Rocket Companies (NYSE: RKT) saw its shares climb in premarket trading on Wednesday after a softer-than-expected U.S. inflation report drove mortgage rates lower, offering modest relief to prospective homebuyers. The stock gained 1.7% to $14.56 ahead of the opening bell, building on a 4.1% rally in the previous session.
The July Consumer Price Index (CPI) rose 0.1% month-over-month and 3.4% year-over-year, matching economists' forecasts. Core inflation, which excludes food and energy, slowed to 2.5% annually from 2.6% previously. Shelter costs were responsible for roughly two-thirds of the monthly increase, underscoring the persistent housing affordability challenge.
In response to the cooling inflation data, the average 30-year fixed mortgage rate slipped by six basis points to 6.72%, down from 6.78%. For a borrower taking out a $400,000 mortgage, this translates to a monthly principal and interest payment of $2,586.42, a savings of $15.95 compared to the previous rate. Over a year, that amounts to roughly $191 in reduced costs.
While the immediate impact is modest, the move highlights the sensitivity of the housing market to interest rate expectations. Mortgage rates are influenced by Treasury yields and mortgage-backed securities, not directly by the Federal Reserve's policy rate. A sustained decline in rates could be more meaningful for housing demand and refinancing activity.
Rocket's Operational Metrics
Rocket Companies reported a strong second quarter, with closed loan originations rising to $49.1 billion, up 9.8% sequentially. However, net rate locks fell 4.9% to $47.0 billion, and the gain-on-sale margin contracted by 26 basis points to 2.48%. Adjusted revenue dipped 2.2% to $2.76 billion.
The company posted $766 million in adjusted EBITDA and $441 million in adjusted net income. CEO Varun Krishna highlighted "record levels of purchase and refinance market share." For the third quarter, Rocket guided adjusted revenue in the range of $2.5 billion to $2.7 billion.
Market Context and Analyst Views
Rocket's $2 trillion servicing portfolio is a key asset. If rates remain lower for an extended period, it could spur refinancing activity among existing borrowers, a potential upside for the company. However, a single six-basis-point move is unlikely to trigger a wave of refinancing on its own.
The broader housing market remains soft. Redfin, which Rocket recently agreed to acquire, reported that home sales fell 4.1% in July compared to June, with pending sales down 2.5%. Canceled purchase agreements reached 14% of all deals, the highest level since 2023.
Among mortgage finance peers, UWM Holdings (NYSE: UWMC) surged 8.5% on Tuesday, while MGIC Investment (NYSE: MTG) edged up 0.3% and Radian Group (NYSE: RDN) slipped 0.4%. Rocket's trading volume on Tuesday was 32.7 million shares, above its recent average.
Analysts remain cautiously optimistic. Of the 11 analysts tracked by Google Finance, seven rate Rocket as a Buy, four as Hold, and none as Sell. The average price target is $17.22, implying nearly 20% upside from Tuesday's close of $14.32. Recent ratings include RBC Capital's Hold with a $16 target, J.P. Morgan's Hold at $14, and KBW's Buy at $19.
Looking ahead, the producer price index (PPI) report is due Thursday at 8:30 a.m. EDT. A hotter-than-expected reading could push bond yields higher, partially reversing the recent decline in mortgage rates. Additionally, energy prices remain elevated, with July's year-over-year increase at 14.7%, posing a risk to further disinflation.
Rocket faces ongoing challenges, including thinner origination margins, subdued purchase demand, and integration risks associated with the Redfin acquisition. Interest rate volatility could also impact mortgage volumes and the value of its servicing portfolio.
