The real estate market has garnered significant investor attention given its impressive performance during this pandemic-led recession. From prolonged indoor stays to historically low Fed Funds rates, there are multiple factors that are acting as tailwinds to bolster the housing market’s growth over the last several months.  

With remote learning and working being the new normal, many people are moving away from cities to the suburban areas for larger residential spaces. This has led to an increase in demand and prices of suburban properties.

In addition, the Federal Reserve has signaled that it plans to keep the interest rates near zero through 2023.  As a result, according to the latest data published by Freddie Mac, interest on 30-year fixed mortgages fell to a historically low level of 2.86% in September, which is the lowest value recorded since 1971.  

A favorable mortgage rate environment for buyers and with buoyant demand bode well for real estate stocks throughout the remainder of 2020, and well into 2021. Companies such as Zillow group, Inc. (ZG), Redfin Corporation (RDFN) and Meritage Homes Corporation (MTH), have reported impressive financials in their last reported quarter, and are expected to witness higher profits in the upcoming quarter.

Zillow group, Inc. (ZG)

ZG offers buying, selling and leasing of real estate properties on its mobile and web applications. It operates through three main segments – Homes, Internet, Media and technology, and Mortgages. ZG’s portfolio of consumer brands include Zillow, Trulia, StreetEasy, HotPads, Naked Apartments and RealEstate.com.

ZG is currently expanding its services to streamline and integrate customer transactions. This move should make it easier for customers to buy and/or lease homes through Zillow Homes, thereby increasing its popularity in the market. Zillow Homes are scheduled to launch in January 2021.

As housing demand is accelerating in the current market, home prices are expected to rise 1.2% from August to November, and 4.8% from August 2020 to August 2021, according to the Zillow Weekly Market Report. Median list price has increased 10.9% from the year-ago value to $345,225 in October.

ZG’s second quarter ended June 2020 earnings report reflects these tailwinds. Total revenue increased 28% year-over-year to $768 million. Cash balance at the end of the quarter reached a record of $3.5 billion, indicating a 34.6% sequential growth. Adjusted EBITDA grew 591.2% to $15.83 million.

The favorable backdrop is expected to drive the third quarter (ended September 2020) results even higher. The consensus EPS estimate of $0.11 for the about-to-be-reported quarter indicates significant improvement from the year-ago negative values. Also, ZG beat the street EPS estimates in each of the trailing four quarters, which is impressive.

ZG gained more than 500% to hit its 52-week high of $112.21 in October since hitting its 52-week low of $18.65 in March.

How does ZG stack up for the POWR Ratings?

A for Trade Grade

B for Buy & Hold Grade

A for Peer Grade

B for Industry Rank

B for Overall POWR Rating.

The stock is also ranked #5 out of 58 stocks in the Internet industry.

Redfin Corporation (RDFN)

RDFN is an online real estate brokerage company operating in the United States and Canada. Designed for both home buyers and sellers, RDFN provides an automated home valuation tool known as Redfin Estimate. It offers full-service brokerage facilities as well as iBuying service for online retail transactions.

According to the latest RDFN report, home prices increased 16% from the year-ago value for the four week period ended October 4th, while median asking prices for listed properties grew 14% year-over-year. The average sale-to-list price ration rose to an all-time high of 99.4% over this period. RDFN also reported a 28.7% increase in the prices of properties in the sub urban areas, as people are shifting from big cities to smaller areas under the new normal of remote working and learning.

Since September 15th, RDFN facilitated cash offers on their listed properties for homebuyers in the Palm Springs area. RDFN expanded its operations to Sacramento on October 9th.

RDFN reported impressive financials in the second quarter ended June 2002 against the backdrop of a booming housing market. Its net revenues increased 8% year-over-year to $214 million, while gross margin increased 200 basis points from the year-ago value to 34%. In this regard, RDFN CEO Glenn Kelman said, “Within the span of a single quarter, year-over-year changes in demand went from -41% to +40%, a level of volatility that I have never seen in nearly 30 years of business. Over the past two months, Redfin’s online visits and customer inquiries have been growing at a faster rate than at any point in the last three years.”

The consensus EPS estimate of $0.20 for the third quarter ended September 2020 indicates 185.7% improvement year-over-year. RDFN has an impressive earnings surprise history as well, as it beat the street EPS estimates in each of the trailing four quarters. The market expects RDFN’s revenue to grow 37.6% to $1.15 billion next year.

RDFN has gained more than 480% since hitting its 52-week low of $9.63 in March. The stock hit its 52-week high of $55.95 in October.

RDFN’s strong fundamentals and underlying industry strength is reflected in its POWR Ratings. It has a “Strong Buy” rating with an “A” for Trade Grade, Buy & Hold Grade and Peer Grade, and a “B” for Industry Rank.  In the 44-stock Real Estate Services industry, RDFN is ranked #3.

Meritage Homes Corporation (MTH)

MTH constructs, markets and sells homes to first-time and first-move-up buyers in the southern states of the United States. It also offers financial services such as title insurance and closing/ settlement services to prospective home buyers. MTH is the 7th largest home builder in the country. As a well-established name in the homebuilding industry, MTH won the Avid Diamond award, Avid Gold Award and the Avid benchmark award across 9 separate divisions. MTH has been awarded this honor for eight straight years, scoring among the top 25% of the home builders in the country for a positive home owner and customer satisfaction experience.

MTH’s home closing revenue increased 20% year-over-year to $1.03 billion in the second quarter ended June 2020. Gross profit improved 39.4% year-over-year to $219 million. Net earnings from financial services improved 78% from the year-ago value to $90.68 million, while EBIT grew 71% from the same period last year to $115.86 million. EPS rose 82% from the prior year quarter to $2.38.

MTH opened a new community “Archer meadow” in San Tan Valley, which is developed to house 350 families in July. MTH’s total orders for July and August increased 73% year-over-year.

The developments are expected to drive MTH’s third quarter results. The consensus EPS estimate of $2.41 for the third quarter ended September 2020 indicates a 34.6% improvement year-over-year. Moreover, MTH beat the street EPS estimates in each of the trailing four quarters, which bodes well for the stock. The market expects MTH’s revenue to grow 19.6% in the current year to $4.37 billion.

MTH gained more than 360% since hitting its 52-week low of $25.24 in March. The stock hit its 52-week high of $117.06 in October.

MTH is rated a “Strong Buy’ in our POWR Ratings system, consistent with its business model and impressive financials. It has an “A” for Trade Grade and Buy & Hold Grade, and “B” for Peer Grade and Industry Rank. In the Homebuilders industry, MTH is ranked #5 out of 21 stocks. 

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ZG shares were trading at $101.94 per share on Tuesday afternoon, up $0.85 (+0.84%). Year-to-date, ZG has gained 122.87%, versus a 10.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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