown and are accepting higher mortgage rates. A number of homebuilders are offering buydowns, or promotions that offer new homebuyers a lower rate.

The Case-Shiller Home Price Index, which also came out this week, showed home prices rising for the third month in a row in April, with all 20 of the metro markets it covers showing month-over-month increases. For the month of April, prices increased by 1.3% but were down 0.2% on a year-over-year basis.

Elsewhere, the National Association of Home Builders housing market index entered positive territory for the first time in 11 months, rising for the sixth straight month. And first-quarter gross domestic product (GDP) was revised higher Thursday morning, from 1.3% to 2%, showing the economy grew steadily in the first quarter, making it less likely that we’ll hit a recession.

Real estate stocks rose broadly on the news, including the three above, which are all connected to the real estate industry in different ways.

Offerpad is essentially a high-tech home-flipping business that uses proprietary algorithms to give offers to prospective home sellers. Once the company buys a house, it typically renovates it as needed and attempts to sell it for a profit. Given the nature of the business, it’s much easier for Offerpad to turn a profit when home prices are rising, so this week’s data is clearly a positive sign for the company.

Compass, meanwhile, is now the nation’s biggest real estate brokerage. The company had a splashy initial public offering (IPO) in 2021 when the real estate market was booming, but the stock has struggled since then. To cut costs and move toward profitability, the company has had three rounds of layoffs in the past year and now expects to be free-cash-flow positive for both this year and the current quarter.

Finally, SmartRent is a property technology known for its Smart Hub device, which connects to other smart home devices like thermostats, locks, and doorbells and allows landlords to monitor their properties so they know when there’s a problem — a leak, for example.

SmartRent went public during the real estate boom amid the pandemic, but since then its stock has plunged. The business has continued to grow quickly, with revenue up 74% in the first quarter to $65.1 million. But the company is still unprofitable, and its gross margins are thin. However, a strengthening housing market should support stronger demand for its products over the long run.

Now what

The real estate industry is cyclical, and all three of these real estate stocks are highly volatile and have significant exposure to the real estate market because they are unprofitable and recent IPOs. All three have demonstrated the ability to grow rapidly and have the potential to be profitable, especially if the real estate market recovers. Given that relationship, I expect these stocks to continue moving higher if housing data improves.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Offerpad Solutions. The Motley Fool has a disclosure policy.

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