3 stocks to watch as mortgage rates fall

January 11, 2024 at 09:30 AM EST

Mortgage rates - stocks to follow

Having increased seemingly month on month since the back-end of 2021, it looks like mortgage rates might finally be cooling. The 30-year fixed-rate average has fallen from a high of 7.79% at the start of November to 6.62% last week, and expectations are for this downward trend to continue through 2024. Indeed, it was reported earlier this week that almost a third of Americans expect rates to continue falling, and this sentiment is mirrored in the increase in mortgage demand.

Applications to refinance a home loan this week were 30% higher than the same week last year, while applications for a mortgage to purchase a home were up 6% for the week alone. Much of this optimism and bullishness stems from the cooling inflation readings we’ve seen in recent months, which have given rise to the prospect of the Fed cutting rates sometime this year.

As we’ve seen, equities are enjoying a return to highs as investor sentiment becomes resolutely risk-on, and we expect this to be particularly pronounced with real estate stocks. Here are three in particular worth looking at more closely.

Zillow Group, Inc (NASDAQ: ZG)

There’s a glut of would-be homebuyers on the sidelines who’ve been put off from buying property in recent years due to the higher borrowing costs. Any sign that the top is in for mortgage rates will naturally incentivize them to start making their move, which can only be a good thing for stocks like online real-estate marketplace Zillow.

So unsurprisingly, Zillow shares saw a surge in demand at the same time mortgage rates began cooling in November. The stock rallied as much as 75% through the last week of 2023, and while it’s cooled somewhat since, it’s looking ready to go again.

MarketBeat’s MarketRank rates Zillow a moderate buy and a street-high price target of $67 points, with there being further upside to be had in the region of 30%. It’s worth noting that the Bank of America team was out with some cautious comments earlier this week. They feel that much of the near-term upside is already priced in, but even then, they stopped short of downgrading the stock to a Sell rating.

Redfin Corp (NASDAQ: RDFN)

Seattle-based Redfin provides residential real estate brokerage and mortgage origination services. Like Zillow, it’s well-positioned to benefit from any drop in rates and the associated increase in housing demand. Their shares have been up 125% since the end of October, and they are consolidating these gains before the next stage of the rally.

They have a street-high high price target of $15, and considering Redfin shares closed below $10 on Wednesday, a targeted upside of some 50% should be enough to get most investors interested. The stock is still struggling to get back to the revenue and earnings numbers it was pumping out during the pandemic when real estate went through the roof, but that doesn’t mean there’s not a solid opportunity to be had right now.

Look for shares to continue consolidating above $9, where any fresh bullish update on rates should see them push on toward the $15 mark.

Toll Brothers, Inc. (NYSE: TOL)

We wrote about how analysts were going crazy for NYSE: TOL" target="_blank" rel="noopener">this stock last month, and they’re still an attractive real estate stock. Shares of Toll Brothers have continued to gain in the meantime and are now up a full 160% since the current rally started in October 2022.

And the best bit? There’s still room to go. A street-high price target of $120 points to a further upside of at least 20% from current levels, and given how well management is executing right now, the home builder should have no problem getting there in the coming weeks.

Just last week, the team at Wells Fargo was calling them an “outperformer” relative to their peers, adding that their forward guidance for FY24 should prove to be on the conservative side. Around the same time, Wolfe Research upgraded Toll Brothers shares to Outperform, further strengthening the bull’s case that this rally still has legs.

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3 stocks to watch as mortgage rates fall

Zillow Group, Inc (NASDAQ: ZG)

Redfin Corp (NASDAQ: RDFN)

Toll Brothers, Inc. (NYSE: TOL)

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