Over the past year, the market for initial public offerings — which of course includes the special purpose acquisition company (SPAC) phenomenon — has been nothing short of fire. Fundamentally — without considering its recent technical price action — Rocket Companies (NYSE:RKT) is easily one of the top beneficiaries. Thanks to the mercurial housing boom, RKT stock should be one of the top performers.
But we can’t play the cherry-picking game because invariably, it doesn’t matter. True, RKT stock got off to an incredibly auspicious start in 2021, jumping from a beginning of January closing price of $20 to an all-time closing high of $41.60 near the start of March. Naturally, this dramatic upside excited investors who had already been blessed with incredible fortunes.
Unfortunately, RKT stock immediately lost its newfound optimism, dropping to below $25 in a matter of days. Here we are near the end of July, the share price has more than halved since early March, including a 13.2% decline in the last month alone.
Despite the clear signs that RKT stock has lost its mojo, the nuances of the fundamentals allegedly support higher valuations. True, prices already soared to ridiculous levels, which usually imply an unsustainable dynamic. But as a June 10, 2021 Bloomberg article reminded us, this isn’t like the last housing crisis. Namely, stricter lending standards greatly mitigate risk in the market.
You’ll recall that the last real estate bubble wasn’t such merely because of rising prices. Instead, people couldn’t afford to stay in their homes because of unscrupulous lending practices. That’s when the NINJA acronym became so popular: no income, no job, no assets — no problem.
We don’t have that. So we’re good with the housing rally… right? Well, we thought so, then came yesterday’s report that new home purchases decreased for a third straight month in June.
RKT Stock Is Facing a No-Good Situation
Although it’s true that the mortgage industry tightened up its act, that doesn’t necessarily mean investments like RKT stock are off the hook. The one headwind that people should focus on is the possibility of higher interest rates.
When I last covered Rocket Companies, I warned that once supply chain issues impacting the real estate market normalizes, higher rates will represent a liability. I stated:
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’s hardly a unique argument. Back in March of this year, Fortune writer Shawn Tully wrote, “Rising rates are already cooling the hot run in home prices, shrinking the edge equities held over bonds that the bulls love to spotlight, and upending the conviction that the U.S. can amass gigantic new debt while its interest outlays fall.”
Just like the crazy used car market, American consumers on average are predictable. When state and federal government agencies backstopped the impact to workers with historically generous support, combined with pandemic-related stimulus checks, the end result was always going to be more consumption (i.e. inflation).
So the question isn’t really about inflation in the near term regarding various asset classes, whether that be housing, used cars or some other in-demand product type. Rather, is this sustainable?
You take away the honey that drives this inflation — that is, ridiculously low rates — and you risk sparking a corrective deflation. Therefore, I can’t get myself excited about RKT stock.
Worse Than 2006?
One of the common retorts that you hear regarding the health and viability of the housing market is that this isn’t 2006. The implication of course is that it’s a better circumstance because mortgage lenders have tightened their standards.
But is that really the implication? In some ways, couldn’t you say that the situation today is worse than 2006?
Back then, the speculators were largely limited to imprudent home buyers and unscrupulous lenders. Now, crazed demand is hitting virtually every sector of the economy, from the aforementioned used car market to apartments and other rental housing units.
Therefore, if there’s a reality check, it won’t just be limited to one consumer demographic. That’s a scary thought, not just for RKT stock but the entire economy.
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.