Mortgage originator Rocket Companies (NYSE:RKT) has seen its shares decline in the middle of an otherwise red-hot housing market. The valuation on RKT stock, down more than 24% in the last three weeks, has now actually become quite reasonable. However…
Existing home sales fell 2.7% in April to a yearly pace of 5.85 million units, the National Association of Realtors said last week. Unsold homes inventory rose to a 2.4-month supply, up from the March level of 2.1 months.
So, with some uncertainty underlying the housing market’s outlook over the medium-term, I recommend that longer-term investors wait for a significant, further pullback in the name before taking a bullish position in these shares.
Here’s a look at some of the issues that could cause the housing market to stumble significantly in the coming weeks and months, potentially dealing a hurtful blow to RKT stock.
Interest Rate Risk, Material Shortages Hurt
With inflation starting to emerge in the U.S., 30-year interest rates could spike suddenly, with or without the Fed’s approval. In fact, in April, the central bank warned that inflation could reach undesirable levels in the coming months, CNBC reported on May 19, citing the minutes of the Fed’s meeting held last month.
Such an increase, of course, may have a huge, negative impact on demand for housing. Additionally, “a number” of the members of the Fed’s board of governors indicated last month that if the economy continues to improve, the central bank could consider reducing its asset purchases in upcoming months, CNBC quoted the Fed’s minutes as saying.
The Fed is currently buying $40 billion of mortgage-backed securities each month, and paring those purchases could cause many mortgages to become more expensive. That, in turn, would likely damage Rocket’s business.
Meanwhile, “Single-family housing starts dropped more than 13% in April compared with March,” CNBC reported on May 18. According to “Peter Boockvar, chief investment officer at Bleakley Advisory Group,” shortages of lumber and other materials, as well as difficulties in recruiting workers, was responsible for the downturn.
To the extent that those issues continue to overhang the housing market, they could prove to be painful for Rocket and RKT stock investors.
Pandemic’s End Could Curb Suburban Migration
One of the main catalysts for the housing boom has been the mass migration of Americans from the cities to suburbia. One of the major causes of the latter trend, in turn, has been the continued closure of many schools in some cities.
But after the head of one of the nation’s largest teachers’ unions recently apparently endorsed reopening schools in September, I expect fewer families to leave cities due to school closures. With the end of the closures now in sight, many urban families whose public schools are closed will instead choose to stay where they are and figure out a way to hold on for another several months.
Similarly, crime and social unrest in many cities over the last year caused a large number of families to flee to the suburbs. But the unrest has certainly eased in most places. And, with the economy continuing to improve and political tensions easing, there’s a good chance that crime will also drop meaningfully.
And with many large cities starting to fully reopen as the pandemic eases, another catalyst for fleeing to the suburbs is being swiftly eliminated.
Finally, while the work-from-home trend will lead many people to move in the coming months and years, that impetus alone may not be enough to prevent the housing boom from slowing going forward.
Bottom Line on RKT Stock
After the recent retreat of its share price, RKT stock has a rather low forward price-to-earnings ratio of 8.2 and a reasonable trailing price-to-sales ratio of 1.9, according to data compiled by Yahoo Finance.
Adding to my caution on the name, asset manager Baron Funds recently sold its shares in the company, citing concerns that are similar to my own. Specifically, the company stated that it was worried “about growth as interest rates rise and mortgage refinancing volumes fall.”
With so many forces poised to potentially slow down the housing market, I’m reluctant to recommend RKT stock even at these levels.
On the date of publication, Larry Ramer 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.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.