The housing market has faced significant challenges since the end of 2021, primarily due to a series of aggressive interest rate hikes. While home prices themselves aren’t the main issue, millions of Americans are tied to low-rate mortgages, which has stifled market movement. This situation limits sales and creates a stagnant environment for real estate agents, mortgage brokers, and home improvement sectors. As we start to see signs of thawing in the market, there’s a growing optimism among investors regarding housing-related stocks.
Two companies that are standing out recently are Home Depot (HD) and Rocket Companies (RKT). Home Depot has reported solid earnings and raised its guidance, which is encouraging. As prices drop and home transactions begin to pick up, their e-commerce sector could see increased activity. On the other hand, Rocket is advantageous as one of the primary players in mortgage originations and also owns Redfin, a major real estate portal. Personally, I’m optimistic about RKT – I hold a long position in their stock.
Interestingly, ValueAct Capital has taken a significant stake in Rocket, with over 25 million shares. They hold 9.9% of the company’s Pro Forma share accounts, hinting at confidence in Rocket’s future, especially with their ongoing acquisition of Mr. Cooper, a large mortgage servicing company.
Looking at the bigger picture, the housing market has been frozen, with high mortgage rates leading to fewer transactions. Existing homeowners are not inclined to give up their low-rate mortgages, which has made it tough for potential buyers as well. This has hit companies like Rocket hard since they thrive when mortgage activity is strong.
The stock for Rocket Companies was notably down, almost 85% from its peak at the start of this slowdown, but we’re seeing a bounce back in its price, signaling a potential resurgence. With Rocket being the largest mortgage originator in the U.S., they’re well-positioned to benefit once the market warms up. Their recapture rate, which refers to the percentage of clients returning for a new mortgage, is also impressive at 83%, significantly higher than the industry average.
Home Depot stands to gain as well, particularly from the lack of recent home improvement spending due to rising interest rates. The company estimates a $50 billion gap in projects over the last five years because homeowners are putting renovations on hold. When purchasing a new home, buyers typically invest heavily in renovations—increasing HD’s sales potential as the market recovers. If home prices stabilize, Home Depot could see an influx of business, potentially converting that pent-up demand into $10–15 billion in additional sales.
As for risk management with HD, it’s interesting to note that the stock has recently achieved what’s known as a “Golden Cross,” with its short-term moving average rising above the long-term average. This could serve as a positive indicator, although if it dips below the recent price, it might signal a warning. Currently, the Relative Strength Index (RSI) is still robust, indicating they haven’t yet reached an overbought condition.
In terms of Rocket, the stock has performed well since hitting lows in spring. If mortgage rates drop below 5%, this could be a prime time for investment. However, any inflation surprises could lead to a pullback, impacting stock performance. With the current share price hovering around $17, investors may want to wait for a potential dip to $19 before buying in. For those looking at long-term holds, $12 might act as a critical entry point considering volatility. If the market sees a significant downturn, I’d definitely be interested in purchasing more shares.
In conclusion, while there are risks involved, the potential upside for both Home Depot and Rocket Companies is appealing as we cautiously navigate through a changing housing market.
