Housing market crash fears are on the rise again. Sure, despite the big jump in interest rates, housing has stayed fairly resilient, thanks to scarce inventory. In fact, housing prices were actually up year after year in July, even as existing home sales dropped to a six-month low. And due to the lack of housing inventory, homebuilders like KB Home (NYSE:KBH) also remain confident that a slowdown, much less a crash, isn’t just around the corner.
However, as InvestorPlace’s Samuel O’Brient discussed last month, numerous economic indicators suggest that a crash could happen pretty soon. For instance, the resumption of student loan repayments this month could curb consumer discretionary spending. And it. may just be the straw that breaks the camel’s back.
Less discretionary spending could hurt the overall economy, which in turn may cause unemployment to rise, leading to increased mortgage defaults/increased forced selling of homes, putting pressure on prices. Ahead of what could be the long-awaited beginning of the end for the early-2020s housing bubble, these are top stocks to sell before a possible housing market crash.
Dream Finders Homes (DFH)
Dream Finders Homes (NYSE:DFH) may not be as well known as other homebuilders. However, the stock has been on a tear so far in 2023, rising nearly threefold since January. Continued strong results, coupled with possible short-squeeze speculation, have big the main reasons for this strong performance.
However, there may be two good reasons why DFH stock is now one of the stocks to sell. First, there is a risk of a housing crash. With high exposure to some of the most overheated housing markets (Florida, Texas), if a crash finally happens, it could have a severe impact on DFH’s operating results. Second, even if a housing crash doesn’t happen, DFH could still pull back, if its “squeeze appeal” begins to fade. According to Fintel, short interest has started to come down. Topping at 23.64% of the float on July 31, it’s now at 22.5%.
Invitation Homes (INVH)
It’s not just homebuilder stocks that are at risk of big declines in a housing market crash. Real estate investment trusts (or REITs) that buy/lease out single-family properties, like Invitation Homes (NYSE:INVH), could be affected as well.
Sure, with INVH stock, maintaining/growing its rental income may help to outweigh a possible decline in the underlying value of the REIT’s single-family home portfolio. However, rent prices have already started to cool. The combination of lower-than-expected income growth and declining asset prices could place a double-whammy of pressure on shares.
That said, there may be a silver lining if a housing crash comes and goes. A depressed housing market may make it easier for Invitation Homes to acquire more properties at favorable prices. Yet while a downturn could be a wash in the long run, as it may drive a sell-off in the near term, consider it best to sell now.
Lennar (NYSE:LEN) is definitely in trouble if a housing crash takes shape. Housing market resilience (thanks to limited inventory) has led to a nearly 25% jump in price for the homebuilder’s share year-to-date (or YTD).
Recent buying of the stock by Warren Buffett’s Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) has also bolstered confidence in LEN stock. However, as a Seeking Alpha commentator argued last month, this may prove to be a mistake on the “Oracle of Omaha’s” part. Why? Per the commentator, homebuilders like Lennar are in a precarious position.
A lowering of interest rates and/or a recession could lead to a rapid rebound in housing inventory. In turn, this would likely bring the continued boom times for home builders swiftly to an end. If this happens, LEN could experience a big reversal. The stock could even cough back all of its 2023 gains.
Opendoor Technologies (OPEN)
Take a look at a multi-year stock chart of Opendoor Technologies (NASDAQ:OPEN), and it may seem like the risk of a housing market crash is already priced in. Since early 2021, the real estate iBuyer’s shares have tumbled from over $35 per share, to just under $4 per share today.
However, more recently, OPEN stock has kicked off a major rebound. As the other shoe has yet to drop with housing, speculators have dived back in, resulting in a 244.1% move higher since January. The issue? This super rally may prove fleeting.
Given Opendoor’s weak fiscal performance in the current “less bad than expected” housing market, with big revenue declines and heavy losses, one can imagine how bad things could get if a bona fide crash occurs. Forget about OPEN making a continued comeback. Falling back to sub-$1 per share prices may be more likely.
Redfin (NASDAQ:RDFN) is another housing-related stock that seems to have priced in a good deal of negativity. As with OPEN, shares in this real estate brokerage firm have experienced a triple-digit rebound in price so far this year.
However, investor sentiment for RDFN stock has shifted back towards negative over the last few several weeks. Since the start of August, RDFN has fallen from just above $15 per share, down to prices below $10 per share. This decline was due largely to the company announcing that its timeline to break even adjusted EBITDA will happen in mid-2024 rather than by the end of 2023.
More declines may be in store if a housing crash happens, and this break-even point is extended even further. This may explain why Redfin shares have a moderately high level of short interest. According to Fintel, 13.62% of Redfin’s outstanding float has been sold short.
UWM Holdings (UWMC)
So far, we’ve talked about homebuilders, single-family home investors, and realtors that could be severely affected by a housing market crash. Now, let’s look at UWM Holdings (NYSE:UWMC), a wholesale mortgage lender that may also be at risk, in two ways.
UWM has continued reporting solid results, thanks to mortgages for new home purchases remaining strong, outweighing the impact of higher interest rates on mortgage refinancing activity. Yet if the housing market crashes and home purchases take an even larger dive, results in 2024 and 2025 could fall far short of current earnings forecasts.
Yes, UWMC stock bulls may point to the potential for interest rates to come back down, as something else that could lead to stronger results. However, while UWM is betting big on a refi boom, as analysts like Morningstar point to interest rates staying elevated through 2024, this “refi recovery” thesis may prove incorrect.
Zillow Group (Z, ZG)
Zillow Group (NASDAQ:Z, NASDAQ:ZG) is another real estate services company whose shares have made a big rebound since the start of the year, rising by more than 55%. However, if you happen to hold Z stock in your portfolio, now may be the time to sell into strength. As InvestorPlace’s Josh Enotomo argued in July, factors like short-squeeze speculations were likely behind the stock’s hot run earlier this year. Going forward, factors more directly related to housing market fundamentals could begin to knock it back down.
That’s not all. Even if a housing crash doesn’t happen, there may be limited upside with Z shares. The stock currently trades for 41.2 times forward earnings, suggesting that the stock already trades as if a housing rebound is a near certainty. With little room to run if housing recovers, but a big downside if a meltdown happens, sell or stay away from Zillow stock.
On the date of publication, Thomas Niel did not hold (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.