Mortgage Rates Drop Present Opportunities For Homebuilders

Fixed-rate mortgage rates have steadily declined, marking a third consecutive week of decrease. Freddie Mac’s data shows that 30-year fixed-rate mortgage now averages 6.60%, significantly lower than the 6.95% rate from a year ago.

“The combination of mortgage rate declines, firm consumer income growth, and a bullish stock market have increased homebuyer demand in recent weeks. While the outlook for the housing market is improving, the improvement is limited given that homebuyers continue to face stiff affordability headwinds,” noted Sam Khater, Freddie Mac’s chief economist.

Fixed-rate mortgages are crucial for many homebuyers, particularly first-time buyers because they offer predictability. Since the interest rate remains constant throughout the loan term, borrowers know their monthly payments regardless of market conditions, making for easier financial planning and buying peace of mind. If these rates continue to drop, this development could make homeownership more accessible, stimulating sales.

Recent data reveals that the U.S. housing market is showing signs of recovery. Existing home sales rose 3.5% in October 2024, rebounding from a 14-year low and surpassing market expectations.

However, the median home sales price increased by 4% to $407,200, outpacing November’s 2.7% inflation rate. While Khater warned about these dynamics, home prices typically rise faster than inflation, which is one reason they were excluded from the Consumer Price Index (CPI) calculation in 1983.

Falling mortgage rates support optimism for the market, which suffered high borrowing costs earlier this year. Furthermore, the National Association of Realtors Chief Economist Lawrence Yun noted increased inventory could further bolster home sales, with job growth and economic expansion supporting growing housing demand.

Still, the home construction market offered mixed results, as shown by broad market ETFs. The iShares U.S. Home Construction ETF ITB returned 14.66% year-to-date, while the SPDR S&P Homebuilders ETF XHB fared better at 23.06%. The Invesco Building & Construction ETF PKB outperformed with 31.86% — however, it is worth noting that it is by far the smallest and most expensive of the group.

Two notable stocks in the sector performed similarly. KB Home KBH has clocked a solid yet underperforming 18.52% return year-to-date. It trades at 8.9x its earnings, significantly lagging the peer average 21.1x.  Meanwhile, Toll Brothers Inc TOL outperformed, climbing 37.39% year-to-date. Still, the firm trades cheaper than its peers at 8.8x its earnings. Following the latest earnings results, Oppenheimer and JPMorgan reiterated an Outperform and Overweight rating, citing robust demand but warning about the gross-margin guidance for the first quarter of fiscal 2025.

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