What happened
Shares of several digital real estate stocks jumped higher today, as experts predicted that mortgage rates and home prices would remain elevated for the foreseeable future.
Shares of Zillow Group (ZG 1.70%) Class A shares traded nearly 10% higher as of 12:33 p.m. ET today. Meanwhile, shares of Redfin (RDFN 8.49%) traded more than 19% higher, and shares of Compass (COMP 2.48%) were up nearly 9%.
So what
All three of these stocks have had a strong year. Investors bought the group after it got hammered last year and as they looked forward the Federal Reserve stopping its interest rate hikes, which have depressed homebuying demand.
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While experts do not see mortgage rates falling abruptly any time soon, they say homebuyers are learning to live with the higher rates.
"One can never truly predict the future, but I don't see mortgage rates returning back to the 3% range in the remainder of my lifetime," said Lawrence Yun, chief economist at the National Association of Realtors, according to CNBC.
That's because mortgage rates are somewhat correlated to the Federal Reserve's overnight benchmark lending rate, and Yun doesn't expect the Fed to drop rates to zero again due to inflation and federal spending deficits.
Compass CEO Robert Reffkin agrees, recently telling CNBC, "I think now we're in an environment where 7% mortgage rates are now the new normal, and people are accepting it."
Last year, a lot of mortgage-related stocks plummeted as rates were rising because higher interest rates make borrowing more expensive, and therefore depresses volume. But at some point, people aren't going to wait around to purchase a home, and if they are starting to accept higher rates as the new normal, then that might increase demand, which benefits companies like Zillow, Redfin, and Compass.
While Reffkin thinks mortgage rates will stay high, he also said not long ago that they could fall to the 5% or 5.5% range, which would unlock a "flood" of badly needed new housing inventory.
In other news, Piper Sandler analyst Thomas Champion upgraded Zillow this morning from a neutral rating to outperform, noting that the company has made market share gains in its premier agent business.
Champion also cited a more favorable macroeconomic environment, suggesting that "home sales growth likely troughed last quarter," and that "while mortgage rates remain higher than a year ago, they've stabilized at current levels, which should spur demand."
Now what
All three of these digital real estate stocks can be impacted by the macro environment and interest rates, which have both been extremely volatile since 2020.
The good news is that while nobody has a crystal ball, conditions do appear to be stabilizing in the sense that nobody is projecting any more 0.75 percentage point rate hikes, although a recession could still very well materialize.
But the goal is to buy stocks that can navigate different economic environments and perform well long-term. On this theme, my pick in this group would be Zillow, given its core business and the moat it has been able to build in the industry.
