Sep
Homebuilding stocks are witnessing a significant boost, driven by anticipated Federal Reserve interest rate cuts and Vice President Kamala Harris’ proposed support for the U.S. housing market. Since the beginning of Q3, homebuilders have been among the top performers in the S&P 1500 Composite Index, climbing 20% and approaching an all-time high. DR Horton Inc. has emerged as the third-best performer in the S&P 500 Index, with a 31% rise over two months. Lennar Corp. ranks 45th, up 19%. Year-to-date, homebuilder stocks have surged 21%, outperforming the S&P 500’s 16% increase.
Declining Mortgage Rates Boost Homebuilding
Mortgage rates have started to decline, which is boosting homebuilding stocks significantly. Freddie Mac’s data shows a decrease. On August 29, 30-year fixed-rate mortgages were at 6.35%, down from 6.95% on July 4. This decline supports the belief in further gains for homebuilding stocks. Expectations of a major Fed rate-cutting phase add to this positive outlook.
Declining mortgage rates boost homebuilding stocks, suggesting more gains with Fed rate cuts, according to wall street journal subscription.
Harris’ Housing Market Stimulus Plan
Kamala Harris, the Democratic nominee, has proposed significant measures to stimulate the housing market. Her plan includes up to $25,000 in down-payment assistance for select first-time homebuyers and aims to construct three million new housing units. Harris also proposes incentives for building starter homes, aiming to reduce construction obstacles and lower development costs. These measures go beyond President Joe Biden’s suggestions and seek to deter large-scale investors from acquiring single-family rentals.
Market Reaction and Political Risks
Since Harris announced her plan on August 15, the homebuilders index has risen by 4.5%. In contrast, the S&P 500 has slightly declined. Buck Horne from Raymond James Financial Inc. notes these policies aim to increase housing supply. They also protect current renters by maintaining tax benefits for large rental operators. However, Harris must win the election and secure Congressional support for these measures, as executive orders alone cannot enact them.
Trump’s Housing Market Proposals
Republican presidential candidate Donald Trump has also emphasized homeownership. The GOP platform suggests tax incentives and regulatory changes to boost the housing market. Karoline Leavitt, a spokeswoman for Trump’s campaign, highlighted Trump’s plan to make home purchases more affordable by reducing federal spending and eliminating certain regulations. The National Association of Home Builders estimates that federal regulations account for nearly 25% of single-family home building costs.
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Concerns Over Policy Impact
Strategists caution about the potential unintended consequences of policies that rapidly increase demand in a supply-constrained market. TD Cowen analyst Jaret Seiberg warns that increased bidding can drive up prices, and such programs might offer limited benefits despite significant costs.
Stock Valuations and Market Outlook
Ryan Grabinski of Strategas Securities points out that much of the anticipated benefit from the housing market surge is already reflected in stock prices. Homebuilders like KB Home and Toll Brothers Inc. are trading above their 50-day moving averages, suggesting high valuations compared to their 10-year average price-to-tangible-book-values.
Challenges in the Housing Market
Despite efforts to boost construction, high borrowing costs and limited resale inventory continue to challenge the market. Homeowners are hesitant to sell due to their advantageous mortgage rates, complicating the search for affordable homes. Economists suggest that deeper rate cuts may be needed to encourage reluctant buyers and sellers to act.
Future Outlook
Dean Baker of the Center for Economic and Policy Research recommends monitoring the impact of interest rates and potential policy changes before making investment decisions. However, with decreasing mortgage rates and improved financial positions for homebuyers, homebuilding activity is expected to recover. Rising poll numbers for Harris may signal a promising future for housing investors, with potential long-term stock price increases anticipated. Baker predicts mortgage rates could fall to around 6% or below by year-end, creating a favorable environment for pro-construction legislation.
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