What Investors Should Know About the Caliber Home Loans IPO

A healthy investor appetite for IPOs and improving housing market fundamentals may prove to be good timing for the upcoming Caliber Home Loans IPO. The Texas-based mortgage lender, which is currently owned by private equity company Lone Star Funds, is set to hit the market as soon as this week. Ahead of the cold winter months, the company will seek to cash in a warming housing market that has been supported by historically low mortgage rates.

Investors interested in the mortgage space are still digesting the Rocket IPO and bracing for the upcoming IPOs from United Whole Mortgage and LoanDepot. Caliber's anticipated market debut comes on the heels of the August 6^th Rocket Companies IPO which saw heavy demand in its first two trading days.

Caliber's stock will be listed on the New York Stock Exchange under the symbol HOMS. Here's what you should know about the latest housing market entrant. 

What Does Caliber Home Loans Do?

Caliber Home Loans has three primary lending segments- retail, wholesale and correspondent. It also has a military lending division for U.S. armed forces members. The company offers multiple lending options including a variety of conventional and government home loans to cater to a wide demographic.

According to Inside Mortgage Finance, the company originated approximately $36 billion in mortgages during the first six months of 2020. It is one of the nation's top 10 mortgage originators. Caliber ultimately sells much of its loan portfolio to various loan servicing companies. But it also retains a sizeable portion of the business.

Similar to Rocket Mortgage, Caliber attempts to differentiate itself by offering a fast, online mortgage application process. It too offers a mobile app that allows customers to get a quick quote, submit an application, and monitor the mortgage process from start to finish. Customers also have access to a team of loan consultants who are available to answer questions about Caliber's loan products.

What are the Growth Catalysts for Caliber Home Loans?

As of last week, the average 30-year fixed-rate mortgage in the U.S. was 2.88%, just shy of the all-time low of 2.86% recorded a few weeks prior. With the economic recovery showing signs of stalling and Fed vowing to keep interest rates low for a long time, the availability of cheap home lending should be a major boon for mortgage companies like Caliber.

Meanwhile, the inventory of U.S. homes is also at a historically low level. With just 3.3 months of housing supply as of August 2020, this means there are a lot of buyers clamoring for very few homes. Consistent with the basic economic principle, high demand and low supply should be supportive of rising home prices for some time.

Amid the recession, the median sales price for U.S. homes sold ticked lower in Q2 to $313,200 from $329,000 in Q1 but is likely to continue to trend higher at its long-term pace into 2021 and 2022. Realtor.com's forecast for existing home sales price appreciation in 2020 is 1.1%. Steadily rising home prices have the potential to push more sellers into the market—and support continued mortgage origination growth at Caliber.

Homeowner demand for mortgage refinancing should also generate significant refi business for the mortgage industry. With historically low mortgage rates likely to stay low for the foreseeable future, Caliber should benefit from a steady flow of refinancing applications.

Should Investors Buy Caliber Home Loans?

Given the favorable housing market dynamics and investor interest in new issues, the timing certainly appears right for the Caliber IPO launch. The company, however, competes in a highly competitive space with a growing list of traditional and tech-oriented mortgage companies. Grabbing market share from banks, mortgage lenders, and the popular Rocket Companies platform will be a formidable task.

Although Caliber has quickly risen to the ranks of the country's top mortgage originators and servicers it still has much to prove. Rocket seems to have an edge with tech-savvy millennial homebuyers who value its simple, user-friendly platform. It’s a bold move for Caliber to go toe-to-toe with Rocket—and it will be hard for the upstart going to stand out as a viable alternative to Rocket.

By the time Caliber's stock starts trading it is expected to command a valuation of more than $2 billion. This pales in comparison to Rocket's current $45 billion market cap, but so too does Caliber's customer base. In this sense, however, Caliber may be considered a cheaper way to play the mortgage growth wave.

With demand for mortgages likely to remain strong well into 2021, there may be plenty of the lending pie to go around. And the timing of the IPO amidst a volatile, pre-election market could cause Caliber's share price to fluctuate wildly in its early trading days.

We could see investor euphoria send the stock soaring out of the gates, only to pull back towards the IPO range (a la Rocket Companies). In this scenario, short-term traders may find Caliber to be a profitable play. Though long term traders may be better off waiting for the emotionally charged trading to diminish to find a better entry point.