Analysis

Why Redfin Stock Rocketed More Than 11% Higher on Monday

The real estate middleman confirmed what many would expect to be the case. It even doubled down on the resulting opportunity.

Largely in response to news regarding its ever-strengthening place within the real estate sales business, data from S&P Global Market Intelligence indicates that as of 3:54 p.m. ET Monday, Redfin (RDFN 12.03%) stock was up 11.4%.

More upside could be in store, too.

It’s complicated

Last month, the National Association of Realtors (NAR) changed long-standing rules regarding agents’ commissions, disclosure requirements, and use of the industry’s internet listing technology. Intended to create more transparency for all parties involved in a sale, the move also posed the risk of lowering agents’ net commissions. The new rules also proved particularly confusing to prospective buyers, who have generally not been responsible for paying any agent; that’s typically been handled by the seller.

Now nearly one month into the new paradigm, almost everyone’s figuring it out. As was widely expected, the key outcome has been lower overall commissions.

This new paradigm, however, is one that readily favors Redfin’s existing business model of making it more cost-effective to buy or sell a home. That’s the word from Redfin, anyway, which announced on Monday that its agents were seeing measurable benefit from the newly required commission flexibility.

Separately but simultaneously, Redfin also announced this morning that beginning in late October, some of its agents will be earning higher commissions. In addition to a commission split of up to 75%, most business expenses incurred by agents participating in its Redfin Next program will be covered by Redfin as well. The revamped compensation plan will likely grow Redfin’s business by attracting agents and brokerages that have sought to continue doing business without the use of its increasingly popular listing platform.

That said, it would be shortsighted to presume recently falling interest rates — and the promise of more interest rate cuts later this month — don’t play a role in Monday’s rekindled bullishness from this stock.

Monday’s move reflects the bigger-picture opportunity

It’s difficult to deny that the real estate business isn’t evolving in a way that favors Redfin — namely, lower commissions are the new norm, and most house hunting is at least initially being done online. Given Redfin’s well-established brand name and the fact that it’s already discounting net commissions, it’s better positioned than most rivals to capitalize on this shift.

More to the point, volatility-tolerant investors interested in this stock can reasonably expect more gains from here. Redfin’s competitive edge in this new era of real estate agent commissions is being cemented into place. Falling mortgage rates simply add some urgency to the matter.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Redfin. The Motley Fool recommends the following options: short November 2024 $13 calls on Redfin. The Motley Fool has a disclosure policy.

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