US mortgage rates are soaring as investors predict that the Federal Reserve will continue hiking rates for longer. They jumped to 8% on Thursday for the first time in 23 years. Similarly, the 30-year Treasury yield soared to 5% as the price of crude oil continued rising.
Higher mortgage rates will likely have major impacts on the housing market, especially when they remain at an elevated level for longer. Worse, the 10-year Treasuries are now yielding higher than the Cap Rate. This rate is what is simply the profit for operating a rental property.
There are other risks to the American economy. Total public debt has surged to over $33.5 trillion in debt while the total deficit is nearing $2 trillion. There are several wars going on, inflation is higher than the 2% target, while oil inventories have slumped.
More people are also working more than one job to make ends meet while homes are becoming less affordable. As mortgage rates rise, the median monthly payment is set to reach $3,000 in the next few weeks.
There it is.
For the first time in 23 years, 8% mortgage rates are officially back.
Less than 3 years ago, the average rate on a 30-year mortgage was just 2.6%.
The median monthly payment for homebuyers will cross $3,000 this month.
We are paying the price for "free" money… pic.twitter.com/A3XWtHZqdh
As a result, shares of property technology stocks have plunged hard in the past few months. Compass (NASDAQ: COMP) slipped to $2 on Thursday, the lowest level since December 2022. It has crashed by over 58% from the year-to-date high and by 90% from its all-time high, bringing its total market cap to $990 million.
Compass is not alone. Offerpad (NASDAQ: OPAD), which runs a home-flipping platform has collapsed to $8.80, giving it a market cap of over $248 million. The stock has fallen by 97% from its all-time high.
Opendoor (OPEN) share price has also plunged. It was trading at $2.28 on Thursday, down from its peak of $36.8.
Similarly, Redfin (NASDAQ: RDFN) stock price has slipped to $5.28 from its all-time high of almost $100. The company’s market cap stands at $649 million. Other firms like Zillow, Cushman & Wakefield (CWK), and Opendoor (OPEN) have crashed hard.
RDFIN vs OPEN vs OPAD vs COMP stocks
Buy the dip?Therefore, the question is whether these stock prices will bounce back in the coming months. Consider what Compass CEO said three weeks ago in an interview with CNBC. In it, he said that the business was doing quite well with mortgage rates at 5%. But he also warned that the situation could worsen if they get to 8%. Here we are.
Watch here: https://www.youtube.com/embed/Yfg8D-VcQaM?feature=oembedThere is a silver lining in this price action. For one, tech stocks like Opendoor, Zillow, Offerpad, and Redfin have seen their valuation crash, which is a good thing for long-term investors.
The other positive is that the housing market is often cyclical. This means that it will ultimately move from the current downturn to a boom again. The key determinant of all this will be the Federal Reserve.
The futures market is pricing in at least two rate cuts in 2023. If this happens, there is a likelihood that these stocks will bounce back as investors buy the dip. The challenge is that we will likely not move to a zero-interest rate environment ant time soon.
Therefore, my recommendation to anyone considering companies like Opendoor, Redfin, Compass, and Offerpad is patience. Wait until there is clarity that the Fed will start cutting interest rates before you buy.
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