Bear of the Day: ReMax Holdings
Today’s Bull of the Day is a construction company poised to capitalize on recent price trends in the home construction and sales industries. enjoy falling costs and further increasing sales prices, Toll Brothers (TOL) manufactures the most popular housing products at the moment.
The same trends that have been so positive for home builders aren’t necessarily good for all real estate market participants. Firms trading in existing home transactions face a number of unique challenges that are likely to keep revenues and profits in check for the next year or more.
The state-sponsored credit institution Fannie Mae estimates that 5.93 million existing homes will change hands in 2021 and that only 5.6 million such transactions will take place in 2022 – a decrease of 5.5%. The state association of real estate agents is somewhat more optimistic and is expecting 6.22 million sales this year and only a slight decrease to 6.2 million next year.
Re / Max stocks (RMAX) is in the transaction business, real estate agency franchising and real estate support services, and also offers mortgage loans through its subsidiary Motto Mortgage. The revenue model is pretty simple, agents and brokers usually earn a percentage of the total transaction value. As prices go up, their share of the deal grows. However, if rising prices and other demographic factors reduce the number of properties for sale, total revenues are likely to stagnate or even decline.
FRED offers
Image source: FRED Listings
The number of active real estate offers in the USA was already slowly declining in the years before the outbreak of the Covid 19 pandemic, but it actually plummeted at the beginning of 2020. Thanks to the low supply of home rentals on the market, there are many stories of hopeful buyers getting caught up in bidding wars and snatching new offers unseen. From the broker’s point of view, however, the lack of offers is a major problem.
The story goes on
(If you haven’t done it in a while, check out your neighborhood on Zillow.com. There’s a good chance you’ll see a lot fewer of these red circles for sale than you did a year or two ago.)
The mortgage business faces similar challenges. After years of rock bottom interest rates that appealed to both new home buyers and customers who saw payment savings by refinancing existing properties, the Mortgage Bankers Association predicts an increase in interest rates on a 30-year fixed-rate mortgage and a sharp decrease in the face value of lending.
The MBA predicts that the average interest rate on a 30-year fixed rate loan will increase from 2.8% in 2020 to an average of 3.7% in 2021 and to 4.4% in 2022. This represents an expected decline in refinancing activity from $ 2.4 trillion in 2020 to $ 573 billion in 2022. The expected increase in new purchase financing from $ 1.4 trillion to $ 1.7 trillion would be less than 20% of this shortfall.
If interest rates rise – as almost every market watcher expects – things could get very tight in the mortgage industry.
Re / Max’s last quarterly report contained a disappointing loss of earnings. While net earnings of $ 0.46 / share weren’t too far below Zacks’ consensus estimate of $ 0.49 / share, the fact that it failed in one of the hottest real estate markets of all time was worrying.
It would be better for investors to focus on the companies – like construction companies – that are able to take advantage of rising demand with additional supply than those that depend on transaction revenues that may never materialize.
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