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Homebuilder stocks soar as investors look ahead to Fed rate cuts

The biggest homebuilders in the US are having a banner year, helped by investor optimism for interest rate cuts by the Federal Reserve in 2024.

The SPDR S&P Homebuilders ETF (XHB) has jumped more than 50% year-to-date, while the iShares US Home Construction ETF (ITB) has surged nearly 70%.

Individual builder stocks are up too. Lennar Corp. (LEN) and DR Horton (DHI) are up more than 60% this year, while PulteGroup (PHM) is nearly 130% higher. By comparison, the benchmark S&P 500 (^GSPC) is up more than 20% in that period.

One advantage for the industry has been the lack of inventory in the resale market, which has sparked higher demand for new homes.

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"There's been a very short supply of affordable products and a very strong demand for that affordable product," Stuart Miller, co-CEO of Lennar, said on the company's fiscal fourth quarter earnings call last week. He added, "the existing home market has been quiet as existing homeowners have coveted their low interest rate mortgages and remained on the sidelines."

The biggest tailwind may be yet to come. The homebuilding industry is known to be one of the sectors most sensitive to changes in interest rates.

Mortgage rates fell below 7% for the first time since August last week, reigniting some life in the housing market. The Fed also signaled earlier this month that three rate cuts are coming next year.

Read more: Mortgage rates are falling. Will 2024 be a good time to buy a house?

As a result, builders are getting more bullish on their outlook. Builder sentiment rose to 37 from 34 in December, ending a four-month decline in builder confidence, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released Monday.

Lennar stock is up more than 60% this year as investors anticipate lower interest rates in 2024. (AP Photo/Paul Sakuma)
Lennar stock is up more than 60% this year as investors anticipate lower interest rates in 2024. (AP Photo/Paul Sakuma) (ASSOCIATED PRESS)

"With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look," NAHB Chairman Alicia Huey said in a press release. "With the nation facing a considerable housing shortage, boosting new home production is the best way to ease the affordability crisis, expand housing inventory, and lower inflation."

Indeed, Lennar said it anticipates a pick-up in demand next year as rates move lower. The homebuilder expects to deliver 80,000 homes in 2024, a 10% increase over the prior year.

"We know that demand is strong, and there is a chronic housing supply shortage that needs to be filled. We will continue to drive production to meet the housing shortage that we know persists across our markets," Miller said. "With that said, as interest rates subside to normalize and if the Fed is going to begin to actually cut rates, we believe that pent-up demand will be activated, and we will be well prepared."

Lennar's expectations for the housing market to be reactivated underscore how other builders are thinking about demand. November’s housing starts for both single and multifamily rose 14.8% from October's revised rate to a 1.56 million annualized rate, according to data from the Census Bureau released Tuesday, blowing past economists' expectations of a 0.6% decline to a 1.35 million pace.

Analysts at JPMorgan wrote in a note following the data's release that "to the extent that rates remain in the range of the past 2-3 months, outside of a more significant macro downturn, we expect the housing market to remain at a more stabilized level over at least the next few months, as supply remains relatively tight, while demand should remain at an improved level against the current interest rate backdrop."

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

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