The artificial intelligence boom is a multitrillion-dollar investment opportunity, without question. But it isn't the only one. A massive opportunity in the real estate sector could be hiding in plain sight.
Consider this. After a surge in mortgage refinancing in the 2020-2021 timeframe, interest rates soared, and refinancing volume dried up. With the majority of U.S. homeowners having mortgage rates under 5%, it no longer made financial sense to refinance at 7% or higher in order to tap into home equity.
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The combination of extremely low mortgage refinancing and home equity loan volume and the fact that home values have risen sharply in the past five years has left homeowners with tons of "paper" wealth. In fact, U.S. homeowners are sitting on $35 trillion in home equity, an all-time high. And if mortgage rates start to thaw, it could lead to a surge in refinancing volume that goes well into the trillions of dollars.
With that in mind, here are two top stocks that could be big winners of this $35 trillion market opportunity if interest rates finally start to come down.
A mortgage giant that makes refinancing easy
Rocket Companies (RKT +3.65%) is the No. 1 mortgage originator in the United States, and a surge in refinancing volume could be a huge catalyst.
In the most recent quarter, Rocket closed on $26.1 of loan origination volume. In the same quarter in 2021, when rates were low, the volume was $103.5 billion, and refinancing was a major driver. Now, I'm not saying that we're going to see a 2021-style refinancing boom anytime soon, but if rates fall we could certainly see a spike in Rocket's total volume.
NYSE: RKT
Key Data Points
However, even if we don't get a surge in refinancing, there's a lot to like about Rocket. The company is aggressively building an all-in-one real estate platform with the goal of bringing the entire home buying and selling process into the digital age. It recently closed on its acquisition of real estate technology company Redfin and has a pending acquisition of leading mortgage servicer Mr. Cooper (COOP +0.00%).
Rocket already boasts a 97% client retention rate, and it is clearly good at what it does. An all-in-one real estate technology ecosystem that creates the most seamless experiences in the industry when it comes to selling, financing, buying, moving, servicing, and more could be huge. Plus, just because Rocket is a massive mortgage originator doesn't mean it can't grow further. The mortgage market is a highly fragmented one, with the top 10 players having less than one-fourth of the market combined. With $5 trillion to $6 trillion in homes selling in the United States in a typical year, if Rocket can grow its market share by even a few percentage points, it would be a big deal. That's especially true if interest rates fall and overall volume soars.
A better way to approve HELOCs
Upstart (UPST +10.04%) has a simple mission that solves a big problem. The company aims to do a better job of predicting whether a loan will be repaid, compared with the traditional FICO credit scoring model. It does this by looking at thousands of data points and their correlation with creditworthiness, and the data shows that the platform has been successful.
So far, Upstart's business has mostly consisted of originating unsecured personal loans on behalf of bank partners. In the first quarter, about 95% of Upstart's origination volume was in this category. However, the company is aggressively building two new lending verticals -- auto loans and home loans (specifically home equity lines of credit, or HELOCs) -- and the early results are impressive.
Auto loan volume and home loan volume increased by 42% and 52%, respectively, on a sequential basis in the first quarter. And both are massive market opportunities that could be helped if interest rates start to fall.
However, the HELOC opportunity is simply massive. Upstart's annual run rate of HELOC borrowing capacity origination is currently about $160 million, which is a minuscule fraction of the multi-trillion-dollar opportunity. If Upstart can even get a percent or two of the HELOC market, and falling rates lead to surging demand, it could be a major win for shareholders.
A $35 trillion opportunity hiding in plain sight
To be sure, even if mortgage rates plunge, homeowners aren't going to tap into all of their available equity, or even close. But it's entirely possible that we'll see trillions of dollars of additional HELOC and refinancing volume once rates become a little more cooperative.
There are many companies that could benefit from this, including banks, retailers, mortgage originators, and many others. In fact, an injection of several trillion dollars into the U.S. economy would be an event that fits into the "rising tide lifts all ships" category.
Having said that, Rocket and Upstart are two well-run businesses that could be especially big winners if Americans start using their home equity once again.
