Stocks to buy

3 Stocks to Sell for the Housing Market Crash

There’s so much to consider when looking for stocks to sell.

Will there or won’t there be another housing market crash? The answer is that nobody knows with precise certainty. Doomsdayers claim that weaker stocks, a recession, higher mortgage rates, and a cooling jobs market could conspire to expose massive unseen cracks.

Maybe they’re right. Until a few weeks ago, the experts claimed the banking sector was solid. 

Currently, the same experts explain that home equity and more credit-worthy borrowers make this housing market fundamentally incomparable to that of 2005-2007.

It feels eerily similar to claims late last year that if we experience a recession in 2023, it’ll merely be a soft landing. Yet, the likelihood of a hard landing is much higher now. In other words, a crash remains entirely impossible, making these the housing stocks to sell.

EARN Ellington Residential Mortgage REIT $7.26
RDFN Redfin  $9.12
DHI D.R. Horton $99.77

Ellington Residential Mortgage REIT (EARN)

Source: Shutterstock

Ellington Residential Mortgage REIT (NYSE:EARN) is exactly the asset you don’t want to if the housing market crashes. 

The company invests heavily in all things related to mortgages including residential and commercial mortgage loans and residential and commercial mortgage-backed securities.

Mortgage-backed securities are investments that are secured by a collection of mortgages and packaged as an investment.

During the financial crisis, they became infamous because of a lack of oversight that allowed subprime borrowers to access mortgages en masse. That may not be present in this case but the possibility exists. 

In any case, EARN stock is very clearly risky based on its high-yield dividend that pays 13.24% currently. That’s well above the level any advisor would term ‘healthy’ and functions as an enticement.

Such high dividends ought to be viewed with a healthy dose of skepticism. In any case, if the housing market crashes, EARN stock is the last place you’ll want your capital parked. This is definitely one of the stocks to sell now.

Redfin (RDFN) 

Source: Sundry Photography / Shutterstock.com

It stands to reason that real estate services firms including Redfin (NASDAQ:RDFN) are stocks to avoid in a housing crash. And that is true.

Redfin has seen its share price decline from $90 in early 2021 to under $9 currently. The company reduced its risk substantially in late 2022 when it shuttered its iBuyer unit and cut 13% of its labor force. 

Redfin overextended itself through the iBuying model that leveraged algorithms to quickly identify purchase-worthy homes.

The problem is that the algorithm clearly wasn’t that great as the homes purchased weren’t able to be resold at higher prices as the Fed raised rates. It appears the algorithm didn’t consider basic risk assessments. Redfin lost a lot of money because of it. 

Anyway, the company is still fraught with risk now. Recessionary conditions and increasing job losses affect the firm directly as home sales plummet under those conditions. In turn, it receives far less revenue as volume declines.

D.R. Horton (DHI)

Source: Casimiro PT / Shutterstock.com

D.R. Horton (NYSE:DHI) stock might not seem to be in too bad of a position. It headed into 2023 with a strong performance in Q1 on an earnings and revenues beat.

It seems the home builder can’t miss, even as rising mortgage rates should slow its business substantially. 

Demand slowed and new orders decreased by 38% in Q1 ‘23 relative to Q1 ‘21, but the company and its shares continued to do well and may continue to. However, there are a few things about D.R. Horton worth understanding.

One, we don’t know what kind of credit risk the firm has because it doesn’t publicly release its mortgage approval criteria. 

And two, there are serious concerns about the quality of the craftsmanship of the homes the company builds. The consumer affairs website lists a pretty dismal rating for the company.

The notion that volume home construction firms might build shoddy homes isn’t new. The build quality isn’t particularly relevant to the housing crash to be sure. The firm’s credit profile may be. 

On the date of publication, Alex Sirois 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.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks.Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.

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