A Housing Recovery — Evening Brief – 08.26.24

The real estate market has experienced significant volatility since the Federal Reserve began its tightening campaign in March 2022. But as expectations of an interest rate cut by the Fed confirmed now following Chair Jay Powell’s speech at Jackson Hole last week, the outlook is rebounding for housing-related stocks.

The recent reports for July on U.S. existing home sales, which rose for the first time since February, and blowout U.S. new home sales, which soared 10.6% month-over-month – the most since August 2022 and five standard deviations above expectations – has drawn attention to the fact that the headwinds facing the sector are slowing and may be about to turn around.

Keep in mind that the last three months have seen large upward adjustments to new home sales data, which has not been the norm in recent years, as mortgage rates have fallen back below 7.00%. From the perspective of homebuilder stocks, the case for expecting a housing rebound is quite strong.

For much of the year, the SPDR S&P Homebuilders ETF (XHB) has outperformed the broader US stock market, as measured by the SPDR S&P 500 ETF Trust (SPY). D.R. Horton and KB Home, for example, which make up 3.59% and 3.58% of the ETF, respectively, are trading at an all-time high.

However, housing construction activity has failed to provide encouraging results. For instance, housing starts reached a four-year low last month. The spike in mortgage rates is largely the key obstacle, but there are hints that the tide is changing, with the average rate on a 30-year mortgage falling to a 15-month low.

“The fate of the housing market in the coming months will be dictated in part by the direction of mortgage rates, as well as the health of the broader economy,” said Bank rate’s senior economic analyst. “The market could benefit from a combination of tailwinds, if they were to develop and are sustained.

The only uncertainty regarding the path of interest rates from a market perspective is the size of the expected Fed interest rate cut at the September meeting. According to the CME FedWatch tool, the market is pricing in 73% odds that the Fed will cut interest rates by a quarter-point in September, while the probability of a 50 basis-points reduction stood at 27.5%.

Before the next meeting, two significant economic indicators for August will be released, which might support or hurt the rate-cut narrative: consumer inflation and payrolls. The prevailing opinion is that the data will align with the view of market participants, namely, that disinflation will persist, and the labor market will continue to cool.