Detroit-based Rocket Companies (NYSE:RKT) is what you might call a mortgage-origination monster. Believe it or not, the company has originated over $1.5 trillion worth of home loans. A vital piece of news, however, could slow down the red-hot housing market and thereby have a negative impact on Rocket Companies.
Rocket Companies’ trailing 12-month price-to-earnings ratio of 4.04 certainly makes RKT stock seem enticing. However, this is a time for caution as Rocket Companies is likely to face headwinds in 2022.
Even prior to this year, Rocket Companies had shrinking top- and bottom-line results. In the fourth quarter of 2020, the company reported total net revenue (unaudited) of $4.681 billion and net income of $2.841 billion. In 2021’s fourth quarter, those figures fell to $2.593 billion in total net revenue and $865 million in net income.
To make matters worse for Rocket Companies, the U.S. Federal Reserve has likely commenced a series of interest-rate hikes in 2022. Yahoo Finance reporter Ronda Lee explained how this has disincentivized potential new home buyers.
“Most likely, many existing home buyers took advantage of the low interest rates to refinance their homes. So they’re reluctant to enter the market again and get a higher rate,” Lee said.
That’s bad news for Rocket Companies. Furthermore, as reported by The Wall Street Journal, the U.S. housing market just hit an unfortunate milestone.
According to the, still, government administered-mortgage company Freddie Mac (OTCMKTS:FMCC), the average 30-year fixed-rate mortgage has reached 5% for the first time since 2011.
This is quite extraordinary, considering mortgage rates were at all-time lows just 15 months ago. If the Federal Reserve continues to raise interest rates throughout the year, this situation could get worse before it gets any better.
Value-focused investors might be tempted to grab shares of RKT stock due to the company’s rock-bottom P/E ratio. This is no time to be hasty, however.
Instead, investors should exercise caution and stay on the sidelines for a while. Let’s see where mortgage interest rates go from here, and how potential home buyers respond, before taking a position in Rocket Companies.
On the date of publication, David Moadel 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.
