Shares of several real estate stocks popped this week on bullish sentiment from Wall Street and soft mortgage rates.
For the week, shares of residential real estate brokerage Redfin (RDFN 2.59%) 11:16 a.m. ET jumped more than 24% Thursday, according to data from S&P Global Market Intelligence. Share of real estate marketplace The Zillow Group (Zg 1.53%) 19% more transactions, while shares Real Estate Anywhere (House 1.72%) increased by about 15%.
Starting the week with a double upgrade from Zillow Bank of America Analyst Curtis Nagel, who upgraded the company from an underperform rating to a buy rating, also raised his price target to $42 per share from $22.
In a research note, Nagel claimed that the real estate market could find its footing in the first half of this year and that the industry will grow again in double digits by 2024.
“Our estimates assume only minimal outperformance, but assets such as showing times, 3D virtual tours, and an increased focus on financing to identify high-intent homebuyers could lead to higher conversions and revenue,” Nagel wrote in his note.
In other more industry-specific news, real estate market conditions showed some signs of improvement this week after a brutal 2022. Last week, mortgage rates for 30-year fixed-rate mortgages for homes priced up to $647,200 fell to 6.42% from 6.58%, prompting more refinancing activity and a 1.2% rise in total mortgages.
“Mortgage rates fell last week as markets reacted to data showing a weak economy and slowing wage growth,” said Joel Kahn, an economist at the Mortgage Bankers Association. “Lending rates across all types fall in survey.”
Redfin also recently issued a report showing that asking rents in the U.S. rose 4.8% on a year-over-year basis in December. This is still modest growth but the smallest increase seen since July 2021. This is the seventh consecutive month of rent cuts.
Rising mortgage rates over the past year have driven more consumers out of the home buying market and into renters, which has pushed up rental costs, 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 significant portion of their business, which is why all three stocks have taken a hit over the past year.
All three stocks should benefit if the housing market recovers, depending in part on the trajectory of inflation and interest rates. With new inflation data this morning showing solid progress, there is hope that the Fed may wind down its aggressive rate-hiking campaign in the coming months, though that is not a guarantee.
I’m not a huge fan of the mortgage sector because the industry is so cyclical, but companies like Zillow and Redfin are leading disruptors in the digital space. After such a beating last year, I see upside for the space if interest rates stabilize.
Bank of America is an advertising partner of The Ascent, a Motley Fool company Bram Berkowitz has positions at Bank of America. The Motley Fool has positions and recommends Bank of America, Redfin and Zillow Group. The Motley Fool recommends the following options: Short February 2023 $7 Redfin calls. Motley Fool has a revealing policy.