What happened
Shares of several real estate stocks popped this week thanks to bullish sentiment from Wall Street and softer mortgage rates.
For the week, shares of residential real estate brokerage Redfin (RDFN 0.57%) jumped more than 24% as of 11:16 a.m. ET Thursday, according to data from S&P Global Market Intelligence. Shares of the real estate marketplace Zillow Group (ZG -1.84%) traded more than 19% higher, while shares of Anywhere Real Estate (HOUS 1.12%) were up about 15%.
So what
Zillow kicked off the week with a double upgrade from Bank of America analyst Curtis Nagle, who upgraded the company from an underperform rating to a buy rating, while also raising his price target from $22 per share to $42.
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Nagle in a research note contends that the real estate market may find its footing in the first half of this year and that the industry will once again be growing in the double-digits by 2024.
"Our estimates only assume minimal outperformance, but assets such as Showing Time, 3D virtual tours, and an increased focus on financing to identify high intent home buyers could lead to higher conversions and revenue," Nagle wrote in his note.
In other more industry-specific news, conditions in the real estate market showed signs of slightly improving this week after a brutal year in 2022. Last week, the mortgage rate on a 30-year fixed rate mortgage for homes valued at no more than $647,200 fell from 6.58% to 6.42%, which in turn prompted more refinancing activity and total mortgage volume rose 1.2%.
"Mortgage rates declined last week as markets reacted to data showing a weakening economy and slowing wage growth," said Joel Kan, an economist at the Mortgage Bankers Association. "All loan types in the survey saw a decline in rates."
Redfin also recently issued a report that showed that asking rent in the U.S. only rose 4.8% on a year-over-year basis in December. That's still decent growth but the smallest increase seen since July 2021. It's the seventh consecutive month of slowing rent.
Soaring mortgage rates over the last year have led to more consumers leaving the homebuying market and becoming renters, which has driven up the cost of rent, so the fact that mortgage rates are starting to fall and rental price growth is cooling is good news.
Redfin, Zillow, and Anywhere Real Estate have different models but all rely on transactions to drive a substantial part of their business, which is why all three of these stocks have been hammered over the last year.
Now what
All three of these stocks should benefit if the housing market can rebound, which is going to depend partly on inflation and the trajectory of interest rates. With new inflation data showing solid progress this morning, the hope is that the Fed can wind down its intense rate-hiking campaign within the next few months, although it is not a guarantee.
I'm not a huge fan of the mortgage sector because the industry is very cyclical, but companies like Zillow and Redfin are the leading disruptors in the digital space. After such a beating last year, I do see upside for the space if and when interest rates stabilize.
