Why Shares of Rocket Companies, Zillow, and Redfin Are Up This Week

What happened

Shares of several real estate stocks bounced this week after what has been a brutal month and year of selling in the sector.

For the week, shares of the largest mortgage originator in the county, Rocket Companies (NYSE: RKT), traded close to 5.5% higher as of 2:38 p.m. ET today. Shares of the real estate marketplace Zillow Group (NASDAQ: ZG) (NASDAQ: Z) traded nearly 14% higher and shares of the brokerage Redfin (NASDAQ: RDFN) traded more than 13% higher.

So what

While all of these companies have different business models, they are all dependent to an extent on mortgage volume, which has absolutely plummeted as the Federal Reserve has aggressively raised its overnight benchmark lending rate, the federal funds rate.

As a result mortgage rates have soared, at times topping 6%, which makes the cost of a mortgage much more expensive. This has really slowed mortgage volume, which boomed during 2020 and 2021 due to all of the refinancing homeowners did in the ultra-low interest rate environment.

For instance, closed loan origination volume at Rocket fell to roughly $54 billion in the first quarter of the year, down from more than $103 billion in the first quarter of 2021. Rocket’s gain-on-sale margins have declined as well.

The outlook is also still murky with recent inflation data showing that consumer prices were still on the rise in May, and the Fed vowing to stay aggressive until inflation flatlines and starts to slow.

This week, however, an interesting phenomenon started to play out. The Mortgage Bankers Association reported that purchase mortgage applications increased 8% last week from the prior week due to higher demand for adjustable-rate mortgages (ARMs). ARMs have lower fixed interest rates for a set period of time — typically, three, five, seven, or 10 years — and then the interest rate is floating, typically based on where mortgage rates are, which are heavily influenced by the federal funds rate.

Interestingly, higher rates likely triggered more demand for mortgages, which sounds counterintuitive.

But with mortgage rates so high right now, people are likely thinking let’s take out an ARM, get a lower rate now, and then either mortgage rates will fall by the time the floating rate comes into play or they’ll be able to refinance down the line. The higher volume in the mortgage market this week shows that there is still solid demand in the home buying market.

Now what

Mortgage stocks can be a tough sector to invest in because they operate in such a cyclical industry. Even when things were booming in 2021, many analysts and investors were warning investors to be careful because conditions were likely to deteriorate. 

All three of these stocks have been heavily beaten down, so there may be opportunities; but with inflation still not necessarily peaking yet and the Fed continuing to stay hawkish, it’s tough to tell where mortgage rates will go this year. Personally, I’d prefer to look at and focus on other discounted parts of the stock market right now.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Redfin, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends the following options: short August 2022 $13 calls on Redfin. The Motley Fool has a disclosure policy.

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