Let’s talk about the pro and cons of investing into Rocket Companies, why I think it has great potential as a long term investment, but I do not think it’s a good point of entry right now due to the macro economics. If this is the type of content you’ve been looking for, please hit that like button and let’s get started
So Rocket Company owns a ton of business, really trying to capture the end to end businesses of anything that touches lending and insurance related to lending. The main part of their business around home loans so we’re going to stick to this bit (imo I think their growth verticals still have a lot of work ahead of it).
According to Forbes, they own about 10% of the entire market share of home loans, the majority of which is made up of refinancing. This makes a lot of sense to me because most people who are looking to buy a house are leveraging lenders based on their realtor’s recommendations, not self service, because let’s face it. It’d take a lot of balls for somebody to try to self service a 30 year debt when you have a professional who is offering you guidance for free.
Their refinance game is strong most likely because their search engine optimization and paid search advertising is great, because then you ARE looking on your own to figure out where and how to refinance.
Reason #1: Macro Economics -> Inflation + low rates
- The most obvious positive about investing in a mortgage company is buying real estate is both the american family’s dream AND what every successful investor eventually dive into. Those fortunate enough will gladly go into debt to own land and property. There are many many positive reasons to buy and I highly recommend it as long as you aren’t going in with a variable mortgage rate. Furthermore, when inflation is happening AND when interest rates are low, investors and regular folks alike will look to buy into real estate.
- Also, with mortgage rates at record lows, there are plenty of indicators highlighting that there is so much demand for buying it is currently a seller’s market. Consequently, we can imagine why Rocket did so well during the COVID crisis, where people less fortunate is looking for stability while people with fortune are buying.
- If you guys are interested in the real estate side of things, I highly recommend you check out some of Grapham Stephen’s videos, since that’s his bread and butter and I’m all about promoting other Stevens (even though he spells his name wrong)
Reason #2: Acceptance of Remote Productivity
- The interesting thing about tech space being allowed to move remote is that I actually think there is going to be housing booms in areas of the United states that are much more pleasant to live rather than where the tech hubs are. I think the indications will come in from the rental side first, because I’ve had several friends and colleagues who said they’re moving because what’s the point of paying 3-4 grand a month for rent here when it’s half that somewhere else with better weather. They definitely have the money to buy, but they want to feel things out first and see how viable it is at their new locations.
- That is a long winded way of saying if the market holds up, there might actually be another housing boom and that will drive companies like Rocket up even more.
These positives are clearly represented in Rocket’s last earnings report, blowing it out of the water. You might be asking yourself why did the stock went down anyway. From the look of things, it’s because the growth is great but percentage wise, it’s trending in the wrong direction. The one thing I always tell you guys is when a stock is “overvalued” what it really means is the stock has priced the future into the current value in a specific way. If the future is starting to look uncertain or slowing down then investors will start pulling away toward more positive certainties.
Concern: Value Proposition
Now my REAL concern. Especially because the majority of their business is refinance, my concern is that their business is heavily driven by the fact that interest rates are low. The majority of refinances are because their original mortgage had a higher interest rate and they want to take advantage of the macro economics. Well our interest rates are already low as hell and it can only go so much lower, plus those who refinanced already are less likely to IMMEDIATELY refinance again so you have to ask yourself how sustainable is Rocket’s short term windfall. My opinion is not that much.
The only way Rocket becomes a buy for me is if they figure out how to capture more market shares, especially in the new loans side. I just don’t see a clear way for that to happen, because the competition IS fierce. Maybe if they do loans in international markets, but I have 0 clue about that so if any of you know please leave a comment and share your knowledge with the 11ish collective.
In any case, the real estate business is built heavily on commissions and local networks of professionals scratching each other’s backs, so I’d think it’d be really hard for Rocket to tackle this challenge. Especially because after seen Rocket’s software, it really isn’t much different than what I’m using or my own mortgage, because frankly how different can it really be? Rates are pretty much standard and never change once you’ve signed, gives you options to pay, options to refinance. Even if the user experience is shit, guess how often I actually open this interface once I’ve setup autopay. So what I’m saying is that I don’t think rocket mortgage has no worthwhile product differentiation for the biggest money making part of their business.
And BTW, this is one of the reasons why I invested in Docusign, because for the dozens of realtors I’ve worked with, docusign is pretty much a standard software now. Another site I’d consider investing in is probably Zillow, but I’d need more research on that.
My second concern is that if the feds DO eventually raise interest rates, Rocket might make more money in the beginning because there MIGHT be a buying frenzy out of fear that the rates will go higher, but eventually Rocket’s refinance business WILL suffer and displayed publicly.
I think this is a great company with a strong future. However, timing wise, because the core of their business is refinancing, and people JUST refinanced, I’d leave this one alone for now.