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Bear of the Day: ReMax Holdings

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Today’s Bull of the Day is a homebuilder that’s in a position to capitalize on recent price trends in the residential construction and sales industry. Enjoying costs that are ion the way down and sales prices that continue to rise, Toll Brothers (TOL) is creating the housing products that are most in demand right now.

The same trends that have been so positive for home builders aren’t necessarily good for all real estate market participants. Businesses that deal in transactions in existing homes are facing a unique set of challenges that are likely to keep a lid on revenues and profits for the next year or more.

The federally-sponsored lending institution Fannie Mae estimates that 5.93 million existing homes will change hands in 2021, and that only 5.6 million such transactions will occur in 2022 – a 5.5% decline. The National Association of Realtors is a bit more optimistic – anticipating 6.22 million sales this year, and only a slight decline to 6.2 million next year.

Re/Max Holdings (RMAX) is in the transactions business, franchising real estate office and support services to realtors and also offering mortgage lending services through its Motto Mortgage subsidiary. The revenue model is fairly simple, agents and brokers typically earn a percentage of total transaction value. If prices are up, their cut of the deal grows. But if rising prices and other demographic factors reduce the number of properties available for sale, total revenues are likely to stagnate or even decline.

FRED Listings
FRED Listings

Image Source: FRED Listings

The number of active real estate listings in the US had already been declining slowly in the years leading up to the start of the Covid-19 pandemic, but really fell off a cliff at the beginning of 2020. Thanks to the low supply of homes on the market, stories abound of hopeful buyers engaging in bidding wars and snatching up new listings sight-unseen. From the perspective of realtors however, the dearth in listings is a big problem.

(If you haven’t done it in a while, look up your neighborhood on Zillow.com. There’s a good chance you’ll see a lot fewer of those “for sale” red circles than you did a year or two ago.)

The mortgage business is facing similar challenges. After years of rock-bottom rates that appealed to both new home shoppers and customers who could generate payment savings by refinancing existing properties, the Mortgage Bankers Association is forecasting a rise in the rate on a 30-year fixed mortgage and a steep decline in the notional value of loan originations.

The MBA has forecast that the average rate on a 30-year fixed rate loan will rise from 2.8% in 2020 to an average of 3.7% in 2021 and to 4.4% in 2022. That translates to an expected drop off in refinance activity from $2.4 trillion in 2020 all the way to $573 billion in 2022. The expected increase in new purchase financing from $1.4 trillion to $1.7 trillion would make up less than 20% of that shortfall.

If rates rise – as nearly every market observer expects – things could get very tight in the mortgage industry.

The last quarterly report from Re/Max contained a disappointing earnings miss. Though the $0.46/share in net earnings wasn’t too far below the Zacks Consensus Estimate of $0.49/share, the fact that it was a miss at all in one of the hottest real estate markets ever was concerning.

For investors, it would be a better idea to focus on the companies – like the builders – who are in a position to capitalize on the rise in demand by adding new supply, rather than those who are dependent on transactional income that may never materialize.

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