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Homebuilder stocks rise after Fed projects three interest rate cuts this year

Homebuilder stocks gained Thursday after the Federal Reserve signaled it would cut interest rates three times this year.

The SPDR S&P Homebuilders ETF (XHB) rose 2.5%, more than the S&P 500’s (^GSPC) 0.64% gain. D.R. Horton, Inc. (DHI), the biggest US homebuilder, advanced 2.3%, while Lennar (LEN) and Toll Brothers (TOL) rose 1.4% and 3.1% respectively during afternoon trading.

Data provided by State Street Global Advisors SPDR shows that homebuilder stocks have gained above market performance over the last year, returning 82% compared to the S&P 500 Index’s 39% return since the end of 2022 to today.

“It’s related to the Fed but not because of the Fed,” Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors, told Yahoo Finance. “Economic resilience is the driver, durability supported by a robust labor market and a healthy consumer. And that is the same rationale for why the Federal Reserve has yet to cut rates, and why projections for rate cuts have fallen from six to start the year to three now.”

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The Fed's projection for three rate cuts was consistent with its December forecast and in-line with market expectations. Prior to the release of the central bank's "dot plot," investors were concerned that hotter-than-expect inflation data could prompt Fed officials to hold rates higher for longer.

The development suggests that mortgage rates should continue to soften this year, providing a boost in the housing market. The central bank doesn’t set mortgage rates but its policy moves consequently impact borrowing costs.

Rates on the 30-year mortgages have been hovering around 7%, significantly higher than the 3% seen during the pandemic-era.

FOLSOM, CALIFORNIA - MARCH 22: In an aerial view, a sign is posted in front of a KB Home housing development on March 22, 2023 in Folsom, California. Homebuilder KB Home will report first quarter earnings today after the closing bell. (Photo by Justin Sullivan/Getty Images)
FOLSOM, CALIFORNIA - MARCH 22: In an aerial view, a sign is posted in front of a KB Home housing development on March 22, 2023 in Folsom, California. Homebuilder KB Home will report first quarter earnings today after the closing bell. (Photo by Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)

Economists at Wells Fargo expect mortgage rates to hit around 6.65% in the second quarter of this year, with a further decline in the fourth quarter, reaching 6.15%. The average 30-year fixed mortgage rate increased 0.13 percentage points to 6.87% this week, erasing last week's decline, according to Freddie Mac.

Amid the high rate environment, homebuilders have benefited from a lack of inventory in the resale market. Fresh government data shows the newly built home market bounced back last month from weather-related weakness, with housing starts increasing nearly 11% in February, the largest bump since May.

The rebound coincides with homebuilder confidence reaching a 8 month high as builders favor the current backdrop that mortgage rates could fall further and a dearth of existing homes for sale.

“That economic resilience has helped homebuilders’ bottom line. The industry grew earnings by 14% versus the broader markets flattish growth of around 1%,” Bartolini said.

Meanwhile, there are signs the spring selling season could be strong. On Wednesday, KB Home (KBH) said its net orders in Q1 were 55% higher than the previous year.

With expectations that the Fed could reduce its policy rate, KB Home plans to lower its mortgage incentives for the year, something the homebuilder hinted at last quarter as well.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.

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