It turns out Quicken Loans wants an initial public offering (IPO). The mortgage lending company has made a private filing and is currently working with major Wall Street banks to make it happen. This tells us a lot about the health of the U.S. housing market, and it’s probably not good.
The Federal Reserve has affirmed its commitment to keeping interest rates at rock bottom. Recent FOMC projections have the Fed Funds rate in the zero bound until at least 2022 .
Mortgage rates, which loosely track the prime rate, hit record lows this week after the traditional 30-year tumbled below 3% for the average “ideal” borrower. Mortgage applications jumped 13%, suggesting robust and pent-up demand in the U.S. housing market.
In theory, this paints a mixed picture for Quicken Loans. While they need to lend to make money, their business is less profitable when rates are low.
Increased demand can potentially offset the smaller return on loans, but total home sales have been depressed during the pandemic, and lenders have been subtly tightening requirements.
If things are only looking rosy for lenders, why would a company that has been around since 1985, choose this moment to go public?
The answer is bleak.
Federal protections for renters, along with extra unemployment benefits, are set to expire at the end of July.
Many are speculating that the fallout for the housing market could be severe , as over-leveraged mortgage holders and tenants alike face a severe cash-flow problem. Declining demand and low interest rates could have a severe impact on Quicken’s bottom line.
On top of this fact, the Federal Reserve may also break their word and squash rates further by going negative , a move that (if the Eurozone and Japan are any indications) can be very difficult to recover from.
All of this means that the red hot U.S. housing market we see now looks unsustainable with tens of millions of Americans out of work.
Against this backdrop, it makes absolute sense for Quicken’s owners and investors to cash out during this burst of housing market strength by offering an IPO. Beyond that point, the outlook on the housing market could darken for years to come.
Don’t forget it was just two months ago we were being told the mortgage industry is on the brink of collapse.
It pays to remember that Wall Street doesn’t launch IPOs for you. Goldman Sachs, JPMorgan, and the rest of the gang make deals to help private businesses access liquidity for their owners and investors.
Imagine you are Dan Gilbert, co-founder and Chairman of Quicken Loans, and you had put in 35 years of work to become the largest mortgage lender in the United States . The Fed is doing its best to kill your earning power at a time when economists are forecasting a grim future for the housing market.
Against this backdrop, you’d cash out as fast as you could. That’s why it’s no surprise to see Quicken jumping on the incredibly successful IPO bandwagon we have seen over the last few weeks.