With the broader equity indices struggling for traction, rising recession fears brings the glaring spotlight back on so-called real estate bubble stocks. Due to the unique circumstance underlying the Covid-19 crisis and subsequent governmental response, housing prices skyrocketed. In turn, several companies plying their trade in the arena benefitted. But as the saying goes, all good things must come to an end.
To be fair, before you start shorting real estate crash stocks, debate about the broader issue rages on. One important factor to consider is that certain regions may never see a true crash. For example, San Francisco is a peninsula: you can only build so many homes. And with demand for the California lifestyle astonishingly strong (despite the “wokism” charge), you probably shouldn’t heed real estate bubble 2023 predictions regarding Frisco.
However, many other (less desirable) areas may be fair game. With that caveat in mind, let’s explore the worst real estate stocks to own now.
While I’m not about to make any kind of recommendations, let’s say theoretically a projectile-firing device was placed to my head. Under this dire circumstance, if I had to give a talk on how to short the real estate market, guess what? I’m going to target Opendoor Technologies (NASDAQ:OPEN). It’s not that I hate the business. Rather, it just doesn’t make much sense under a rising interest rate environment.
Here’s the deal. When the oil cartel known as OPEC+ decided to surprisingly cut production in early April, it sent a message. Basically, the Federal Reserve will not be the only entity to significantly influence the trajectory of the dollar. Since higher energy prices only exacerbate inflation for the consumer, the Fed may have little choice but hike rates.
Under this ecosystem, I don’t see how Opendoor can flip homes via its iBuyer business model. Sure, you can talk about artificial intelligence and machine learning. Nevertheless, at the end of the day, people must be willing to buy and sell. The market simply isn’t active enough for OPEN, making it one of the real estate bubble stocks.
Most Wall Street analysts don’t agree, to be fair, with the consensus being hold. Also, their average price target hits $3.97, implying 215% upside potential.
Zillow Group (Z, ZG)
A white clock indicates it's time to sell.
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Real-estate marketplace company Zillow Group (NASDAQ:Z, NASDAQ:ZG) may be one of the more creative enterprises among real estate bubble stocks. Leveraging various technologies, it zoomed to popularity since its founding in Dec. 2004. To note, the Class C Z stock put in a great performance this year, gaining 24% since the Jan. opener. In the past year, it’s up over 6%.
However, with the topic at hand being real estate crash stocks, questions haven risen about Zillow’s viability. For example, Zillow’s foray into the iBuyer phenomenon failed miserably. And that might be a fundamental clue for other housing-related entities. When the housing market is booming, even bad business models can flourish. However, when circumstances sour, only the best ideas thrive.
In addition, I’m struggling to understand how in the face of mass layoffs that companies like Zillow can thrive. I don’t know about you but I field tons of calls from various brokerages wishing to earn my business. Given the broader market desperation, I’m gonna say that Z may be one of the worst real estate stocks to own now. To be fair, though, Wall Street thinks I’m an idiot, with analysts pegging Z a moderate buy. Also, their average price target comes out to $49.33, implying over 18% upside potential.
LoanDepot (LDI)
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Founded in Dec. 2009, LoanDepot (NYSE:LDI) ascended from the ashes of the Great Recession. Now, it appears we’re coming full circle in terms of crisis management. Structured as a non-bank holding company, LoanDepot sells mortgage and non-mortgage lending products. Since the start of the year, LDI gained over 1% of market value. However, momentum is fading quickly.
Fundamentally, you can appreciate why. Sure, as the Fed raises the benchmark interest rate, mortgage lenders and their ilk theoretically enjoy high profitability. However, they must also find willing borrowers. I’m afraid that’s where I’m struggling to understand the viability of LDI.
Financially, circumstances don’t look too appealing, making shares one of the real estate bubble stocks. For one thing, LoanDepot suffers from a poor, debt-laden balance sheet. Further, it incurred negative revenue growth and negative net margin. Lastly, analysts peg LDI as a consensus hold. Their average price target is only $1.80, a little more than 9% implied upside.
Redfin (RDFN)
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On surface level and absent other context, Redfin (NASDAQ:RDFN) appears to rank among the securities to buy, not one of the real estate bubble stocks to avoid. Since the Jan. opener, RDFN gained more than 63%, a remarkable bounce back. Some of that was justified based on fundamental factors. For example, earlier this year, falling mortgage rates brought some homebuyers back into the market.
However, the nearer-term circumstances suggest that RDFN may be one of the worst real estate stocks to own now. In the trailing month, RDFN slipped nearly 15%. And just in the past five sessions, shares plunged almost 22%. With fears of a recession rising, most people’s idea of making smart decisions don’t involve potentially overpriced real estate.
Also, I’m questioning the viability of the labor market, which will impact so-called real estate crash stocks. When you consider the layoffs that generated headlines, we’re not talking about BS jobs. Rather, these are high-paying jobs that support homeownership ambitions.
Here, Wall Street seems to agree with me, assigning a consensus hold rating. Moreover, the average price target is only $7.51, implying less than 7% upside potential.
KB Home (KBH)
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On paper, mentioning homebuilder KB Home (NYSE:KBH) as one of the real estate crash stocks seems risky. Since the beginning of this year, KBH soared to almost 27% up. Nor is that a “beauty” stat based on favorable timing as the trailing-one-year return also hits 27% up. Also, in the near term, KBH seems to be building momentum. It’s up almost 2.5% in the past 30 days.
Still, it’s also possible that KBH could make the ranks of real estate bubble stocks. After flying through the pandemic, posting revenue of $5.73 billion in 2021 and $6.9 billion in 2022, the performance this year appears to be decelerating slightly.
Now, that might not seem like such a bad development. However, KBH appears undervalued based on its low trailing-year multiple of 4.51. But if forward projections don’t match up with reality, KBH could become technically overvalued. So far, analysts don’t share my opinion, with the consensus rating reaching a moderate buy. Nevertheless, the price target of $43.79 (which implies less than 7% upside) doesn’t exactly ring confidence.
Ocwen Financial (OCN)
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A lesser-known enterprise among possible real estate bubble stocks, Ocwen Financial (NYSE:OCN) is a provider of residential and commercial mortgage loan servicing, special servicing and asset management services. With higher rates hurting consumer sentiment, Ocwen may struggle moving forward. Since the Jan. opener, OCN gave up more than 12% of equity value.
That said, OCN did post a return of over 51% in the past 365 days. However, investors look forward to their ventures, not backward. And presently, Ocwen just doesn’t print attractive financial metrics. Perhaps most noticeably, its balance sheet imposes a liability. Its cash-to-debt ratio sits at 0.02, ranked worse than 98% of the competition.
As well, its three-year revenue growth rate slipped to 4.4% below zero. And its net margin of only 2.57% rates as one of the worst in the business. Thus, OCN might very well be among the worst real estate stocks to own now. Interestingly, only one analyst covers OCN and the rating is a hold. Also, the expert did not provide a price target, which isn’t exactly inspiring.
Rocket Companies (RKT)
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Earlier, I said that in a theoretically dire circumstance, if I had to discuss how to short the real estate market, I’d pick Opendoor. Well, if you want another idea for extreme (negative) speculation, you might consider Rocket Companies (NYSE:RKT). To be 100% clear, I’m not suggesting you do anything. Frankly, I just need to make my articles as SEO friendly as possible.
However, if I was a bearish trader (which I’m not), I’d be tempted to target Rocket. Fundamentally, the mortgage industry appears to be headed for a reckoning because of the high-interest-rate environment. Again, people lost the motivation to borrow, especially with home prices remaining significantly elevated.
Financially, Rocket appears to be a messy proposition for the bulls. Most conspicuously to me, the balance sheet suffers from too much debt relative to cash. Also, its three-year revenue growth rate pings at 61% below breakeven. On the bottom line, Rocket’s net margin is only 0.82%. This ranks worse than 96% of the competition. On a final note, analysts peg RKT as a consensus hold. Their average price target sits at $7.71, implying nearly 10% downside risk.
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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
