Rocket Mortgage's prospects dim in purchase market, analyst states

Rocket Mortgage's prospects going into 2024 may not be as promising as the mortgage shop may hope, at least according to one observer.

A note published by Bose George, analyst at Keefe, Bruyette & Woods, Wednesday downgraded Rocket's stock "on valuation and on the company's relative weakness in the purchase market." 

George set the stock-price target at $10.75, down from his previous level of $14.48.

The thorn in Rocket's side is that refinance volume will be low this year, the note said. That creates a "relative disadvantage" for Rocket, which historically had a much larger share of the refi market versus purchase. Rocket's purchase market share has bounced between 3.5% to 4% since 2021, George estimates.

"This reliance on the refinance market made [Rocket] the No. 1 originator during the refinance boom in 2021, but the company's market share has fallen meaningfully since then as refinance activity has plummeted and peers with greater exposure to the purchase market have grown market share. While the company has a number of initiatives to grow its purchase share, we do not expect them to have any meaningful impact over the next few years," the note said.

Some of the measures taken by the Michigan-based mortgage lender to ramp up purchase business has been the rollout of new loan products, partnerships with community banks and a renewed focus on their wholesale channel.

George believes that "much of the company's purchase volume is likely coming from its partner network, which includes its broker channel." But wholesale "remains a competitive channel, since United Wholesale Mortgage has roughly 50% of industry broker volume and can move pricing around," the note said.

From Dec. 14 to Dec. 27, Rocket's stock price grew by over 45% to $15.04, according to Morningstar. The increase was buoyed by the announcement the Federal Reserve would stop its fight with inflation. George "believe[s] the recent increase in the stock price is not justified" because KBW expects the company's earnings to not benefit meaningfully from the recent reduction in rates.

Rocket's stock closed 5% lower on Thursday at $12.67 per share, the day after the KBW note came out, but in early trading Friday morning, it was up to $12.88.

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