US real estate stocks: making a turn on housing is flipping difficult

US house prices continue to defy gravity. Despite the steep rise in mortgage rates, home prices have marched higher. The median price for a pre-owned house in April was up 15 per cent from a year ago, according to the National Association of Realtors.

This should be good news for property-related stocks. But you would not know it from looking at their prices. Online real estate platforms Zillow, Opendoor Technologies and Redfin are down between 36 and 75 per cent this year. Non-bank mortgage lenders such as Rocket Companies, which owns Quicken Loans, and UWM, the parent company of United Wholesale Mortgage, have shed more than a third of their value.

The average charge on a 30-year fixed-rate mortgage rose from 3.1 per cent at the end of 2021 to 5.3 per cent last month, near the highest level in almost 13 years. The sharp jump has taken the air out of the refinancing boom. At Rocket and UWN, first-quarter revenues were down 40 per cent and 30 per cent respectively as demand for refinancing shrivelled up. Meanwhile, high home prices and rising rates are deterring new buyers from entering the market. Overall, mortgage origination is forecast to drop more than a third to $2.5tn this year, says the Mortgage Bankers Association.

Meanwhile, so-called “iBuyers” — companies that use big data and algorithms to buy and flip homes — are being de-rated amid the sell-off in technology stocks. Sentiment is not helped by Zillow. The property advertising and listing website is shutting down its homebuying business after racking up big losses last year.

Technology has not eliminated the balance sheet risks associated with the property sector. iBuying pioneer and market leader Opendoor increased revenue and profit in its latest quarter thanks to better inventory management. But it finances its own homes through debt, leaving it vulnerable to rising interest rates. Share price underperformance reflects concerns about higher funding costs on margins and cash tied up in unsold dwellings if demand for new homes slow.

Homeowners can still make money from physical real estate. Investors in real estate stocks will find it more difficult.