Key Takeaways
- Shares of U.S. homebuilders and housing-related stocks jumped after cooler-than-expected May inflation.
- Wednesday’s inflation report raised hopes of an interest rate cut by the Federal Reserve that could eventually lower rates on consumer loans, especially mortgages.
- Higher mortgage rates have also dissuaded existing homeowners from selling, reducing supply of homes on the market and pushing prices higher.
Shares of companies heavily exposed to U.S. residential real estate jumped on Wednesday after a soft inflation report raised hopes of an interest rate cut by the Federal Reserve that could imply the worst of the housing market’s deep freeze could be in the rearview mirror.
The iShares U.S. Home Construction ETF (ITB) climbed more than 4.5% as of 1:15 p.m. ET Wednesday, boosted by its largest holdings, homebuilders D.R. Horton (DHI) and Lennar (LEN), up 4.4% and 3.3%, respectively.
Wednesday’s inflation report, which revealed consumer prices were practically unchanged in May, raised hopes that the Federal Reserve will begin cutting its benchmark federal funds rate later this year. That would take pressure off all kinds of consumer loans, including mortgage rates, which have declined somewhat this year but remain north of 7%.
How Higher Rates Broke The Housing Market
The U.S. housing market has been stuck in a gridlock ever since the Federal Reserve began raising interest rates in March 2022 to tackle the hottest bout of U.S. inflation since the 1980s. Lenders issued fewer than 1.3 million home loans in the first quarter of 2024, the lowest total of any quarter since 2000.
That’s a far cry from the depths of the pandemic, when rock-bottom interest rates and excess savings powered a home-buying bonanza. In January 2021, when the average rate on a 30-year fixed-rate mortgage was about 2.7%, existing homes sold at an annual rate of 6.69 million. As of April 2024, that number had fallen to 4.14 million.
Prospective homebuyers have faced several obstacles. Existing homeowners, reluctant to trade in their 3% or 4% mortgages for today’s 6% or 7% rates, have stayed put. And what homes are listed command high prices; the median sales price of a home in the U.S. climbed from $317,100 in the second quarter of 2020 to a record high of $442,600 in the fourth quarter of 2022.
Wednesday’s inflation report gave a boost to home builders, home improvement retailers, mortgage lenders, and home listing services. Shares of Zillow Group (Z) surged more than 12% as of 1:15 p.m. ET, while lender Rocket Cos. (RKT) gained 5.4%. Home improvement giant Home Depot (HD) was the second-best-performing stock in the Dow, up 2.7%.