US Homebuilder Stocks Soar Amid Optimism for Increased Demand Following Fed Rate Cuts, According to Reuters

By Pratyush Thakur

Shares of key U.S. homebuilders experienced an upswing in early trading on Thursday as the Federal Reserve’s anticipated rate-cut cycle is expected to alleviate pressure on mortgage rates, thereby increasing demand for new homes.

Major companies such as D.R. Horton, Lennar, and PulteGroup saw stock increases ranging from approximately 1% to 3%. Lennar is scheduled to announce its quarterly earnings later today.

On Wednesday, the U.S. central bank initiated a widely expected series of interest rate reductions, starting with a significant half-percentage-point cut. This move is likely to lower mortgage rates in the coming months and decrease the incentives that builders need to provide in order to attract buyers.

In addition, shares of home improvement retailers such as Home Depot and Lowe’s rose by over 1% on Thursday.

The reduced cost of financing is expected to invigorate homebuilding activities, helping to ease a long-standing shortage of homes that has persisted since the 2008 financial crisis.

After raising interest rates to the 5.25%-5.50% range between 2022 and 2023 to combat high inflation, the central bank’s recent signals of rate reductions have contributed to a decline in mortgage rates. The average 30-year fixed mortgage rate recently fell to 6.20%, down from nearly 8% observed a few months ago.

According to NAHB Chief Economist Robert Dietz, the Fed’s rate cuts are anticipated to lower mortgage interest rates as well as decrease loan interest rates for land development and home construction projects. “Lowering the cost of construction is critical to confront persistent challenges for housing affordability,” Dietz noted in a recent report.

Homebuilder stocks have seen substantial growth recently, with the S&P 500 Homebuilding Index climbing over 30% this year, in contrast to a 17% increase in the broader market. This surge reflects expectations of additional rate cuts and consequent easing of mortgage rates.

Analysts at BofA believe that both homebuilder stocks and mortgage rates have already accounted for anticipated rate cuts following the recent rally.