Open Editor's Digest for free
Rula Khalaf, editor of the Financial Times, picks her favorite stories in this weekly newsletter.
The real estate market in America is still stuck in the mud. Existing home sales, which make up most of the U.S. housing market, totaled just 4.09 million units in 2023, the lowest level in 30 years. However, median home prices reached a record high of $389,800.
Neither of them prevented the stock prices of US mortgage lenders from regaining popularity among investors. Shares of Rocket, which owns Quicken Loans, the country's largest non-bank mortgage lender, have risen 66 percent since November. Shares of rival UWM, parent of United Wholesale Mortgage, rose 43 percent.
Mortgage lending is a feast or famine business. The market believes that the interest cycle has reached its peak. The Federal Reserve is expected to cut interest rates, possibly starting in June. The average rate for a 30-year fixed mortgage was 6.63 percent last week, according to Freddie Mac. While this number is more than double the level of two years ago, it is down from 7.79 percent in October.
Mortgage origination volume looks set to grow again in 2024 after falling to its lowest level in nearly 30 years, according to the Mortgage Bankers Association. Lenders should distribute more than $2 trillion worth of mortgages in 2024. According to current estimates, this appears to be 22 percent more than last year but still well below 2021's $4.4 trillion.
And here lies the problem. Interest rates are unlikely to return to near-zero levels soon. Many borrowers have already secured mortgages with very low interest rates. This means that refinancing activity – which accounted for 58 percent of record mortgage originations in 2021 – will remain weak.
As the dominant player in the direct-to-consumer mortgage space, Rocket can grab market shares while smaller players struggle or even collapse. The consensus expects Rocket to return to net income of $613 million this year and $1.2 billion in 2025. However, these numbers may be too optimistic considering that it will take some time for Rocket to rebuild its margins. The sale profit margin – which measures how much is earned when selling mortgages – was 2.6 per cent in the first nine months of 2023, compared to 4.5 per cent in 2020.
This makes Rocket's valuation – a staggering 92 times forward earnings – difficult to accept. Its price-to-book value is nearly 3 times that of mortgage-heavy Wall Street banks such as JPMorgan, Bank of America and Wells Fargo. But Rocket doesn't have a significantly higher return on equity. This indicates that the missile's trajectory should stabilize soon.
Lex is FT's main daily investing column. If you are a subscriber and would like to receive alerts when Lex articles are published, simply click the 'Add to myFT' button, which appears at the top of this page above the headline
