Homebuilder stocks catapulted to unprecedented heights on Friday, propelled by a favorable inflation report that solidified expectations for interest rate reductions in September.
The Personal Consumption Expenditure (PCE) price index, known as the Fed’s favored gauge of inflation, decreased from 2.6% year-on-year to 2.5% in June 2024, aligning with forecasts.
The iShares U.S. Home Construction ETF (ITB), a crucial index monitoring U.S. homebuilder stock performances, soared by 3.8%, achieving its third consecutive week of gains.
Charting Heights: U.S. Home Construction ETF Hits Record Peaks
Over the past three weeks, U.S. homebuilder stocks have surged by over 20%, fueled by the prospect of lower interest rates benefiting rate-sensitive sectors like home construction.
Market observers have fully priced in a Federal Reserve rate cut in September, with expectations for at least one more decrease by December 2024.
“Homebuilders are trading at the high-end of the historical valuation range, a position we believe is warranted by higher return-on-equity (ROE). On average, our forecast anticipates a 22% return-on-equity, exceeding the 2019 level of 20%,” Bank of America analyst Rafe Jadrosich stated in a recent analysis.
Bank of America highlighted previous instances in 2018 and 2021 where similar valuation levels led to sharp declines as the Fed raised rates. Nevertheless, the investment bank believes that conditions in the latter half of 2024 are distinct, with the Fed expected to commence rate cuts.
Bank of America took a bullish stance on Mohawk Industries, Inc. (MHK) on Friday, upgrading the stock from Underperform to Buy and elevating their price target from $120 to $177 following robust Q2 2024 earnings.
Leading 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. | 35.92% |
| Green Brick Partners, Inc. | 31.50% |
| American Woodmark Corporation | 28.44% |
| Dream Finders Homes, Inc. | 27.42% |
| JELD-WEN Holding, Inc. | 26.80% |
| Installed Building Products, Inc. | 26.65% |
| D.R. Horton, Inc. | 26.29% |
| Tri Pointe Homes, Inc. | 26.26% |
| Century Communities, Inc. | 26.05% |
Recent Mortgage Rates and Housing Market Data
The Mortgage Bankers Association disclosed that the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $766,550 or less dipped by 5 basis points to 6.62% for the week ending July 19, 2024.
Despite the decline in borrowing expenses, additional housing market metrics paint a gloomy picture.
Homebuilder confidence plummeted to 42 in July, marking its lowest level year-to-date, as reported by Bank of America.
Jeffrey Roach, chief economist for LPL Financial, remarked on the situation, noting, “The limited housing supply and elevated interest rates have severely impacted affordability to near-term lows.”
The National Association of Realtors documented a significant 5.4% drop in existing home sales for June, representing the most substantial monthly decrease since 2022.
Additionally, the U.S. Census Bureau revealed that new single-family home sales diminished by 0.6% month-over-month to a seasonally adjusted annual rate of 617,000 in June 2024, the weakest figure in seven months and below forecasts of 640,000, as soaring prices continued to challenge affordability.
The median sales price of existing homes rose by 4.1% year-over-year, reaching a new all-time high.
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