One of the bright spots for the economy in 2020 was the housing market. Even prior to the coronavirus, the housing market was in good shape due to strong fundamentals - low housing supply, rock-bottom mortgage rates, and favorable demographics.

The coronavirus resulted in a surge in demand for housing as many people moved from cities to suburban or rural areas. These factors resulted in a sharp increase in home prices, strength for housing-related stocks, and another decline in the supply of homes.

Some skeptics believe that the strength in housing is transitory, as the coronavirus simply pulled demand away from future quarters. Thus, the housing market will lose steam, due to weaker demand going forward. 

I disagree with this assessment. 

The same fundamentals that were behind the housing market’s strength prior to the pandemic remain in play - currently housing is affordabie due to even lower mortgage rates, housing supply is close to record-lows, and the Millennials are entering their 30s and 40s when people tend to become homeowners. 

Aggregate measures of the economy are in good shape like household balance sheets, incomes, and consumer spending that are consistent with the early stages of an expansion. Housing data is also confirming this picture.

(source: Bespoke Investment Group)

As the housing data above shows, housing has been gently strengthening since 2011. Now, this trend seems to be accelerating in recent months.

3 Stocks to Buy

There are several ways that investors can take advantage of the housing market’s strength. Some of the conventional choices are buying home improvement stocks, homebuilders, REITs, or materials stocks. And, certainly these stocks will do well with rising home prices that translates into more construction and renovations.

However, I believe that the stocks with the most upside are the real estate tech stocks. While many areas of the economy have been disrupted by technology, this is just beginning in real estate. Part of the challenge is that every state has its own regulations, and the entrenched participants in the real estate industry like agents or brokers have little incentive to change given that it would threaten their bottom line. 

Nevertheless, it’s only a matter of time before real estate goes through this transformation. From other industries, we know that it will result in quicker transactions, lower transaction costs, and more transparency. Ultimately, the consumer is the winner, and the middle-men are the losers.   

Fortunately, there are several innovative companies working on modernizing the real estate industry. Investors who want to take advantage of this trend should consider investing in Redfin (RDFN), Zillow Group (Z), and

Redfin (RDFN)

RDFN is a high-tech real estate brokerage. It offers buyers and sellers significantly less fees than typical agents. Commissions are 1% rather than 3%. The pandemic has led to an uptick in business as the company was one of the first to adopt virtual home tours. Through software and digitalization, it’s also managed to reduce the time it takes for a home sale to close as well. 

It’s added some more premium offerings including Redfin Concierge in which the selling fee is increased to 2% but RDFN fixes up the home to increase its selling price, shouldering the cost of these improvements. Additionally, it offers Redfin Now in which the company will outright buy the house for a 7% fee. 

Real estate commissions are how real estate agents make money, but they also skew incentives. In contrast, Redfin’s agents earn a salary with benefits, so their incentives are aligned with the buyer or seller. Bonuses for Redfin agents are paid out based on customer satisfaction rather than being tied to the selling price of the property.

RDFN is on its way to becoming the largest real estage broker in the country. This is also leading to momentum in terms of 325% earnings growth and 39% revenue growth in 2021.

The POWR Ratings rate RDFN a strong buy. It has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade. Among Real Estate Services stocks, it’s ranked #4 out of 54.

Zillow Group (Z)

Among the real estate tech stocks, I believe Z is in the strongest position. It’s become the default real estate search engine with all types of available information about real estate including property valuations based on its own algorithm.

Over the past decade, we’ve seen that once a platform can get enough users, then monetization works itself out. Zillow has abundant opportunities given that most of the people are on the site and are interested in buying and selling. Additionally, real estate transactions tend to be in the six or seven figures.

So far, Zillow has been focused on growth, however it’s starting with monetizing through ads and lead-generation for brokers and real estate agents. Zillow also has a tremendous amount of proprietary data on users’ buying interest and sellers as well which it can also package as a product.

Zillow’s next step is to use the platform for selling and buying homes through the use of its own agents which take much smaller commissions than the typical 3%. Of course, the bull market in housing will be a catalyst for this segment’s growth. Additionally, younger buyers and sellers are more likely to use these platforms rather than traditional means.

The POWR Ratings are bullish on Z as well. It has a Strong Buy rating. The stock is rated an “A” across all components including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Among Internet stocks, it’s ranked #8 out of 59.

OpenDoor (OPEN)

OPEN became public in November through a SPAC sponsored by Chamath Pahilipatiya in a $4.8 billion reverse merger. OPEN is an onlien platform for buying and selling homes. The company is ambitious and seeks to be the “Amazon (AMZN) of home buying”.

OPEN has a simple business model. Any homeowner who wants to sell their home can get an instantaneous quote from the company’s algorithm. OPEN will typically make some fixes and aesthetic improvements and put the house back on the market. Typically, it earns margins around 10% on each transaction. It also offers higher-margin products like mortgages, home repairs, and home warranties. 

OPEN is applying e-Commerce principles to the real estate process, specifically in terms of increasing transaction speed. In 2019, the company had over 18,000 homes sell on its platform, and the company is targeting 100,000 in 2021. 

It has a number of high-profile backers beyond Pahilipatiya such as Lennar (LEN), Blackrock (BLK), General Atlantic, and Softbank. I believe OPEN has a bright future and along with Z and RDFN will continually take market share away from legacy operators.