Rocket Companies (NYSE:RKT) is the parent company of multiple digital real estate service platforms, most notably Rocket Mortgage and Redfin.
With the Federal Reserve’s decision to start cutting interest rates last month, real estate stocks like RKT could be in for a period of improved performance ahead.
Will rate cuts help Rocket stock, or is the housing market still too uncertain for investors to buy RKT today?
How Did Rocket Respond to the First Rate Cut?
To some extent, we can get a sense of how RKT shares may respond to falling interest rates by looking at how the stock did leading up to and immediately after September’s rate cut.
Early last month, shares of Rocket were rising steadily in anticipation of the Federal Reserve’s long-awaited decision to cut interest rates. Shortly after the rate-cut decision, however, RKT began to give up a significant amount of the ground it had gained.
This likely indicates perhaps the market had priced in the higher demand anticipated or that Rocket isn’t especially sensitive to small, individual rate cuts. For it to deliver sustained gains, a series of rate reductions are required to bring interest rates down to well below their present level.
Luckily for RKT shareholders, current projections suggest two more rate cuts this year, followed by at least one next year. Generally lower rates could put upward pressure on RKT both because of the boost they could give the housing market and by making the stock itself more appealing as a potentially high-growth asset.
Will Rate Cuts Revitalize the Housing Market?
Beyond how RKT responds to rate cuts over short periods of time, there’s the larger question of whether lower interest rates will successfully stimulate the housing market to consider. A combination of high interest rates and above-average inflation has kept many would-be homebuyers out of the market in the past few years, creating an estimated 4.5 million homes’ worth of pent-up demand.
Where Rocket is concerned, it’s especially important to keep in mind the level of pent-up housing demand among young and first-time homebuyers. The business’s focus on tech-savvy Millennial and Gen Z buyers could pay off in a major way in the event of a housing market boom.
Last year, the median age of first-time homebuyers in the United States rose to 38. This suggests that many younger buyers may be holding off on home purchases, creating a large pool of latent demand among exactly the consumer demographics that Rocket targets most.
To some extent, lower interest rates could help to unlock some of this demand and benefit not only Rocket but the US housing market as a whole.
Recent projections from Fannie Mae predict that mortgage rates will fall to 6.4 percent by the end of the year and 5.9 percent by the end of 2026. Current forecasts suggest that this could contribute to a nearly 10 percent year-over-year increase in the number of existing homes sold by the end of next year.
On the whole, it seems likely that Rocket’s business will benefit from the Federal Reserve’s push to cut interest rates. This scenario, however, may have a few caveats. To begin with, lower rates may not translate to a booming housing market in the event of a recession or economic stagnation setting in. The Fed could also undershoot the current rate cut expectations if inflation remains persistent or ticks up again.
RKT Trading at Premium to Sales
Another major point for investors looking at Rocket is its current valuation. Right now, shares of RKT do look fairly expensive at 72.8 times trailing 12-month earnings and 4.0 times sales.
It’s worth noting, however, that a stronger housing market could significantly benefit Rocket’s bottom-line performance, potentially helping to justify at least some of its rather premium P/E ratio.
With that said, Rocket has still gone slightly above the average analyst price forecast of $17.67. This consensus price would represent a downside of a little more than 4 percent from the last price of $18.37. Between this and the fact that RKT shares are trading at something of a premium to begin with, it’s likely that Rocket could be trading slightly above its fair price.
Rocket’s Losses May Be In The Rearview Mirror
Though rate cuts and a potentially stronger housing market ahead could provide significant boosts to Rocket’s business, it’s also useful to understand how the business is faring currently. In the first half of this year, Rocket generated revenues of $2.40 billion, down from $2.68 billion in the prior-year period.
Net losses for H1 totaled $178 million, down from a net income of $469 million last year. Despite an overall loss YTD, it’s worth noting that Rocket was able to generate positive net income of $34 million in Q2.
Looking back over the last 12 months, Rocket’s net income, ROE and ROIC have all been essentially at 0. This situation, however, could change if the housing market moves upward as expected. Rocket’s EPS is expected to grow at strong double-digit rates over the next 3-5 years, though it’s worth keeping in mind that this performance could be heavily dependent on an uncertain macroeconomic environment.
Is Now the Time to Buy Rocket?
Rocket is something of a mixed bag from an investment perspective. On the plus side, the business has situated itself as a potentially disruptive force in a large and generally fairly static marketplace. This approach may very well help Rocket achieve significant market share among young homebuyers, among whom there appears to be significant pent-up demand.
On the downside, Rocket is still operating in a weak housing market that may or may not respond as positively as expected to lower interest rates over the next couple of years.
At the end of the day, Rocket may still be a better hold than a buy. Despite the potential for tailwinds from a stronger housing market ahead, Rocket is still trading at a fairly high price tag that could somewhat limit its upside.
While lower interest rates do seem primed to benefit Rocket as a business, the uncertainty around how much new homebuying activity will result from them may make Rocket risky to buy at today’s prices.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.