As our own Ian Bezek mentioned, Rocket Companies (NYSE:RKT) theoretically should be soaring to fresh heights after fresh heights. As he put it, the organization has “a great name, tons of meme energy and solid fundamentals.” Factor in the strong business and “excellent earnings and prospects” and you’d expect RKT stock to jump higher.
Truth be told, it has but only on a relative basis compared to its recent lows. During the doldrums in May of this year, RKT stock slipped below its initial public offering price. At time of writing, shares have made their way back up above the key threshold, but not by much.
Further, it’s difficult to ignore that if you even out the wild swings in market value, RKT stock really hasn’t gone anywhere. No matter what you feel about the underlying financials, that’s not exactly a recipe for instilling confidence.
Of course, one of the main issues with RKT stock is that it’s tied to two main businesses: home purchase loans and refinancing. As you know, the former has gone gangbusters and continues to do so. But the latter may experience a slow down due to rising interest rates. Should rates rise high enough, there obviously won’t be an incentive to refinance.
Further, refinancing deals don’t occur all the time. And as Rocket itself states, refinancing involves many nuances. It’s not as easy as free money. Therefore, only a limited number of qualified applicants exist. And likely, the industry has burned through much of this consumer base.
However, Bezek counters that “refinancings are unlikely to totally dry up.” In addition, he states that “even while refinancings slow, new home purchases should remain strong in coming quarters.” Thus, RKT may be worth another look.
Maybe. But there’s a headwind brewing that investors should consider.
Booming Housing Market Not Guaranteed for RKT Stock
To avoid getting into a rut with my writing, I make sure to take inspiration from a variety of sources. Recently, I’ve been tuning into the YouTube channel Uneducated Economist. Unlike the litany of self-professed YouTube experts out there, the gentleman that runs the channel keeps it real.
I like that. I also like that he works in a lumberyard. That piqued my interest because he offered a contrarian take on the mainstream media’s constant barrage of content that claimed lumber shortages have contributed to the housing availability crisis. But he’s out there reporting that lumber prices are falling, and this shortage story is over and done.
Really? Well, I looked into it (you know, because I can’t use personal YouTube videos as a definitive source) and indeed, lumber prices are down 40% from their May record high. Further, across the nation, building permits, housing starts, and housing completions have been rising over the last several months.
Combine that with the apparent normalization of the lumber supply chain and you’ve got yourself the potential for increased housing supply. In turn, this isn’t necessarily good news for RKT stock.
Yes, the rising supply will meet raging demand. But once that demand is filled, Rocket will need to look for additional revenue streams. And that’s where the rising interest rate is problematic. First, it disincentivizes people from repackaging their loans, stymieing revenue on that side of the business. Second and just as importantly, higher rates represent the one major factor that could deflate the housing bubble.
It comes down to a math equation. Earlier, people were willing to pay higher prices because over a typical 30-year loan, the ridiculously low rates meant that they could afford the month-to-month payments. But if rates rise, the principal will have to come down noticeably to achieve cost parity.
The Lesser-Discussed Topic
To me, the narrative for RKT stock is not as enticing as the mainstream headlines would have you believe. Lumber prices are falling, interest rates are rising and builders are building; these are not great components to supporting a housing bubble.
Don’t get me wrong, I’m not suggesting that we’ll see a housing collapse. But a normalization will occur. Personally, I believe that investors recognize this and that’s why RKT stock has been disappointing.
Also, consider that in any mature economy, there are only so many resources to go around. Therefore, the panic buying of real estate in 2020 and 2021 could be demand accelerated forward from say 2022 or 2023. Therefore, by the time we get to tomorrow, the demand that would have been there if the pandemic never occurred won’t be.
In other words, housing demand would have a “debt” to pay. In my view, the only way to rectify this debt is lower prices. Credit goes to another YouTube channel, Reventure Consulting, which provides excellent explanations regarding this dynamic.
Having reviewed the available recent evidence, I’m going to pass on RKT stock. And it already seems that the rest of the market has beaten me to the punch.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.