The housing market has faced its fair share of challenges lately, but there is a glimmer of hope on the horizon as the Federal Reserve has begun to gradually ease back its benchmark interest rate. If that helps trigger a much-needed revival in the housing sector, Rocket Companies (RKT +0.49%) stands to benefit.
After years of struggling stock performance, falling mortgage rates might just provide the boost Rocket has been waiting for. But that's not all -- Rocket has made strategic moves to diversify its operations across the entire housing ecosystem, positioning itself to better weather the ups and downs of that cyclical industry.
Here are three reasons why Rocket could be an excellent stock to buy today.
NYSE: RKT
Key Data Points
1. Rocket has diversified its business
Rocket has undergone big changes since its early days as a pure online mortgage originator. Under its original business model, Rocket would lend funds to customers to buy homes or assist customers in refinancing their existing home loans. It worked closely with borrowers, underwrote the loans, and funded them at closing. Afterwards, these loans were generally sold to investors.
This business model made Rocket particularly vulnerable to the cyclical nature of rising and falling interest rates. When mortgage interest rates declined, Rocket's business boomed as customers rushed to refinance home loans or buy houses. However, when mortgage rates rose, the housing market slowed down, and there was less incentive to refinance, leading to a contraction in its business.
This is why the company has diversified -- to reduce its exposure to the boom-and-bust nature of mortgage origination. Through major acquisitions, Rocket has expanded into a full-service housing company with an integrated homeownership platform.
One major acquisition was Redfin, a residential real estate brokerage company. Redfin gives Rocket access to its 50 million monthly customers, positioning it at the top of the funnel and making it seamless to transition from home search to financing.
Image source: Getty Images.
In addition, Rocket expects to close on its acquisition of Mr. Cooper Group this quarter. That deal will allow Rocket to expand its mortgage servicing business, which generates recurring cash flow and enables it to maintain long-term relationships with its customers. As of June 30, Rocket services 2.8 million loans with a total serviced unpaid principal balance of $609.2 billion. This acquisition will roughly quadruple Rocket's servicing balance to about $2.1 trillion.
2. Falling interest rates could spur refinancings
Rising interest rates have weighed on Rocket's business for the past several years. In 2022, in response to a surge in inflation, the Federal Reserve began rapidly raising its benchmark interest rate from the ultra-low levels that it had been held at for most of the prior decade, and since then, it has been a slog for Rocket's stock. However, the central bank has already cut the federal funds rate by 150 basis points (1.5 percentage points) from the cyclical peak that it sat at for most of 2024, and some expect further cuts. According to the CME Group's FedWatch Tool, the market currently projects three additional 25-basis-point rate cuts by this time next year.
Falling interest rates have a dual effect on Rocket's business. For one, they reduce the value of its mortgage servicing rights. That's because lower interest rates mean loans are more likely to be paid off early or refinanced, shortening their expected life. That decreases the value of mortgage servicing rights.
On the other hand, Rocket stands to benefit from increased refinancing activity. While market rates for home loans are not directly tied to the federal funds rate, it does influence them. Homeowners who bought in recent years had to accept mortgage rates as high as 7.5%. If mortgage rates decline further, it could spur a wave of refinancings, which would also be an excellent opportunity for Rocket to add more customers to its expanded platform and lock in long-term customer relationships.
3. Structural tailwinds should benefit its all-in-one housing platform
Rocket aims to capitalize on structural tailwinds in a fragmented home finance market. The company sees a $5 trillion total addressable market, with the mortgage origination segment alone expected to be around $1.9 trillion in 2025. The top 10 players in the mortgage origination space only have 23% of that market.
Rocket sees this as proof that the industry is "one of the last frontiers, ripe for technology-driven disruption." By creating a technology platform that integrates everything from searching for a home to taking out a mortgage to paying that mortgage over time, Rocket looks to build a lifetime relationship with its customers and reduce its client acquisition costs over time.
Additionally, it has invested $500 million in artificial intelligence in recent years to automate its platform, enabling it to handle surges in volume that are two to three times its normal levels. As such, it should be able to adapt to a steep rise in traffic should interest rates fall fairly quickly.
Rocket has done a solid job of diversifying its business across the entire home-buying ecosystem. Its moves have made it less sensitive to changes in interest rates, which will allow it to perform better across the economic cycle. With interest rates expected to fall in the coming year, Rocket is in a prime position to capitalize, which is why I think it's a solid stock to scoop up today.
