Tag: Mortgages

Rocket Companies Acquires Redfin in $1.75 Billion All-Stock Deal

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Rocket Companies has announced a $1.75 billion all-stock acquisition of real estate brokerage Redfin.
– Redfin’s stock surged over 76%, while Rocket’s shares dropped by 10% following the announcement.
– The merger aims to streamline the home-buying process by integrating mortgage lending, brokerage, and real estate listings into one ecosystem.

Rocket Companies, a leading mortgage lender, has announced plans to acquire digital real estate brokerage Redfin in an all-stock transaction valued at $1.75 billion. The move seeks to integrate home search, brokerage services, mortgage lending, and title services under one platform, creating a more seamless and cost-efficient home-buying experience for consumers.

The acquisition is positioned as a strategic effort to modernize and consolidate the fragmented home-buying process. Rocket CEO Varun Krishna emphasized the inefficiencies in the current system, where home search, brokerage, mortgage, and title services exist in separate ecosystems. By combining Rocket’s mortgage and financing capabilities with Redfin’s online brokerage and home search platform, the companies aim to streamline the process and reduce transaction costs, which currently total around 10% of a home’s price.

Redfin, founded in 2004, operates a technology-driven real estate platform with over one million for-sale and rental listings and employs more than 2,200 agents. Rocket Companies, best known for its Rocket Mortgage brand, sees the acquisition as a natural fit to leverage artificial intelligence and automation to accelerate the homebuying process.

Following the announcement, Redfin shares skyrocketed by over 76%, reflecting investor enthusiasm for the deal’s potential to reshape the real estate industry. Meanwhile, Rocket’s stock fell by 10%, as investors weighed the financial implications of the transaction. The deal values Redfin at $12.50 per share, a 115% premium over its last closing price before the announcement.

Under the terms of the agreement, Redfin shareholders will receive approximately 0.8 shares of Rocket stock for each share of Redfin they own. Once the deal is finalized, current Rocket shareholders will own about 95% of the combined company, with Redfin shareholders controlling the remaining 5%. Rocket shareholders will also receive a special dividend of $0.80 per share.

The companies project that the merger will generate $200 million in cost synergies by 2027, including $140 million in operational efficiencies and an additional $60 million from enhanced collaboration between Redfin’s agents and Rocket’s financing platform. By aligning these services, the combined company aims to close home transactions faster and provide a more seamless customer experience.

Redfin CEO Glenn Kelman will continue to lead the business post-merger and will report directly to Rocket CEO Varun Krishna. The deal has been approved by both companies’ boards and is expected to close in the second or third quarter of 2025, pending regulatory approval and customary closing conditions.

This acquisition comes at a time of volatility in the housing market, with high mortgage rates and tight housing supply impacting affordability. Redfin’s stock, once trading near $96 per share at its pandemic peak in 2021, has struggled in the higher-rate environment. Rocket Companies, which went public in 2020, has similarly faced headwinds as mortgage demand has declined.

By integrating home search and mortgage lending, Rocket and Redfin could provide consumers with a more efficient home-buying experience. However, questions remain about execution risks and how regulators will view the increased consolidation of real estate services.

Economic Headwinds: Labor Market Softens and Housing Sector Cools

Posted on by slightbourne@noblecapitalmarkets.com

Recent economic reports suggest that the U.S. economy may be facing increasing headwinds, with signs of softening in both the labor market and housing sector. These indicators point to a moderation in economic activity for the second quarter of 2024, potentially setting the stage for a shift in Federal Reserve policy later this year.

The Labor Department reported that initial jobless claims for the week ended June 15 fell by 5,000 to a seasonally adjusted 238,000. While this represents a slight improvement from the previous week’s 10-month high, it only partially reverses the recent upward trend. More tellingly, the four-week moving average of claims, which smooths out weekly volatility, rose to 232,750 – the highest level since mid-September 2023.

Adding to concerns about the labor market, continuing unemployment claims edged up to 1.828 million for the week ending June 8, marking the highest level since January. This uptick in ongoing claims could indicate that laid-off workers are facing increased difficulties in finding new employment, a potential red flag for overall job market health.

The unemployment rate, which rose to 4.0% in May for the first time since January 2022, further underscores the gradual cooling of the labor market. While job growth did accelerate in May, some economists caution that this may overstate the true robustness of employment conditions.

Turning to the housing sector, the news is equally sobering. The Commerce Department reported that housing starts plummeted 5.5% in May to a seasonally adjusted annual rate of 1.277 million units – the lowest level since June 2020. This decline was even more pronounced in the critical single-family housing segment, which saw starts fall 5.2% to a rate of 982,000 units, the lowest since October 2023.

The slowdown in housing construction is mirrored by a drop in building permits, often seen as a leading indicator for future construction activity. Permits for new housing projects tumbled 3.8% in May, again reaching levels not seen since June 2020. This decline in both current and future building activity paints a concerning picture for the housing market’s near-term prospects.

Several factors appear to be contributing to the housing sector’s struggles. Mortgage rates have seen significant volatility, with the average 30-year fixed rate reaching a six-month high of 7.22% in early May before retreating slightly. These elevated borrowing costs are keeping many potential buyers on the sidelines, as noted by the National Association of Home Builders, which reported that homebuilder confidence hit a six-month low in June.

The combination of a softening labor market and a cooling housing sector has led some economists to revise their growth projections downward. Goldman Sachs, for instance, has pared back its GDP growth estimate for the second quarter to a 1.9% annualized rate, down from an earlier projection of 2.0%.

These economic indicators are likely to factor heavily into the Federal Reserve’s decision-making process in the coming months. Despite the Fed’s more hawkish stance at its recent meeting, where officials projected just one quarter-point rate cut for this year, financial markets are anticipating the possibility of multiple rate cuts. The latest data may bolster the case for monetary easing, with some economists now seeing the potential for an initial rate cut as early as September.

Many economists believe that the soft activity and labor market data reinforce expectations for the Fed to begin cutting interest rates in the coming months, with potential cuts in September and December being discussed.

While the U.S. economy continues to show resilience in many areas, the emerging signs of moderation in both the labor and housing markets suggest that the impact of higher interest rates is beginning to be felt more broadly. As we move into the second half of 2024, all eyes will be on incoming economic data and the Federal Reserve’s response to these evolving conditions. The delicate balance between managing inflation and supporting economic growth remains a key challenge for policymakers in the months ahead.

The confluence of a cooling job market and a struggling housing sector paints a picture of an economy at a crossroads. As these trends continue to develop, they will likely play a crucial role in shaping both economic policy and market expectations for the remainder of the year and beyond.

Pending Home Sales Plunge to Lowest Levels in Over 20 Years

Posted on by slightbourne@noblecapitalmarkets.com

Pending home sales in the U.S. unexpectedly plunged in October to their lowest levels since record-keeping began over two decades ago, even below readings seen during the housing crisis in 2008.

The National Association of Realtors (NAR) reported Thursday that its index of pending sales contracts signed on existing homes retreated 1.5% from September. On an annual basis, signings were a staggering 8.5% lower than the same month last year.

October’s reading marks a continuation of the housing market’s steep slide over the past year from blistering pandemic-era sales levels as mortgage rates rocket higher in the most dramatic housing finance shake-up in decades.

“Recent weeks’ successive declines in mortgage rates will help qualify more home buyers, but limited housing inventory is significantly preventing housing demand from fully being satisfied,” said NAR Chief Economist Lawrence Yun.

Spike in Mortgage Rates Strangles Demand

The October pending home sales data reflects buyer activity when popular 30-year fixed mortgage rates shot up above 8% in mid-October before settling back around 7% in more recent weeks.

Skyrocketing borrowing costs over the past year have rapidly depleted home shoppers’ budgets and purchasing power, squeezing huge numbers of Americans out of the market entirely and forcing others to downgrade to lower price points.

With the average rate on a 30-year fixed loan more than double year-ago levels despite the recent retreat, still-high financing costs in tandem with stubbornly elevated home prices continue dampening affordability and sales.

All U.S. regions saw contract signings decline on a monthly basis in October except the Northeast. The Western market, where homes are typically the nation’s most expensive, recorded the largest monthly drop.

Pending transactions fell across all price tiers below $500,000 while rising for homes above that threshold. The shift partly reflects moderately improving supply conditions on the high end, even as demand rapidly recedes at lower price points.

Home Prices Still Climbing for Now

Even against shrinking demand, exceedingly tight inventories of homes listed for sale have so far prevented any meaningful cooling in the torrid home price appreciation that’s stretched affordability near the breaking point for many buyers.

The median existing home sales price rose 6.6% on the year in October to $379,100. While marking a slowdown from mid-2021, when prices were soaring 20% annually, it still represents an acceleration over the 5.7% rate seen last October.

With few homes hitting the market, bidding wars continue breaking out for even modest starter homes in many areas. In such seller-favorable conditions, a plunge in overall sales does little to crimp further rapid home value growth.

Leading indicators suggest home prices likely still have further to climb before lackluster sales and eroding affordability force more substantive cooling. But shifts in home values and sales usually lag moves in rates and mortgage activity by several months.

“The significant decline in pending sales suggests…further weakness in closed existing home sales in upcoming months,” said Swiss bank UBS economist Jonathan Woloshin.

With mortgage activity plunging to a quarter-century low, actual completed sales are widely expected to continue deteriorating into early next year or beyond as the pipe of signed deals still working through the market keeps drying up.

Path Ahead for Housing Market

Most economists expect home sales will likely continue slumping over the next six months or so until lower financing costs combined with a slow improving inventory offer some stability.

“We think housing activity has little prospect of bottoming out until spring 2024, at the earliest,” said Nancy Vanden Houten of Oxford Economics. She projects existing home sales will fall nearly 25% in 2024 from current-year levels.

Other analysts say still-strong demographics and a solid job market should prevent an all-out housing collapse, but that robust spring and summer recovery rallies like those seen earlier this century are unlikely in coming years.

Instead, as mortgage rates settle somewhere above 6% and homes trickle back on the market, sales activity should slowly stabilize around 10-15% below 2018-2019 levels through 2024 and beyond – marking a ‘new normal’ after ultra-hot pandemic conditions.

“I expect mortgage rates to moderate…helping home sales firm up a bit, but still remain below pre-pandemic activity,” said Yun. With fresh records signaling just how devastating this year’s rate spike proved for buyers, Yun expects the spring thaw in housing demand could come slower next year than markets anticipate.