Homebuilder stocks soar as investors bet on lower interest rates
Homebuilder stocks shot up 22% in just 10 days this month as Wall Street grows more hopeful about potential interest rate cuts. This sharp rise puts homebuilders on track for their best month of the year.
Three big names in the homebuilding world—D.R. Horton, PulteGroup, and Lennar—have seen their stock prices climb significantly since the start of this month. These companies' strong performance has fueled the rally in the rest of the sector.
Softer-than-expected June inflation data pitched in as well. Traders believe there’s a nearly 100% chance of a rate cut at the Fed's September meeting, according to the CME Group's FedWatch tool.
Recent trading patterns suggest investors may be reevaluating their portfolios as a result, with some moving funds from tech stocks to sectors more sensitive to interest rate changes, like housing.
The S&P Composite 1500 Homebuilding Index has surged 18% since July 1, dramatically outpacing the broader S&P 500's modest 2% gain.
Homebuilders get creative to drive sales
Despite the stock market enthusiasm, the housing market isn't out of the woods yet. With mortgage rates hovering around 7%, many would-be homebuyers still can’t afford a new house. To keep sales moving, builders have gotten creative.
They're not only buying down customers' mortgage rates to get them in the door but also increasingly cutting prices.
The NAHB July survey revealed that 31% of builders reduced prices in July, up from 29% in June and 25% in May. These costly approaches have helped maintain sales momentum in a tough market.
Builders may not have to rely on these tactics for much longer, says Tyler Batory, an analyst at Oppenheimer & Co. The prospect of lower borrowing costs, coupled with a constrained resale market, should give them more options in the near future.
Short-sellers see $750 million in losses
Meanwhile, it’s been a cruel summer for short sellers.
"July's homebuilder market rally has wiped all of the profits short sellers had earned in the first six months of the year,” said Ihor Dusaniwsky, managing director at S3 Partners.
These investors who bet on stock price declines in the homebuilder market have seen paper losses of $750 million this month through last Thursday.
While the recent rally in homebuilder stocks hints at growing optimism, some market observers are urging caution. The surge has been largely fueled by hopes of a Fed rate cut, but the fundamental challenges facing the homebuilding industry haven't disappeared overnight.
High mortgage rates and affordability issues continue, which could keep demand for new homes limited.
The National Association of Home Builders reports that builder confidence, while improving, still remains below the key threshold of 50, indicating more builders view conditions as poor rather than good.