U.S. Homebuilder Stocks Surge

WASHINGTON – The Federal Reserve's rate-cut cycle is expected to ease pressure on mortgage rates, driving demand for new homes, even as shares of major U.S. homebuilders rose in early trading on September 19.

The U.S. central bank kicked off an anticipated series of interest rate cuts this week with a larger-than-usual half-percentage-point reduction. This reduction is expected to reduce mortgage rates further in the coming months and help reduce incentives builders need to offer to attract buyers.

The lower cost of financing could also boost further homebuilding activity, offsetting a chronic shortage of homes, which has been a growing issue since the 2008 financial crisis.

The central bank drove interest rates up between 2022 and 2023 to the 5.25% to 5.50% range to bring down high inflation, causing a slowdown in the housing market, but mortgage rates have been falling as the Fed telegraphed rate reductions.

According to Freddie Mac, the average 30-year fixed-rate mortgage rate recently declined to 6.20% from a high of nearly 8% months ago.

In a recent report, NAHB Chief Economist Robert Dietz said that Fed rate cuts will likely push mortgage interest rates down and should reduce interest rates on loans for land development and home construction businesses.

"Lowering the cost of construction is critical to confront persistent challenges for housing affordability."

Homebuilder stocks have rallied recently with the S&P 500 Homebuilding Index, gaining more than 30% so far this year compared to a 17% rise in the S&P 500 Index, pricing in expectations of further rate cuts and the corresponding easing in mortgage rates.

In a note, BofA analysts said, "We believe homebuilder stocks and mortgage rates already anticipated rate cuts following the rally in recent months."

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