In the financial markets, few partners are as closely intertwined as housing stocks and mortgage rates. They often move in sync, yet sometimes they surprise us with their own version of their favorite dance. But what if that rhythm changes and mortgage rates reverse their course – what could that mean for your portfolio?
In the last few years, we’ve seen interest rates climb sharply upwards. This has made homeownership a much more expensive (and often impossible) prospect for many people living in America. However, these mortgage rates cannot continue climbing upward linearly. There are also some signs that mortgage rates are on their way back down to Earth again.
So let’s stop and think: how will housing stocks react if mortgage rates drop? For one, it may create a favorable environment for picking up shares in undervalued housing companies.
In this article, we’ll cover three housing-related stocks to buy if mortgage rates reverse course. A reversal in mortgage rates would be their main catalyst. Other compelling reasons make them good buys too. So let’s dive in and discover these opportunities.
D.R. Horton (DHI)
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D.R. Horton (NYSE:DHI) is the largest home construction company in the US. The company has also demonstrated consistent revenue growth and profitability. Their recent financial reports show it’s in a robust position. This is important to capitalize on declining mortgage rates.
For example, in the company’s second quarter, it beat Zacks’s analyst estimates for its earnings per share (EPS) growth. Additionally, the company is showing signs of strong sales growth, posting revenues of $7.97 billion for the quarter. Another factor that plays into its bullish thesis is that the stock price is in a clear uptrend. Horton has been gaining ground since October last year. A rebound may give its rally some extra conviction for the bulls to continue the charge.
There’s also evidence it’s preparing for a rebound in the housing market. In 2022, it increased its inventory to 54,800 homes, up 30% from 2021. Home prices are a critical factor for this stock, as it could considerably alter its fundamentals.
In summary, Horton is in a strong position, both on fundamental and technical levels to benefit from a decrease in mortgage rates.
Zillow Group (ZG)
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Zillow Group (NASDAQ:ZG) is a key player in the online real estate market. The company recently suffered from a slump in real estate demand in the U.S. However, it has since shown signs of recovery. Zillow exceeded its guidance for revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in last year’s fourth quarter.
Lower mortgage rates could increase the use of Zillow’s online marketplace. This in turn could lead to increased ad revenue and premium subscriptions. These services are part of key operating segments for Zillow’s business model.
Looking ahead, the company is estimated to grow its EPS by 47.30% in 2024. A projected EPS increase could be partly due to mortgage rates falling.
In Zillow’s case, the market seems to believe it will see improvements in its fundamentals, thus making it a stock to watch if rates fall lower.
Annaly Capital Management (NLY)
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Annaly Capital Management (NYSE:NLY) is a real estate investment trust (REIT) that invests primarily in mortgage-backed securities (MBS) part of its strategy is to earn interest income on those securities.
The REIT is poised to benefit from falling mortgage rates because as they decrease, more people can afford to take out mortgages. This, in turn, leads to more securities on the market, which leads to additional investment opportunities for companies like Annaly to explore.
Although the company has seen its EPS shrink 38.60% this year, it’s poised for a turnaround if the wider market recovers. A big draw card is that its dividend yield stands at 13.81%, making it a high-risk investment that has a big upside.
The brand is therefore a way to double down on one’s investment thesis of falling mortgage rates, making it a stock to watch.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Matthew started writing coverage of the financial markets during the crypto boom of 2017 and was also a team member of several fintech startups. He then started writing about Australian and U.S. equities for various publications. His work has appeared in MarketBeat, FXStreet, Cryptoslate, Seeking Alpha, and the New Scientist magazine, among others.
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