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Key Takeaways
- Homebuilder stocks jumped after the milder-than-expected June inflation print fueled investors’ hopes that the Federal Reserve will cut its influential fed funds rates this year.
- With a lower fed funds rate, all kinds of borrowing would be less expensive including mortgages.
- High mortgage rates have hindered potential homebuyers from entering the market by pushing up the monthly payment on already pricey houses.
Homebuilder stocks jumped Thursday on hopes that mortgage rates will start to significantly downshift this year.
A cooler-than-expected inflation report for June raised investors’ hopes that the Federal Reserve (Fed) will cut rates. Traders now think there is more than a 90% chance that the Fed will reduce rates at its September meeting, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
If the Fed does cut its influential rate, homebuyers who have chosen to stay on the sidelines may be more likely to enter the housing market—boosting investor confidence in the outlook for homebuilders.
Shares in D.R. Horton ( DHI ), Toll Brothers ( TOL ), PulteGroup ( PHM ), and Lennar Corporation ( LEN ) gained more than 6%, while KB Home ( KBH ) stock was up almost 10% at 3 p.m. Eastern Thursday.
What Does Inflation Have To Do With Homebuilder Stocks?
Investors’ attention turned to homebuilders Thursday because of the impact mortgage rates have on their businesses.
Mortgage rates are in part determined by the fed funds rate , which affects the interest banks charge on loans. Mortgages are also influenced by 10-year Treasury yields, which in this economic cycle have moved as investors gain more confidence the Fed will cut rates.
The Federal Reserve has held its key rate at a 23-year high for nearly 12 months in order to tame inflation by making borrowing more expensive.
That has been a double whammy for homebuilders, who not only face higher borrowing costs themselves but also see weakened demand. Potential homebuyers have been sitting out of the market as rising mortgage rates and home prices make buying a house less affordable.
The good inflation report, paired with other economic data supporting the notion of a rate cut, could indicate that the tides are turning for homebuilders.
“This has led investors to believe we’ll get a rate cut by the end of the year, and has helped drive down the 10-year treasury today to lows not seen since March,” wrote Realtor.com’s Senior Economist, Ralph Mclaughlin. “Although volatile, we should see 10-year treasury rates continue on a downward trend and, as a result, a slow decline in mortgage rates throughout the rest of the year.”