Hot Economy Would Help Homestore

The fundamentals for Homestore (Nasdaq: HOMS  ) came in strong for the first quarter, though not as strong as expected. The stock is trading 7% lower on the news.

The big question for the company, which operates the leading network of real estate-related information websites, is how will a rising interest rate environment affect its sales?

If mortgage rates continue to rise, mortgage activity is likely to slow down. That would mean lower revenue from home listings. But then the reduction in mortgage activity due to higher rates could be offset by a strong economy.

I recall reading the results of a survey about a month ago that showed 60% of middle managers plan to change jobs within the next year. In other words, many people took whatever job they could get during the recession, and companies have so taken advantage of their employees' desperation that the majority have little loyalty, and are ready to jump ship at the first better offer they get.

Turnover in the labor market would mean more mortgage activity as workers relocate to new jobs. I think that is the trend that will win out, and after a period of slowing mortgage activity, there will actually be a surge. A 10% salary increase amounts to a great deal more money than a 2% rise in mortgage rates. So a rise in mortgage rates won't be an impediment to someone selling their home with a fixed rate and recently refinanced mortgage, if it's for a higher-paying job that outweighs higher mortgage costs.

If that is indeed what occurs, it will be a largely unanticipated trend and a positive for Homestore, making the current dip a potential buying opportunity. But it's certainly a risky proposition, given the company's history with accounting problems, the possibility that mortgage activity could wane significantly, and that home prices might not hold up.

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Fool contributor Mark Mahorney doesn't own shares of any companies mentioned.


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