Homebuilder Stocks Rally To New Highs, Housing Sales Struggle
Homebuilder stocks soared to unprecedented heights on Friday, riding high on a favorable inflation report that solidified expectations of interest rate cuts in September.
The Personal Consumption Expenditure (PCE) price index, the Federal Reserve’s favored inflation gauge, dropped to 2.5% in June 2024 from 2.6% year-on-year, aligning with predictions.
The iShares U.S. Home Construction ETF (NYSE: ITB), a crucial index monitoring U.S. home construction equities, climbed 3.8%, notching its third consecutive week of ascent.
Chart: U.S. Home Construction ETF Reaches Record Highs
Over the past three weeks, U.S. homebuilder stocks have surged by over 20%, fueled by expectations of lower interest rates favoring rate-sensitive sectors like home construction.
Market players have fully priced in a rate cut by the Federal Reserve in September, with prospects for another reduction by December 2024.
“Homebuilders are at the high end of the historical valuation range, which we believe is warranted by higher return-on-equity (ROE). On average, we anticipate a 22% ROE compared to the 2019 level of 20%,” wrote Bank of America analyst Rafe Jadrosich.
Bank of America noted that similar valuation levels in 2018 and 2021 triggered significant retractions as the Fed hiked rates. Nonetheless, the investment bank posited that the current scenario in the latter half of 2024, with the Fed likely to initiate rate cuts, presents a different outlook.
On Friday, Bank of America upgraded Mohawk Industries, Inc. (NYSE: MHK) from Underperform to Buy and increased their price target from $120 to $177 following Q2 2024 earnings that surpassed expectations.
Top-Performing Homebuilder Stocks In July 2024
The top ten best-performing stocks in the U.S. Home Construction ETF this month are:
| Name | Price Chg. % (MTD) |
| Mohawk Industries, Inc. | 37.16% |
| M/I Homes, Inc. (NYSE: MHO) | 35.92% |
| Green Brick Partners, Inc. (NYSE: GRBK) | 31.50% |
| American Woodmark Corporation (NASDAQ: AMWD) | 28.44% |
| Dream Finders Homes, Inc. (NYSE: DFH) | 27.42% |
| JELD-WEN Holding, Inc. (NYSE: JELD) | 26.80% |
| Installed Building Products, Inc. (NYSE: IBP) | 26.65% |
| D.R. Horton, Inc. (NYSE: DHI) | 26.29% |
| Tri Pointe Homes, Inc. (NYSE: TPH) | 26.26% |
| Century Communities, Inc. (NYSE: CCS) | 26.05% |
Latest Mortgage Rates, Housing Market Data
The Mortgage Bankers Association revealed that the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $766,550 or less decreased by 5 basis points to 6.62% for the week ending July 19, 2024.
Despite the drop in borrowing costs, several housing market indicators paint a bleak picture. Homebuilder confidence slid to 42 in July, its lowest level year-to-date, as per Bank of America.
Chief economist for LPL Financial, Jeffrey Roach, remarked, “The low housing supply and high interest rates have dampened affordability to near-term lows.”
The National Association of Realtors reported a substantial 5.4% decline in existing home sales in June, marking the most significant monthly decrease since 2022.
Moreover, the U.S. Census Bureau disclosed that new single-family home sales fell 0.6% month-over-month to an adjusted annual rate of 617,000 in June 2024, the lowest in seven months and below the forecasted 640,000, as soaring prices continued to impede affordability.
The median sales price of existing homes escalated by 4.1% year-on-year, hitting a new record high.