Here's How to Profit From Falling Mortgage Rates
Mortgage rates have pulled back sharply in recent months after the Federal Reserve backed away from its plan to raise interest rates later this year. This has provided a powerful boost to the $33.3 trillion U.S. housing industry by increasing the affordability of homes.
The following stocks can provide you with the means to profit from these trends.
The online empire
Zillow Group (NASDAQ: Z) (NASDAQ: ZG) is the largest online real estate marketplace. The company's brands include its namesake Zillow.com site and popular online real estate properties Trulia and RealEstate.com. Its database contains information on 110 million homes, from which it generates its proprietary Zestimate home values. All told, 195 million unique users visited its sites 7 billion times in 2018.
Real estate agents pay hefty sums to reach Zillow's massive audience. Revenue in Zillow's premier agent business climbed 18% year over year to $898 million in 2018. Yet even after this impressive growth, Zillow Group still accounts for only about 10% of the more than $9 billion that real estate agents and developers will spend on advertising in the U.S alone in 2019, according to research firm Borrell Associates. That leaves long runways for growth still ahead for Zillow.
Remarkably, the company believes it has an even larger growth opportunity in its new Zillow Offers business. In addition to providing advertising services for property owners and agents, Zillow has also begun to purchase homes for its own inventory. It then makes any necessary repairs and attempts to resell the houses at a profit. Within three to five years, Zillow expects to purchase 5,000 homes per month and generate approximately $20 billion in annual revenue from this business.
To complement its homebuying business, Zillow acquired Mortgage Lenders of America and rebranded it as Zillow Home Loans. The company plans to originate more than 3,000 loans per month in its mortgage segment within the next half-decade, which could produce hundreds of millions of dollars in additional revenue.
Lower mortgage rates should be a boon for all three of Zillow's core businesses. By increasing the affordability of homes, lower rates could lead to more home sales, thereby boosting demand for Zillow's advertising, homebuying (for those looking to trade up to more expensive homes), and mortgage services. This, in turn, could add a powerful near-term boost to this long-term growth story.
Zillow's shares are up nearly 20% so far in 2019 and have no doubt benefited from the expected beneficial impact of lower mortgage rates on its business. But investors should continue to enjoy handsome gains from this point forward as Zillow expands its online empire and fulfills its vast growth potential.
The broker
Redfin (NASDAQ: RDFN) is another excellent business that should benefit directly from lower mortgage rates. More home sales should equate to more commissions for the technology-powered discount brokerage company.
Redfin's Internet-based model and salaried agents allow it to charge home sellers fees as low as 1% of the sale price of their house, which is substantially lower than the typical 3% agent fee. Home sellers can save thousands of dollars in fees when using Redfin instead of a traditional brokerage. Homebuyers can also save by using Redfin; the company refunds $1,700 of its commission on average to buyers upon closing.
Redfin's cost savings for both buyers and sellers are helping it gain share in the massive U.S. real estate brokerage industry. It accounted for 0.81% of the value of existing home sales in 2018, up from 0.67% in 2017. That helped the company's revenue surge 32% year over year to $487 million.
Moreover, like Zillow, Redfin also has homebuying and mortgage businesses, which management expects to grow rapidly in the coming years. To do so, Redfin is expanding its operations to new cities, capturing market share -- and additional revenue -- along the way.
Redfin's stock has been on a tear in 2019, rising 56% so far this year. But plenty of gains could still lie ahead for investors who buy shares today, particularly if Redfin can continue to increase its share of the $80 billion in commissions earned by the U.S. real estate industry every year.
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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool recommends Redfin. The Motley Fool has a disclosure policy.