After a few months of stalemate between buyers and sellers, the U.S. real estate sector is finally looking to get back on its feet. With the Intercontinental Exchange reporting that most outstanding mortgages in the U.S. carry an interest rate of only 3.25% today, most homeowners don’t have an incentive to put their homes on the market.
By the same token, would-be homebuyers today aren’t too excited to face near 7.3% mortgage rates in the market, not to mention a roughly 32% higher average home price compared to pre-pandemic ranges. Because of this supply and demand imbalance, it seemed the only way to break this stalemate was to inject new inventory, whether by building new units or hoping owners would be incentivized to put their homes on the market.
For better or for worse, the latter case came first. For the past four months, active listings in the U.S. housing market have risen steadily, a trend not seen since January 2022. Before digging into who may be putting their homes on the market, investors should be aware of stocks like SoFi Technologies Inc. (NASDAQ: SOFI), Equity LifeStyle Properties Inc. (NYSE: ELS), and especially Zillow Group Inc. (NASDAQ: Z).
Zillow's Platform Primed to Benefit First from Rising Home Listings
The only way to make sense of these new listings is to assume that most are from late buyers into the property cycle. These listings may be led by those who bought the last inning of cheap mortgage rates and high home prices, which have been declining in formerly hot markets like Florida and Texas.
Either way, listings will likely end up in the same place--Zillow’s platform. Whether by ad revenue or a fee-sharing based on making the connection between realtor and buyer, Zillow’s outlook looks better each month as new listings expand.
Wall Street analysts noticed this first step in the listing value chain, so they felt comfortable projecting earnings per share (EPS) growth rates up to 41% in the next 12 months. This exceeds the growth rates expected from peers like RE/MAX Holdings Inc. (NYSE: RMAX) and its 8.6%.
Those at Stephens saw it fit to boost their valuations for Zillow stock up to $9 a share, daring it to rally by 39.5% from where it sits today, a decent discount of only 70% of its 52-week high price.
SoFi Steps Up: Financing New Mortgages in the Expanding Property Listings Market
After Zillow has completed connecting these listings, it is time for SoFi to step in and help new buyers finance their purchases.
An added catalyst is the potential for the Federal Reserve (the Fed) to cut interest rates this quarter, which could be as soon as September 2024, according to the CME’s FedWatch tool. Cheaper mortgage rates and rising new listings act as a double catalyst for the stock to see higher prices ahead.
Wall Street expects these higher prices to be backed by a projection of up to 200% growth in EPS, which stands head and shoulders above any peers in the space due to its higher adoption rate. Because of these outstanding growth rates, those at Deutsche Bank see up to $11 a share as a fair valuation for SoFi stock, which is 57.1% higher than today's price.
Considering that the stock is only trading at 60% of its 52-week high, investors could take this as a potential bottoming sign, as it is now pregnant with upside tail risk. Knowing this, short sellers have started to step away from the situation, as SoFi’s short interest declined by 1.8% over the past month.
Value Creation for Equity LifeStyle Properties as Homes Enter the Market
The last step in the value chain is for these sold properties to end up in the hands of proud owners or landlords looking to catch the next wave in the real estate sector. If the latter comes into the game, it could be real estate investment trusts (REITs) that snatch up many doors.
One of these REITs is Equity LifeStyle properties, which invest in markets with potential new listings, such as Texas and Florida. Acquiring new property boosts the REIT's net asset value (NAV) and, therefore, its stock price.
Not only that, new rental income can retain—and even expand—the stock’s dividend payout. For Equity LifeStyle Properties, this annual dividend yield turns out to be up to 3.1%, which comes as a secondary upside to today’s price targets set by Wolfe Research analysts of $75 a share, calling for a 20.3% upside from where the stock trades today.
