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The
S&P Composite 1500 Homebuilding Index, which includes 16 stocks,
including homebuilders Lennar, D.R. Horton, KB Home and
PulteGroup, is up about 29% so far this year. while the
benchmark S&P 500 has risen about 18%.
The sector typically notches gains in the months surrounding the
start of a Federal Reserve rate cutting cycle. But analysts say
there's reason to be skeptical that builder stocks will remain
on a tear this time.
“We see a few key risks to the recent rally,” analysts at BofA
Securities wrote in a research note this week.
Builder stocks started the year strong, but lost ground in the
April-June quarter as the average rate on a 30-year mortgage
surged above 7%.
The sector rallied again in the current quarter as mortgage
rates eased and signs of waning inflation and a cooling job
market fueled expectations of the first Fed rate cut in four
years. Mortgage rates are influenced by factors including how
the bond market reacts to the Fed’s interest rate policy
decisions.
In the three months before and after the Fed cuts rates,
homebuilder stocks have outperformed the S&P 500 index in three
out of the last five such periods, according to BofA.
Still, the BofA analysts and many economists contend that the
recent pullback in mortgage rates already reflects a Fed rate
cut. Mortgage rates tend to track the moves in the 10-year
Treasury yield.
BofA's mortgage-backed securities team forecasts that the
average rate on a 30-year mortgage will be between 5.75% and 6%
by the end of the year. That implies the bulk of the decline has
already happened.
Other potential red flags: Homebuilder stock valuations are
elevated after their sharp runup this year and the job market
has been weakening.
“In our view, the stock performance has been stronger than the
improvement in underlying fundamentals as investors look through
near-term weakness to a 2025 recovery fueled by lower mortgage
rates and pent-up demand.” the analysts wrote.
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