Stocks of homebuilders are rallying ahead of the Federal Reserve’s annual summer economic summit in Jackson Hole, Wyo. – AFP/Getty Images
Previously unloved stocks have been making a big comeback, with investors anxious to find bargains that could see upside should the Federal Reserve resume rate cuts soon.
Shares of homebuilders have been among the sectors catching a bid as focus turns to the Fed’s Jackson Hole, Wyo., gathering in the week ahead. The optimism also lifted small-cap stocks and other rate-sensitive assets.
“A number of sectors that are traditionally beneficiaries of rate cuts have been rallying on confidence that the Fed will resume its rate-cutting cycle,” said Michael Arone, chief investment strategist at State Street Investment Management.
Homebuilders in particular have been “showing some signs of life,” Arone said, speaking to the mood ahead of Fed Chair Jerome Powell’s annual speech, due this year on Aug. 22, at the central bank’s summer summit.
Powell last year said the “time has come” for rate cuts at Jackson Hole, and then in September kicked off the easing cycle with a jumbo rate cut of 50 basis points. The Fed cut rates by a full 1% last year, but then hit pause after December.
Yet a look at the Dow Jones U.S. Select Home Construction Index XX:DJSHMB shows it climbing above its 200-day and 50-day moving averages, a technical signal of upward momentum, according to LPL Financial.
Homebuilder stocks rally as investors gear up for the Federal Reserve’s summer summit. – LPL Research, Bloomberg
The iShares U.S. Home Construction ETF ITB gained 5.6% in the past week, according to FactSet, while homebuilders D.R. Horton Inc. DHI and Lennar Corp. LEN climbed 5.8% and 9.2%, respectively.
It certainly hasn’t hurt homebuilders that big-time investors have been jumping on the homebuilder bandwagon.
Warren Buffett’s Berkshire Hathaway Inc. BRK.A BRK.B last week disclosed a new roughly $200 million position in D.R. Horton and upped its stake in Lennar, according to regulatory filings.
“They were pretty beaten up,” said Adam Turnquist, chief technical strategist at LPL Financial, of homebuilder stocks, which have been recovering from an almost 36% drop from their October highs.
Yet homebuilders still lag the broader U.S. stock market’s SPX rebound since its near 20% drop during the April lows sparked by President Trump’s tariff fight.
Tariffs, while now at the highest levels in decades, have given way to trade agreements with several trade partners. Still, concerns about inflation gaining a lasting foothold in prices remain.
That’s kept the Fed on hold this year, weighing on the rates outlook. It also has the broader U.S. housing market largely going nowhere, with record home prices, a supply imbalance and several years of higher mortgage rates keeping a lid on the ability of families to buy or sell a home.
It’s a “death or divorce only” time, when houses do go up for sale, said Turnquist at LPL.
A caveat to the housing freeze has been home builders offering temporary rate “buydowns,” sometimes starting as heavily subsidized as 3.99%. That gives them an advantage over individuals trying to sell an existing home to someone needing standard financing. It also aims to move their new inventory off the market more quickly.
The average 30-year fixed mortgage rate fell to around 6.7% recently, off the recent highs above 7%, spurring some refinancing activity.
“The one big thing,” said Turnquist, would be a big move lower in rates because the Fed wins its inflation battle, not because Wall Street starts pricing in a recession. “You might have a massive amount of supply of existing homes hit the market, and that actually could weigh on home builders,” he said.
Treasury Secretary Scott Bessent recently made the case for a large Fed rate cut of 50 basis points in September, while advocating for steep cuts thereafter. While that could risk looking “panicky,” the odds still favor rates a gradual cut of 25 basis points, starting next month.
The backdrop favored the small-cap Russell 2000 index RUT, which gained 3.1% in the past week. The S&P 500 gained 0.9% and the Nasdaq Composite Index COMP rose 0.8%, while the Dow DJIA jumped 1.7% for the week.
Sinead Colton Grant, BNY Wealth’s chief investment officer, said her team expects two rate cuts of 25 basis points this year, one in September and another in December, with inflation staying relatively tame.
Given the “chronic lack of supply” in the housing market, she sees why investors would look at certain sectors like homebuilders. But her preferred sectors still are technology, communication services, financials, industrials and utilities, an AI-adjacent sector, given its power demands.
There’s been a lot of talk lately of high valuations, yet Grant pointed to margins of top tech names in the S&P 500 outpacing the rest of the index.
“It’s really very fundamentals driven,” she said.
Monday brings homebuilder confidence data, following by housing start Tuesday, Fed meeting minutes from July a day later and a slew of economic data Thursday, including existing home sales. But all eyes will be on Powell’s speech Friday.
